Law Report: No implied duty in names' contracts with Lloyd's: Ashmore and others v Corporation of Lloyd's - Queen's Bench Division (Commercial Court) (Mr Justice Gatehouse), 2 July 1992

Lloyd's owes no duty to its underwriting members or 'names' either by contract or statute to alert them about matters of which Lloyd's becomes aware which might seriously affect their underwriting interests or to impose a premium monitoring system.

Mr Justice Gatehouse dismissed an action against Lloyd's brought by the plaintiffs, who were underwriting names and members of Lloyd's organised in syndicates managed by Oakeley Vaughan (Underwriting) Ltd, agents approved by Lloyd's.

Each plaintiff claimed damages from Lloyd's for losses on insurance contracts entered into by OVU between 1980 and 1983. Preliminary points arose: (1) Whether Lloyd's owed a duty to each plaintiff imposed as implied terms of the membership agreement or of the general contractual relationship between Lloyd's and each plaintiff or as a statutory duty arising out the Lloyd's Act 1871, as amended; (2) if Lloyd's did owe a duty of care then was it immune from suit by virtue of section 14 of the Lloyd's Act 1982?

The implied terms alleged were, in effect: (1) A duty to alert, generally and in specific circumstances, the plaintiff names about matters which merited investigation by the plaintiffs for protection of their underwriting interests; and (2) a duty to impose a premium monitoring system.

Michael Lyndon-Stanford QC and Paul Griffin (Michael Freeman & Co) for the plaintiffs; Peregrine Simon QC, Paul Walker and Matthew Reeve (Solicitors' Department, Lloyd's) for Lloyds.

MR JUSTICE GATEHOUSE said that every aspiring name was made unequivocally aware of certain matters from the moment he or she first read the brochure containing a description of Lloyd's, from the application form for underwriting membership and from the confirmation document signed by each applicant.

Those basic matters were: (1) underwriting was a high risk business which could bring losses instead of profits; (2) every name had unlimited liability with respect to his share of all policies he underwrote and would be assessed to the entire amount of his personal fortune to pay any valid claims against him; and (3) every name was required to appoint an underwriting agent to whom there must be a complete delegation of underwriting business. Those were factors which made Lloyd's a unique institution.

Implication of contractual terms was a matter of necessity and the necessity test was a stringent one.

Neither of the implied terms came within reasonable distance of passing the 'business efficacy' test.

Very many thousands of people over the years had been or were now names of Lloyd's under the same contractual arrangements and it was obviously impossible to say that without those implied terms the contract would not work.

Turning to the 'officious bystander' test, with regard to the alleged 'duty to alert', the complexity of its formulation was such that it was impossible to contemplate an officious bystander being capable of thinking up so complex a term.

The other implied term relating to premium income monitoring was surrounded by imprecision. It was to the agent that the name must look for compensation where losses were suffered by reason of the agent's failure to carry out his duties to his principal. It seemed a novel conception that where one principal (the name) undertook contractual obligations to another principal (Lloyd's) and agreed that his obligations should be discharged through an agent, the other principal was under a duty to supervise the agent and/or to inform his opposite number if he learnt that the agent was failing in his duties.

The third basis for implying a term, implication in law, was explained in Lister v Romford Ice and Cold Storage Co Ltd (1957) AC 555. The principle that certain terms would be implied in contracts of a certain type applied to certain broad categories of relationships where the individual contracts within the category would vary infinitely in their terms.

The contract between Lloyd's and each name was unique in the sense that there was no category into which it could be placed. Everyone of the contracts was in identical terms apart from the contracting party's name and individual premium income limit. It was not part of a genus: it was sui generis.

There was no authority to suggest that the principle had any application to such a case. There must first be established a genus, however various the individual contracts within it might be, before the principle could be founded upon.

Turning to the plaintiff's contention based on statutory duty, the statute did not impose any express duty upon Lloyd's.

Lloyd's was authorised by its constitution to exercise supervisory, regulatory and disciplinary powers over its members. It was a most important function of the corporation to regulate the Lloyd's insurance market, primarily for the protection of the policy holders.

It would greatly inhibit the proper discharge of those powers if those who exercised them had constantly to be looking over their shoulders because of a supposed duty to safeguard the interests of one section of the market.

If the contract between a name and Lloyd's did not impose any implied obligations of the kind contended for, the statutory framework could not do so.

Lloyd's did not owe to the plaintiffs either of the duties alleged.

Finally, section 14 extended Lloyd's immunity from a claim for damages to contractual causes of action. Section 14 came into force on the date when the Act received the Royal Assent, 23 July 1982.