Arbuthnott (and others) (Respondents) v. Fagan and Feltrim
Underwriting Agencies Limited (and others) (Appellants) and
two other actions (1st Appeal)
Arbuthnott (and others) (Respondents) v. Fagan and Feltrim
Underwriting Agencies Limited (and others) (Appellants) and
two other actions (2nd Appeal)
Deeny (and others) (Respondents) v. Gooda Walker Limited (In
Voluntary Liquidation) (and others) (Appellants)
(Conjoined Appeals)
Henderson (and others) (Respondents) v. Merrett Syndicates
Limited and others (Appellants) and two other actions
JUDGMENT
Die Lunae 25° Julii 1994
Upon Report from the Appellate Committee to whom were
referred the Appeals Arbuthnott (and others) against Fagan and
Feltrim Underwriting Agencies Limited (and others) and two other
actions (two appeals), Deeny (and others) against Gooda Walker
Limited (and others) and Henderson (and others) against Merrett
Syndicates Limited and others and two other actions, That the
Committee had heard Counsel as well on Tuesday the 15th as on
Wednesday the 16th, Thursday the 17th, Tuesday the 22nd,
Wednesday the 23rd, Thursday the 24th and Monday the 28th days
of March last upon the Petitions and Appeals of the Defendants
listed in the Schedule to the Writs of Summons in Actions 1992
Folios 1856, 2423 and 3383; of Feltrim Underwriting Agencies
Limited of Friary Court, 65 Crutched Friars, London EC3N 2NP; of
the Defendant Members’ Agents listed in Schedules 4 to 20, 22 to
48 and 50 to 69 of the re-amended Writ of Summons in Action 1993
Folio 335; and of Merrett Syndicates Limited and Merrett
Underwriting Agency Management Limited, both of Arthur Castle
House, 33 Creechurch Lane, London EC3A 5EB, praying that the
matter of the Orders set forth in the Schedules thereto, namely
Orders of Her Majesty’s Court of Appeal of the 13th day of
December 1993, might be reviewed before Her Majesty the Queen
in Her Court of Parliament and that the said Orders might be
reversed, varied or altered or that the Petitioners might have
such other relief in the premises as to Her Majesty the Queen in
Her Court of Parliament might seem meet; as upon the cases of
Hugh Sinclair Arbuthnott and John Keithley Oxley Arbuthnott (and
the others listed in the first Schedules to the Writs of Summons
in Actions 1992 Folios 1856, 2423 and 3383); of Michael Eunan
McLarnon Deeny (and the others listed in Schedules 1 to 71 of the
Writ of Summons in Action 1993 Folio 335); and of Ian McIntosh
Henderson, William Hallam-Eames and Elise Heckman Hughes (and the
others listed in the Schedules to the Writs of Summons in Actions
1992 Folio 1496 and 1993 Folios 145 and 545) lodged in answer to
the said Appeals; and due consideration had this day of what was
offered on either side in this Cause:
Judgment: 25 July 1994
HOUSE OF LORDS
ARBUTHNOTT (AND OTHERS) (RESPONDENTS) v. PAGAN AND FELTRIM
UNDERWRITING AGENCIES LIMITED (AND OTHERS) (APPELLANTS)
AND TWO OTHER ACTIONS (1ST APPEAL)
ARBUTHNOTT (AND OTHERS) (RESPONDENTS) v. PAGAN AND FELTRIM
UNDERWRITING AGENCIES LIMITED (AND OTHERS) (APPELLANTS)
AND TWO OTHERS ACTIONS (2ND APPEAL)
DEENY (AND OTHERS) (RESPONDENTS) v. GOODA WALKER LIMITED
(IN VOLUNTARY LIQUIDATION) (AND OTHERS) (APPELLANTS)
(CONJOINED APPEALS)
HENDERSON (AND OTHERS) (RESPONDENTS) v. MERRETT SYNDICATES
LIMITED (AND OTHERS) (APPELLANTS) AND TWO OTHER ACTIONS
Lord Keith of Kinkel
Lord Goff of Chieveley
Lord Browne-Wilkinson
Lord Mustill
Lord Nolan
LORD KEITH OF KINKEL
My Lords.
For the reasons set out in the speech of my noble and learned friend
Lord Goff of Chieveley. which I have read in draft and with which I agree,
1 would dismiss these appeals.
LORD GOFF OF CHIEVELEY
My Lords.
Introduction
The appeals now before your Lordships’ House arise out of a number
of actions brought by underwriting members (known as Names) of Lloyd’s
against their underwriting agents, in an attempt to recoup at least part of the
great losses which they have suffered following upon recent catastrophic
– 1 –
events, mainly in the United States of America, which have led to
unprecedented claims being made upon Lloyd’s underwriters.
The actions in question form part of a large number of actions of this
kind, which are now approaching trial in the Commercial Court. At the root
of many of these actions lie questions of law, upon the resolution of which
depends the nature of the legal responsibility which rested upon underwriting
agents towards the Names for whom they acted. Accordingly, with the co-
operation of the parties to the actions out of which the present appeals arise.
Saville J. ordered that certain issues of principle should be decided as
preliminary issues. Having heard argument upon these issues, he gave
judgment on 12 October 1993, his rulings being favourable to the contentions
advanced on behalf of the Names. On 13 December 1993, the Court of
Appeal unanimously affirmed the decision of Saville J., for the reasons given
by him. The matter now comes before your Lordships’ House, with the leave
of the House; and the hearing of the appeals has been expedited, in the hope
that the fact that the appeals have come before the House will result in as little
disturbance as possible to the programme now established for the hearing of
the various Lloyd’s actions in the Commercial Court.
It is necessary for me now to identify, and place in their context, the
various issues which fall for consideration on these appeals. But before I do
so, it is desirable that I should first set out certain basic facts about the
structure of Lloyd’s, with special reference to the relationship between Names
and their underwriting agents.
Every person who wishes to become a Name at Lloyd’s and who is not
himself or herself an underwriting agent must appoint an underwriting agent
to act on his or her behalf, pursuant to an underwriting agency agreement.
Underwriting agents may act in one of three different capacities.
-
-
-
They may be members’ agents, who (broadly speaking) advise
Names on their choice of Syndicates, place Names on the Syndicates chosen
by them, and give general advice to them. -
They may be managing agents, who underwrite contracts of
insurance at Lloyd’s on behalf of the Names who are members of the
Syndicates under their management, and who reinsure contracts of insurance
-
-
and pay claims.
(3) They may be combined agents, who perform both the role of
members’ agents, and the role of managing agents in respect of the Syndicates
under their management.
Until 1990, the practical position was as follows. Each Name entered
into one or more underwriting agency agreements with an underwriting agent,
which was either a members’ agent or a combined agent. Each underwriting
agency agreement governed the relationship between the Name and the
– 2 –
members’ agent, or between the Name and the combined agent in so far as it
acted as a members’ agent. If however the Name became a member of a
Syndicate which was managed by the combined agent, the agreement also
governed the relationship between the Name and the combined agent acting
in its capacity of managing agent. In such a case the Name was known as a
direct Name. If however the Name became a member of a Syndicate which
was managed by some other managing agent, the Name’s underwriting agent
(whether or not it was a combined agent) entered into a sub-agency Agreement
under which it appointed the managing agent its sub-agent to act as such in
relation to the Name. In such a case the Name was known as an Indirect
Name.
Before 1 January 1987, no forms of underwriting agency or sub-agency
agreements were prescribed at Lloyd’s; but standard clauses were in common
use, and forms of agreement used by underwriting agents were similar, if not
identical. For the purposes of the first group of actions now under appeal (the
Merrett actions), which were concerned with that period, specimen agreements
were placed before Saville J. for use by him in respect of those actions.
These are to be found annexed to his judgment. However, pursuant to the
Lloyd’s Act 1982, Byelaw No. 4 of 1984 was made which prescribed forms
of agency agreement and sub-agency agreement. These forms became
compulsorily applicable as from 1 January 1987, and are the relevant forms
in the other two groups of actions which are the subject of the present appeals,
the Feltrim actions and the Gooda Walker actions. A subsequent Byelaw, No.
8 of 1988, prescribed new standard forms of agreement for use in 1990 and
subsequent years of account. With these forms, which swept away the
distinction between direct and indirect Names, your Lordships are not directly
concerned in the present appeals.
I turn to the appeals now before your Lordships’ House. These are (1)
the Merrett Appeals, and (2) the conjoined Feltrim and Gooda Walker
Appeals.
(1) The Merrett Appeals.
The appellants in these appeals (referred to as “Merretts”) are in fact
Merrett Syndicates Ltd. (“MSL”) and Merrett Underwriting Agency
Management Ltd. (“MUAM”). Up to 1 January 1986, MSL was a combined
agent. It was the Managing Agent of Syndicate 418/417, and was also a
members’ agent. From 1 January 1986, MUAM became the Managing Agent
of Syndicate 418/417, and MSL operated solely as a members’ agent. There
are three groups of Merrett actions brought by Names who were members of
Syndicate 418/417. In all three groups of actions, there are complaints of
negligent closure of a year or years of account into subsequent years by
reinsurance to close (“RITC”). In one of them, there is also a complaint as
to the writing of certain contracts of insurance; and in this case there is also
an issue of limitation.
– 3 –
(2)(a) The Feltrim Appeals.
The appellants are (i) Feltrim Underwriting Agencies Ltd. (“Feltrim”),
which acted as a managing agent only; and (ii) about 40 members’ agents-
(“the Feltrim Members’ Agents”), which are in fact unrelated to Feltrim. In
the actions which are the subject of these appeals, Names who were members
of Syndicates managed by Feltrim sue Feltrim as managing agents, and also
sue the Feltrim members’ agents as their members’ agents. All the Names are
indirect Names. The Names allege against Feltrim negligent underwriting
during the years 1987-1989 arising out of their Syndicates’ participation in the
London Market Excess of Loss (“LMX”) business, it being alleged that the
underwriters assumed greatly excessive aggregate liabilities, and took out far
too little reinsurance. The Feltrim members’ agents are sued on the basis that
they are contractually liable for the defaults of Feltrim as managing agents to
whom the underwriting was delegated. There is no limitation issue.
(2)(b) The Gooda Walker Appeals.
The appellants are 65 members’ agents (“the Gooda Walker Members’
Agents”), against which it is alleged by Names that they are contractually
liable to the Names for failure by the managing agents of the Syndicates of
which the Names were members, to which the Gooda Walker Members’
Agents had delegated the function of underwriting, to exercise reasonable care
and skill in relation to such underwriting.
It might have been expected that, in all three groups of appeals, there
would be appeals by both the members’ agents and the managing agents: and
that in each case issues would arise whether there was liability on their part
in contract, or in tort, or for breach of fiduciary duty. But that is not in fact
the case. In the case of the Merrett Appeals, there is no issue before your
Lordships between the Names and their members’ agents acting as such.
Except for one entirely distinct issue concerned with RITC, the appeals are
concerned only with the issue of liability, either in tort or for breach of
fiduciary duty, of Merretts as managing agents, whether to direct Names
(where Merretts were combined agents) or to indirect Names. By way of
contrast, in the Gooda Walker Appeals the Gooda Walker Managing Agents
are not appealing to this House against the decision of the Court of Appeal,
with the result that the ruling of the Court of Appeal that they owed a
contractual duty to direct Names, and a duty of care in tort to indirect Names,
will remain binding as between them and the Names in question. The only
issue now before your Lordships on the Gooda Walker appeals arises in
relation to the agency agreements entered into between Names and the Gooda
Walker Members’ Agents. So far as the Feltrim appeals are concerned,
however, issues arise both as to Feltrim’s liability as managing agents, viz.
whether Feltrim owed a duty of care in tort, or as fiduciary, to the indirect
Names who were members of the Feltrim Syndicates in the years 1987-1989,
and as to the Feltrim Members’ Agents’ liability as such in relation to the
– 4 –
agency agreements entered into between them and Names, as in the Gooda
Walker appeals.
In the result, the following issues have been identified as arising for
the decision of your Lordships’ House on these appeals:
Issue 1.
(A). Merrett Appeals. Liability of managing agents to Names under
the forms of agreement in force before 1987.
(1) Duty of care – indirect Names. Did managing agents (who
were not also members agents) owe indirect Names a duty under the pre-1985
Byelaw form of underwriting agency agreement to carry out their underwriting
functions with reasonable care and skill for the 1979 to 1985 years of account
inclusive?
(a) Does the law of tort impose any duty upon managing agents not
to cause purely economic loss to Names?
(b) Does the “absolute discretion” conferred upon managing agents
under the pre-1985 Byelaw form of underwriting agency agreement preclude
the implication of any duty other than duties to act honestly, rationally and
loyally?
(2) Duty of care – direct Names. Did Merretts as managing agents
who were also members’ agents owe direct Names a non-contractual duty
under the pre-1985 Byelaw forms of underwriting agency agreement to carry
put their underwriting functions with reasonable care and skill for the 1979
to 1985 years of account inclusive?
(3) Fiduciary duty. Did Merretts as managing agents (whether they
were also members’ agents or not) owe Names as fiduciary a duty to conduct
the underwriting for the account of the Names with reasonable care and skill
for the 1979 to 1985 years of account (inclusive) equivalent to the alleged duty
of care in tort?
(B). Feltrim Appeals. Liability of managing agents to names under
the forms of agreement in force between 1987 and 1989.
-
-
-
Duty of care – indirect Names. In tort Did Feltrim, a
managing agent only, owe a duty of care in tort to the (indirect) Names on the
Feltrim Syndicates to carry out the conduct and management of the
underwriting business of the Feltrim Syndicates with reasonable care and skill
at any material time between 1987 and 1989? -
Fiduciary duty. As fiduciary Did Feltrim owe Names a
fiduciary duty equivalent to a duty of care in tort as described above?
-
-
– 5 –
Issue 2.
Feltrim and Gooda Walker Appeals. Liability of members’ agents to
Names under the forms of agreement in force during the period 1987 to 1989;-
Whether, in relation to, and on the true construction of, agency
agreements entered into between Names and members’ agents in the standard
form provided for by Lloyd’s Byelaw No. 1 of 1985:
(1) It was a term of the said agency agreements that the actual
underwriting would be carried on with reasonable care and skill, so that the
members agents remained directly responsible to their Names for any failure
to exercise reasonable care and skill by the managing agents of any particular
Syndicate to whom such underwriting had been delegated.
(2) There was a term of the said agreements that the members’ agent
was only required to exercise reasonable care and skill in relation to such
activities and functions as members’ agents by custom and practice actually
perform for their Names personally.
(3) There was a direct contractual relationship of principal and
agent between Names and the managing agents of Syndicates in which the
Names participated.
Issue 3.
Merrett Appeals. Reinsurance to close.
Whether for Names who executed the new prescribed 1985 Byelaw
form or underwriting agency agreement the contractual relationship between
such Names for the 1985 underwriting year of account and their members’
agents and between their members’ agents and the managing agent in relation
to the acceptance in about June 1987 by the Syndicate for the 1985
underwriting year of account of the reinsurance to close the 1984 underwriting
year of account was governed by the 1985 Byelaw form of agreement or by
the pre-1985 Byelaw form of agreement.
For the purpose of considering these various issues, I shall for
convenience organise them a little differently, as will appear hereafter.
I Merrett and Feltrim Appeals.
A Duty of care – Liability of managing agents to Names (both direct and
indirect Names) in tort.
(1) Introduction
– 6 –
I turn now to the tortious issues which arise in the Merrett and Feltrim
appeals. The first issue, in the order in which they are stated, is concerned
with the question whether managing agents, which were not also members’
agents, owed to indirect Names a duty of care in tort to ‘carry out their
underwriting functions with .reasonable care and skill. The second issue is
concerned with the question whether managing agents, which were also
members’ agents, owed such a duty to direct Names.
The first of these issues, relating to indirect Names, arises in both the
Merrett appeals and the Feltrim appeals. However the issue in the Merrett
appeals arises in the context of the pre-1985 Byelaw forms of agency and sub-
agency agreements, whereas that in the Feltrim appeals does so in the context
of the forms of agreement prescribed under the 1985 byelaw. The second of
these issues, relating to direct Names, arises only in the Merrett appeals, in
the context of the pre-1985 Byelaw forms.
It is desirable that I should at once identify the reasons why Names in
the Merrett and Feltrim actions are seeking to establish that there is a duty of
care owed to them by managing agents in tort. First, the direct Names in the
Merrett actions seek to hold the managing agents concurrently liable in
contract and in tort. Where, as in the case of direct Names, the agents are
combined agents, there can be no doubt that there is a contract between the
Names and the agents, acting as managing agents, in respect of the
underwriting carried out by the managing agents on behalf of the Names as
members of the Syndicate or Syndicates under their management, the only
question being as to the scope of the managing agents’ contractual
responsibility in this respect. Even so. in the Merrett actions. Names are
concerned to establish the existence of a concurrent duty of care in tort, if
only because there is a limitation issue in one of the actions, in which Names
wish therefore to be able to take advantage of the more favourable date for the
accrual of the cause of action in tort, as opposed to that in contract. Second,
the indirect Names in both the Merrett and the Feltrim actions are seeking to
establish the existence of a duty of care on the part of the managing agents in
tort, no doubt primarily to establish a direct liability to them by the managing
agents, but also, in the case of the Merrett actions, to take advantage of the
more advantageous position on limitation. Your Lordships were informed that
there is no limitation issue in the Feltrim actions.
I turn next to the forms of agreement which provide the contractual
context for these issues. I have already recorded that, so far as the pre-1985
Byelaw forms are concerned, no form was prescribed, but those in use were
substantially similar if not identical, and that specimen forms of agency and
sub-agency agreement were agreed for the purposes of these preliminary
issues and are scheduled to the judgment of Saville J. The most relevant
provisions of the specimen forms are the following.
(1) Agency Agreement
– 7 –
” 1. The Agent shall act as the underwriting agent for the Name
for the purposes of underwriting at Lloyd’s for the account of
the Name policies and contracts of insurance reinsurance and
guarantee relating to all classes of insurance business which
with the sanction of the Committee of Lloyd’s may be
transacted at Lloyd’s by the Syndicate.
. . .
4. The Agent shall have full power and authority to appoint and
employ the Sub-Agent to carry on or manage the underwriting
and to delegate to or confer upon the Sub-Agent all or any of
the powers authorities discretions and rights given to the Agent
by this agreement.
. . .
6. (a) The Agent shall have the sole control and management
of the underwriting and absolute discretion as to the acceptance
of risks and settlement of claims whether such claims shall in
the opinion of the Agent be legally enforceable or not.
. . .
(d) The Name shall not in any way interfere with the exercise
of the aforesaid control or management or discretion.
7. The following provisions shall apply concerning the
accounts of the underwriting:-
. . .
(e) The Syndicate account of any calendar year shall not be
closed before the expiration of the two calendar years next
following the calendar year in question and in order to close
the Syndicate account of any year the Agent may:-
(i) re-insure all or any outstanding liabilities in such
manner and by debiting such account with such sum as
the Agent shall in the absolute discretion of the Agent
think fit as a premium for reinsurance and crediting the
reinsurance premium to the Syndicate account of the
next succeeding year or
(ii) re-insure all or any outstanding liabilities of such
account into the account of any other year then
remaining open or in any other manner which the Agent
thinks fit or
(iii) allow the whole or part of a Syndicate account of
any year to remain open until its outstanding liabilities
shall have run off
– 8 –
. . .
12.(a) The Agent may from time to time retain out of the
profits of the underwriting which would otherwise be payable
to the Name any moneys which the Agent may in the absolute
discretion of the Agent (subject to any requirements prescribed
by Lloyd’s) think desirable to carry to reserve and such moneys
may be placed on deposit at any bank or discount house of
public or local authorities or building society or may be
invested in such stocks funds shares or securities (including
bearer securities) in any part of the world as the Agent may
determine and the Agent shall not be responsible for any loss
of principal or interest on such deposits or investments.
Interest or dividends earned on any such deposits or
investments shall be credited to the Name in respect to the
Name’s due proportion thereof.”
(2) Sub-Agency Agreement
“2. The Sub-Agent agrees and is retained and authorised to act
as Underwriting Sub-Agent for the Agent for the purpose of
underwriting at Lloyd’s in the Names and for the account of
each of the Names policies and contracts of insurance
reinsurance and guarantee relating to all classes of insurance
business which with the sanction of the Committee of Lloyd’s
may be transacted as insurance business and of carrying on for
each of the Names the business of Marine Underwriter at
Lloyd’s and the appointment of the Sub-Agent shall take effect
in respect of each of the Names on and from the date specified
in the second column of the Schedule hereto opposite the name
of each of the Names.
. . .
5. The Agent delegates to the Sub-Agent the exercise of all
such powers authorities discretions and rights conferred upon
the Agent by the Underwriting Agency agreement as it may be
in any way necessary for the Sub-Agent to have to enable the
Sub-Agent or any underwriter or agent appointed by the Sub-
Agent to carry on the underwriting for the Names and to close
the accounts of the Names.
6. Subject to the provisions of clause 7 hereof the
underwriting shall be conducted and the accounts thereof shall
be kept and made up and the profits ascertained in such manner
as the Sub-Agent may for the time being think fit and the Sub-
Agent shall have the sole control and management of the
– 9 –
underwriting and sole discretion as to the acceptance of risks
and the compromise or settlement of claims.
. . .
8. All questions relating to the investment of premiums and
other monies not required for the current service of the
underwriting and to the time and manner of paying over profits
and the placing of sums to a reserve shall be decided by the
Sub-Agent and subject as aforesaid the Sub-Agent shall pay
over the profits of the underwriting to the Agent for
distribution to the Names.”
Turning to the forms of agency and sub-agency agreements prescribed
by the 1985 Byelaw, I will set out the material provisions below when
considering Issue 2, concerned with the liability of members’ agents. These
provisions will therefore be available for reference, and I do not propose to
repeat them here.
In the result, in neither the specimen agreements nor the agreements
prescribed by the 1985 Byelaw is there any express provision imposing on the
agent a duty to exercise care and skill in the exercise of the relevant functions
under the agreement: but I understand it not to be in dispute that a term to
that effect must be implied into the agreements. It is against that background
that the question falls to be considered whether a like obligation rested upon
the managing agents in tort, so that the managing agents which were also
members’ agents owed such a duty of care in tort to direct Names, with the
effect that the direct Names had alternative remedies, in contract and tort.
against the managing agents; and whether managing agents which were not
also members’ agents owed such a duty of care in tort to indirect Names, so
that the indirect Names had a remedy in tort against the managing agents,
notwithstanding the existence of a contractual structure embracing indirect
Names, members’ agents and managing agents, under which such a duty was
owed in contract by the managing agents to the members’ agents, and by the
members’ agents to the indirect Names. Furthermore, the question also arises
whether, under the pre-1985 forms of agreement, the absolute discretion as
to the acceptance of risks (and settlement of claims) vested in agents under
clause 6(a) of the agency agreement, and delegated by them to sub-agents (the
managing agents) under clauses 5 and 6 of the sub-agency agreement, was
effective to exclude any duty of care which might otherwise have been
imposed upon the managing agents, either in contract or in tort.
Saville J. resolved all these issues in favour of the Names. He held
that a duty of care was owed by managing agents in tort both to direct Names
and to indirect Names, and that the existence of such a duty of care was not
excluded by reason of the relevant contractual regime, whether under the pre-
1985 specimen agreements, or under the forms of agreement prescribed by the
1985 Byelaw. In particular, he held that the absolute discretion conferred on
– 10 –
the agent under clause 6(a) of the pre-1985 Byelaw specimen agency
agreement, and delegated to the managing agent under clauses 5 and 6 of the
related sub-agency agreement, did not exclude any such duty of care. On all
these points Saville J,’s decision was, as I have recorded, affirmed by the
Court of Appeal.
(2) The argument of the Managing Agents
The main argument advanced by the managing agents against the
existence of a duty of care in tort was that the imposition of such a duty upon
them was inconsistent with the contractual relationship between the parties.
In the case of direct Names, where there was a direct contract between the
Names and the managing agents, the argument was that the contract legislated
exclusively for the relationship between the parties, and that a parallel duty of
care in tort was therefore excluded by the contract. In the case of indirect
Names, reliance was placed on the fact that there had been brought into
existence a contractual chain, between Name and members’ agent, and
between members’ agent and managing agent; and it was said that, by
structuring their contractual relationship in this way, the indirect Names and
the managing agents had deliberately excluded any direct responsibility,
including any tortious duty of care, to the indirect Names by the managing
agents. In particular, the argument ran. it was as a result not permissible for
the Names to pray in aid, for limitation purposes, the more favourable time
for accrual of a cause of action in tort. To do so, submitted the managing
agents, would deprive them of their contractual expectations, and would avoid
the policy of Parliament that there are different limitation regimes for contract
and tort.
Such was the main argument advanced on behalf of the managing
agents. Moreover, as appears from my summary of it, the argument was not
precisely the same in the case of direct Names and indirect Names
respectively. However, in any event, I think it desirable first to consider the
principle upon which a duty of care in tort may in the present context be
imposed upon the managing agents, assuming that to impose such a duty
would not be inconsistent with the relevant contractual relationship. In
considering this principle, I bear in mind in particular the separate submission
of the managing agents that no such duty should be imposed, because the loss
claimed by the Names is purely economic loss. However the identification of
the principle is, in my opinion, relevant to the broader question of the impact
of the relevant contract or contracts.
(3) The governing principle
Even so, I can take this fairly shortly. I turn immediately to the
decision of this House in Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd.
[1964] AC 465. There, as is of course well known, the question arose
whether bankers could be held liable in tort in respect of the gratuitous
provision of a negligently favourable reference for one of their customers,
– 11 –
when they knew or ought to have known that the plaintiff would rely on their
skill and judgment in furnishing the reference, and the plaintiff in fact relied
upon it and in consequence suffered financial loss. Your Lordships’ House
held that, in principle, an action would lie in such circumstances in tort; but-
that, in the particular case, a duty of care was negatived by a disclaimer of
responsibility under cover of which the reference was supplied.
The case has always been regarded as important in that it established
that, in certain circumstances, a duty of care may exist in respect of words as
well as deeds, and further that liability may arise in negligence in respect of
pure economic loss which is not parasitic upon physical damage. But, perhaps
more important for the future development of the law, and certainly more
relevant for the purposes of the present case, is the principle upon which the
decision was founded. The governing principles are perhaps now perceived
to be most clearly stated in the speeches of Lord Morris of Borth-y-Gest (with
whom Lord Hodson agreed) and of Lord Devlin. Lord Morris said, at
pp. 502-503):
“My Lords, I consider that it follows and that it should now be
regarded as settled that if someone possessed of a special skill
undertakes, quite irrespective of contract, to apply that skill for the
assistance of another person who relies upon such skill, a duty of care
will arise. The fact that the service is to be given by means of or by
the instrumentality of words can make no difference. Furthermore, if
in a sphere in which a person is so placed that others could reasonably
rely upon his judgment or his skill or upon his ability to make careful
inquiry, a person takes it upon himself to give information or advice
to, or allows his information or advice to be passed on to. another
person who, as he knows or should know, will place reliance upon it.
then a duty of care will arise.
Lord Devlin said, at p. 526:
“The respondents in this case cannot deny that they were performing
a service. Their sheet anchor is that they were performing it
gratuitously and therefore no liability for its performance can arise.
My Lords, in my opinion this is not the law. A promise given without
consideration to perform a service cannot be enforced as a contract by
the promisee; but if the service is in fact performed and done
negligently, the promisee can recover in an action in tort.”
He then cited a number of authorities, and continued, at pp. 528-529:
“I think, therefore, that there is ample authority to justify your
Lordships in saying now that the categories of special relationships
which may give rise to a duty to take care in word as well as in deed
are not limited to contractual relationships or to relationships of
fiduciary duty, but include also relationships which in the words of
– 12 –
Lord Shaw in Norton v. Lord Ashburton [1914] A.C. 932, 972 are
‘equivalent to contract,’ that is, where there is an assumption of
responsibility in circumstances in which, but for the absence of
consideration, there would be a contract. Where there is an express
undertaking, an express warranty as distinct from mere representation,
there can be little difficulty. The difficulty arises in discerning those
cases in which the undertaking is to be implied. In this respect the
absence of consideration is not irrelevant. Payment for information or
advice is very good evidence that it is being relied upon and that the
informer or adviser knows that it is. Where there is no consideration,
it will be necessary to exercise greater care in distinguishing between
social and professional relationships and between those which are of
a contractual character and those which are not. It may often be
material to consider whether the adviser is acting purely out of good
nature or whether he is getting his reward in some indirect form. The
service that a bank performs in giving a reference is not done simply
out of a desire to assist commerce. It would discourage the customers
of the bank if their deals fell through because the bank had refused to
testify to their credit when it was good.
“I have had the advantage of reading all the opinions prepared by your
Lordships and of studying the terms which your Lordships have
framed by way of definition of the sort of relationship which gives rise
to a responsibility towards those who act upon information or advice
and so creates a duty “of care towards them. I do not understand any
of your Lordships to hold that it is a responsibility imposed by law
upon certain types of persons or in certain sons of situations. It is a
responsibility that is voluntarily accepted or undertaken, either
generally where a general relationship, such as that of solicitor and
client or banker and customer, is created, or specifically in relation to
a particular transaction.”
He said, at pp. 531-532:
“Since the essence of the matter in the present case and in others of
the same type is the acceptance of responsibility, I should like to guard
against the imposition of restrictive terms notwithstanding that the
essential condition is fulfilled. If a defendant says to a plaintiff: ‘Let
me do this for you: do not waste your money in employing a
professional, I will do it for nothing and you can rely on me.’ I do
not think he could escape liability simply because he belonged to no
profession or calling, had no qualifications or special skill and did not
hold himself out as having any. The relevance of these factors is to
show the unlikelihood of a defendant in such circumstances assuming
a legal responsibility, and as such they may often be decisive. But
they are not theoretically conclusive and so cannot be the subject of
definition. It would be unfortunate if they were. For it would mean
that plaintiffs would seek to avoid the rigidity of the definition by
– 13 –
bringing the action in contract as in De La Bere v. Pearson Ltd. [1908]
1 K.B. 280 and setting up something that would do for consideration.
That, to my mind, would be an undesirable development in the law;
and the best way of avoiding it is to settle the law so that the presence’-
or absence of consideration makes no difference.”
From these statements, and from their application in Hedley Byrne, we can
derive some understanding of the breadth of the principle underlying the case.
We can see that it rests upon a relationship between the parties, which may
be general or specific to the particular transaction, and which may or may not
be contractual in nature. All of their Lordships spoke in terms of one party
having assumed or undertaken a responsibility towards the other. On this
point. Lord Devlin spoke in particularly clear terms in both passages from his
speech which I have quoted above. Further, Lord Morris spoke of that party
being possessed of a “special skill” which he undertakes to “apply for the
assistance of another who relies upon such skill”. But the facts of Hedley
Byrne itself, which was concerned with the liability of a banker to the
recipient for negligence in the provision of a reference gratuitously supplied.
show that the concept of a “special skill” must be understood broadly,
certainly broadly enough to include special knowledge. Again, though Hedley
Byrne was concerned with the provision of information and advice, the
example given by Lord Devlin of the relationship between solicitor and client,
and his and Lord Morris’ statements of principle, show that the principle
extends beyond the provision of information and advice to include the
performance of other services. It follows, of course, that although, in the
case of the provision of information and advice, reliance upon it by the other
party will be necessary to establish a cause of action (because otherwise the
negligence will have no causative effect), nevertheless there may be other
circumstances in which there will be the necessary reliance to give rise to the
application of the principle. In particular, as cases concerned with solicitor
and client demonstrate, where the plaintiff entrusts the defendant with the
conduct of his affairs, in general or in particular, he may be held to have
relied on the defendant to exercise due skill and care in such conduct.
In subsequent cases concerned with liability under the Hedley Byrne
principle in respect of negligent misstatements, the question has frequently
arisen whether the plaintiff falls within the category of persons to whom the
maker of the statement owes a duty of care. In seeking to contain that
category of persons within reasonable bounds, there has been some tendency
on the part of the courts to criticise the concept of “assumption of
responsibility” as being “unlikely to be a helpful or realistic test in most
cases” (see Smith v. Eric S. Bush [1990] 1 AC 831, 864-865, per Lord
Griffiths: and see also Caparo Industries Plc v. Dickman [1990] 2 AC 605,
628. per Lord Roskill). However, at least in cases such as the present, in
which the same problem does not arise, there seems to be no reason why
recourse should not be had to the concept, which appears after all to have
been adopted, in one form or another, by all of their Lordships in Medley
– 14 –
Byrne [1964] AC 465 (see, e.g., Lord Reid at pp. 483, 486 and 487; Lord
Morris (with whom Lord Hodson agreed) at p. 494; Lord Devlin at pp. 529
and 531; and Lord Pearce at p. 538). Furthermore, especially in a context
concerned with a liability which may arise under a contract or in a situation
“equivalent to contract”, it must be expected that an objective test will be
applied when asking the question whether, in a particular case, responsibility
should be held to have been assumed by the defendant to the plaintiff: see
Caparo Industries Plc v. Dickman [1990] 2 AC 605, 637, per Lord Oliver
of Aylmerton. In addition, the concept provides its own explanation why
there is no problem in cases of this kind about liability for pure economic
loss; for if a person assumes responsibility to another in respect of certain
services, there is no reason why he should not be liable in damages for that
other in respect of economic loss which flows from the negligent performance
of those services. It follows that, once the case is identified as falling within
the Hedley Byrne principle, there should be no need to embark upon any
further enquiry whether it is “fair, just and reasonable” to impose liability for
economic loss – a point which is, I consider, of some importance in the
present case. The concept indicates too that in some circumstances, for
example where the undertaking to furnish the relevant service is given on an
informal occasion, there may be no assumption of responsibility; and likewise
that an assumption of responsibility may be negatived by an appropriate
disclaimer. I wish to add in parenthesis that, as Oliver J. recognised in
Midland Bank Trust Co. Ltd. v. Hett, Stubbs & Kemp [1979] Ch. 384, 416F-
G. (a case concerned with concurrent liability of solicitors in tort and contract,
to which I will have to refer in a moment) an assumption of responsibility by,
for example, a professional man may give rise to liability in respect of
negligent omissions as much as negligent acts of commission, as for example
when a solicitor assumes responsibility for business on behalf of his client and
omits to take a certain step, such as the service of a document, which falls
within the responsibility so assumed by him.
(4) The application of the principle to managing agents at Lloyds
Since it has been submitted on behalf of the managing agents that no
liability should attach to them in negligence in the present case because the
only damage suffered by the Names consists of pure economic loss, the
question arises whether the principle in Hedley Byrne is capable of applying
in the case of underwriting agents at Lloyds who are managing agents. Like
Saville J. and the Court of Appeal, I have no difficulty in concluding that the
principle is indeed capable of such application. The principle has been
expressly applied to a number of different categories of person who perform
services of a professional or quasi-professional nature, such as bankers (in
Hedley Byrne itself); solicitors (as foreshadowed by Lord Devlin in Hedley
Byrne, and as held in the leading case of Midland Bank Trust Co. Ltd v. Hett,
Stubbs & Kemp [1979] Ch. 384, and other cases in which that authority has
been followed); surveyors and valuers (as in Smith v. Eric S. Bush [1990] 1
A.C. 831); and accountants (as in Caparo Industries Plc. v. Dickman [1990]
– 15 –
2 A.C. 605). Another category of persons to whom the principle has been
applied, and on which particular reliance was placed by the Names in the
courts below and in argument before your Lordships, is insurance brokers.
As Phillips J. pointed out in Youell v. Bland Welch & Co. Ltd. (The-
Superhulls Cover Case No. 2) [1990] 2 Lloyd’s Rep. 431, 459, it has been
accepted, since before 1964, that an insurance broker owes a duty of care in
negligence towards his client, whether the broker is bound by contract or not.
Furthermore, in Punjab National Bank v. DeBoinville [1992] 1 Lloyd’s Rep.
7 it was held by the Court of Appeal, affirming the decision of Hobhouse J.,
that a duty of care was owed by an insurance broker not only to his client but
also to a specific person whom he knew was to become an assignee of the
policy. For my part I can see no reason why a duty of care should not
likewise be owed by managing agents at Lloyds to a Name who is a member
of a Syndicate under the management of the agents. Indeed, as Saville J. and
the Court of Appeal both thought, the relationship between Name and
managing agent appears to provide a classic example of the type of
relationship to which the principle in Hedley Byrne applies. In so saying, I
put on one side the question of the impact, if any, upon the relationship of the
contractual context in which it is set. But, that apart, there is in my opinion
plainly an assumption of responsibility in the relevant sense by the managing
agents towards the Names in their Syndicates. The managing agents have
accepted the Names as members of a Syndicate under their management.
They obviously hold themselves out as possessing a special expertise to advise
the Names on the suitability of risks to be underwritten; and on the
circumstances in which, and the extent to which, reinsurance should be taken
out and claims should be settled. The Names, as the managing agents well
knew, placed implicit reliance on that expertise, in that they gave authority to
the managing agents to bind them to contracts of insurance and reinsurance
and to the settlement of claims. I can see no escape from the conclusion that.
in these circumstances, prima facie a duty of care is owed in tort by the
managing agents to such Names. To me, it does not matter if one proceeds
by way of analogy from the categories of relationship already recognised as
falling within the principle in Hedley Byrne or by a straight application of the
principle stated in the Hedley Byrne case [1964] AC 465 itself. On either
basis the conclusion is, in my opinion, clear. Furthermore, since the duty
rests on the principle in Hedley Byrne, no problem arises from the fact that
the loss suffered by the Names is pure economic loss.
This conclusion is, however, subject to the impact, if any, of the
contractual context. In argument before your Lordships this was regarded as
constituting the main basis for the managing agents’ challenge to the
conclusion on this point of the courts below. To this point I must therefore
turn: but before I do so I propose to consider briefly, if only to put it on one
side, the question whether, under the pre-1985 forms of agreement, a duty of
care on the part of the managing agents was excluded by the absolute
discretion vested in them under their contract with the direct Names, or with
the members’ agents in cases involving indirect Names.
– 16 –
(5) Absolute Discretion
I can deal with this point briefly because, like the Court of Appeal, I
agree with Saville J. that there is no substance in it. It was the submission of
the managing agents in the Merrett appeals before your Lordships, as it had
been before Saville J., that there was an unbroken line of authority supporting
the proposition that the expression “absolute discretion” in the context of a
private law agreement meant that the exercise of the power given by the
agreement to the recipient of the power cannot be challenged by the donor or
beneficiary of the power unless (a) the exercise of the power is in bad faith,
or (b) (arguably) the exercise of the power is totally unreasonable. It
followed, so the argument ran, that a duty to exercise due skill or care,
whether contractual or extra-contractual, was inconsistent with the bargain
and so must be excluded. However, it appears to me, as it did to the judge,
that in the present context the words used cannot have the effect of excluding
a duty of care, contractual or otherwise. Clear words are required to exclude
liability in negligence; and in the present case the words can, and in my
opinion should, be directed towards the scope of the agents’ authority. No
doubt the result is that very wide authority has been vested in the agents; but
the suggestion that the agent should as a result be under no duty to exercise
due skill and care in the exercise of his function under the agreement is, in the
present context, most surprising. I am content to adopt the following passage
from the judgment of Saville J. as my own:
“As I have said in other cases, Lloyd’s could not exist as an insurance
and reinsurance market unless the business is conducted by
professionals who must be given the widest possible powers to act on
behalf of the Names. Thus the underwriting agency agreement makes
absolutely clear that the Name must leave it exclusively to the
underwriting agents actually to run the business. The standard of
behaviour to be expected of the underwriting agents in carrying out
this task is an entirely different matter. The underwriting agency
agreement contains no express provisions in this regard, but I do not
find this in the least surprising, since it seems to me literally to go
without saying that the underwriting agents must act with reasonable
care and skill in exercising their authority and carrying on the
underwriting business on behalf of the Name. The very fact that the
agents are given the widest possible authority to act on behalf of the
Name, together with the fact that the Name’s potential liability for the
actions of the agents is unlimited and the further fact that the agents
receive remuneration for exercising their professional skills on behalf
of the Name, seem to me to point irresistibly to the conclusion that in
such a relationship the law does (as a matter of common sense it
should) impose a duty of reasonable care and skill upon the
underwriting agents of the kind alleged by the Names, which could
only be modified or excluded by clear agreement between the parties.
I can find nothing in the underwriting agency agreement which
indicates that this duty (the ordinary one owed by any professional
– 17 –
person) is in any way modified or excluded in the present cases, nor
to my mind is there anything of relevance in this context in the sub-
agency agreement.”
For these reasons I am, like both courts below, unable to accept the managing
agents’ argument on this point. With this point out of the way I can turn to
the main argument on this part of the case, relating to the impact of the
contractual context.
(6) The impact of the contractual context.
All systems of law which recognise a law of contract and a law of tort
(or delict) have to solve the problem of the possibility of concurrent claims
arising from breach of duty under the two rubrics of the law. Although there
are variants, broadly speaking two possible solutions present themselves:
either to insist that the claimant should pursue his remedy in contract alone.
or to allow him to choose which remedy he prefers. As my noble and learned
friend Lord Mustill and I have good reason to know (see J. Bracconot et Cie
v. Compagnie des Messageries Maritimes (The Sindh) [1975] 1 Lloyd’s Rep.
372). France has adopted the former solution in its doctrine of non cumul.
under which the concurrence of claims in contract and tort is outlawed (see
Tony Weir in XI Int. Encycl. Comp. L., ch. 12. paras. 47-72, at para. 52).
The reasons given for this conclusion are (1) respect for the will of the
legislator, and (2) respect for the will of the parties to the contract (see: para.
53). The former does not concern us; but the latter is of vital importance.
It is however open to various interpretations. For such a policy does not
necessarily require the total rejection of concurrence, but only so far” as a
concurrent remedy in tort is inconsistent with the terms of the contract. It
comes therefore as no surprise to learn that the French doctrine is not
followed in all civil law jurisdictions, and that concurrent remedies in tort and
contract are permitted in other civil law countries, notably Germany
(see: para. 58). I only pause to observe that it appears to be accepted that no
perceptible harm has come to the German system from admitting concurrent
claims.
The situation in common law countries, including of course England.
is exceptional, in that the common law grew up within a procedural
framework uninfluenced by Roman law. The law was categorised by
reference to the forms of action, and it was not until the abolition of the forms
of action by the Common Law Procedure Act 1852 that it became necessary
to reclassify the law in substantive terms. The result was that common
lawyers did at last segregate our law of obligations into contract and tort,
though in so doing they relegated quasi-contractual claims to the status of an
appendix to the law of contract, thereby postponing by a century or so the
development of a law of restitution. Even then, there was no systematic
reconsideration of the problem of concurrent claims in contract and tort. We
can see the courts rather grappling with unpromising material drawn from the
old cases in which liability in negligence derived largely from categories based
– 18 –
upon the status of the defendant. In a sense, we must not be surprised: for
no significant law faculties were established at our universities until the late
19th century, and so until then there was no academic opinion available to
guide or stimulate the judges. Even so, it is a remarkable fact-mat there was
little consideration of the problem of concurrent remedies in our academic
literature until the second half of the 20th century, though in recent years the
subject has attracted considerable attention.
In the result, the courts in this country have until recently grappled
with the problem very largely without the assistance of systematic academic
study. At first, as is shown in particular by cases concerned with liability for
solicitors’ negligence, the courts adopted something very like the French
solution, holding that a claim against a solicitor for negligence must be
pursued in contract, and not in tort (see, e.g., Bean v. Wade (1885) 2 T.L.R.
157): and in Groom v. Crocker [1939] 1 K.B. 194, this approach was firmly
adopted. It has to be said, however, that decisions such as these, though
based on prior authority, were supported by only a slender citation of cases,
none of great weight; and the jurisprudential basis of the doctrine so adopted
cannot be said to have been explored in any depth. Furthermore when, in
Bagot v. Stevens Scanlan & Co. Ltd. [1966] 1 Q.B. 197. Diplock L.J. adopted
a similar approach in the case of a claim against a firm of architects, he felt
compelled to recognise (pp. 204-205) that a different conclusion might be
reached in cases “… where the law in the old days recognised either
something in the nature of a status like a public calling (such as common
carrier, common innkeeper, or a bailor and bailee) or the status of master and
servant”. To this list must be added cases concerned with claims against
doctors and dentists. I must confess to finding it startling that, in the second
half of the 20th century, a problem of considerable practical importance
should fall to be solved by reference to such an outmoded form of
categorisation as this.
I think it is desirable to stress at this stage that the question of
concurrent liability is by no means only of academic significance. Practical
issues, which can be of great importance to the parties, are at stake.
Foremost among these is perhaps the question of limitation of actions. If
concurrent liability in tort is not recognised, a claimant may find his claim
barred at a time when he is unaware of its existence. This must moreover be
a real possibility in the case of claims against professional men. such as
solicitors or architects, since the consequences of their negligence may well
not come to light until long after the lapse of six years from the date when the
relevant breach of contract occurred. Moreover the benefits of the Latent
Damage Act 1986, under which the time of the accrual of the cause of action
may be postponed until after the plaintiff has the relevant knowledge, are
limited to actions in tortious negligence. This leads to the startling possibility
that a client who has had the benefit of gratuitous advice from his solicitor
may in this respect be better off than a client who has paid a fee. Other
practical problems arise, for example, from the absence of a right to
contribution between negligent contract-breakers; from the rules as to
– 19 –
remoteness of damage, which are less restricted in tort than they are in
contract; and from the availability of the opportunity to obtain leave to serve
proceedings out of the jurisdiction. It can of course be argued that the
principle established in respect of concurrent liability in contract and tort
should not be tailored to mitigate the adventitious effects of rules of law such
as these, and that one way of solving such problems would no doubt be ‘to
rephrase such incidental rules as have to remain in terms of the nature of the
harm suffered rather than the nature of the liability asserted’ (see Tony Weir,
XI Int. Encycl. Comp. L. ch.12., para. 72). But this is perhaps crying for
the moon; and with the law in its present form, practical considerations of
this kind cannot sensibly be ignored.
Moreover I myself perceive at work in these decisions not only the
influence of the dead hand of history, but also what I have elsewhere called
the temptation of elegance. Mr. Tony Weir (XI Int. Encycl. Comp. L.
ch. 12., para. 55) has extolled the French solution for its elegance; and we
can discern the same impulse behind the much-quoted observation of Lord
Scarman when delivering the judgment of the Judicial Committee of the Privy
Council in Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd. [1986]
A. C. 90. 107 B-D:
Their Lordships do not believe that there is anything to the advantage
of the law’s development in searching for a liability in tort where the
parties are in a contractual relationship. This is particularly so in a
commercial relationship. Though it is possible as a matter of legal
semantics to conduct an analysis of the rights and duties inherent in
some contractual relationships including that of banker and customer
either as a matter of contract law when the question will be what, if
any, terms are to be implied or as a matter of tort law when the task
will be to identity a duty arising from the proximity and character of
the relationship between the parties, their Lordships believe it to be
correct in principle and necessary for the avoidance of confusion in the
law to adhere to the contractual analysis: on principle because it is a
relationship in which the parties have, subject to a few exceptions, the
right to determine their obligations to each other, and for the
avoidance of confusion because different consequences do follow
according to whether liability arises from contract or tort, e.g. in the
limitation of action.”
It is however right to stress, as did Sir Thomas Bingham M.R. in the present
case, that the issue in Tai Hing was whether a tortious duty of care could be
established which was more extensive than that which was provided for under
the relevant contract.
At all events, even before Tai Hing we can see the beginning of the
redirection of the common law away from the contractual solution adopted in
Groom v. Crocker [1939] 1 K.B. 194, towards the recognition of concurrent
remedies in contract and tort. First, and most important, in 1963 came the
– 20 –
decision of your Lordships’ House in Hedley Byrne & Co. Ltd. v. Heller &
Partners Ltd., reported in [19641 A.C. 465. I have already expressed the
opinion that the fundamental importance of this case rests in the establishment
of the principle upon which liability may arise in tortious negligence in respect
of services (including advice) which are rendered for another, gratuitously or
otherwise, but are negligently performed – viz., an assumption of
responsibility coupled with reliance by the plaintiff which, in all the
circumstances, makes it appropriate that a remedy in law should be available
for such negligence. For immediate purposes, the relevance of the principle
lies in the fact that, as a matter of logic, it is capable of application not only
where the services are rendered gratuitously, but also where they are rendered
under a contract. Furthermore we can see in the principle an acceptable basis
for liability in negligence in cases which in the past have been seen to rest
upon the now outmoded concept of status. In this context, it is of particular
relevance to refer to the opinion expressed both implicitly by Lord Morris of
Borth-y-Gest (with whom Lord Hodson agreed) and expressly by Lord Devlin
that the principle applies to the relationship of solicitor and client, which is
nearly always contractual: see [1964] AC 465, 497-499 (where Lord Morris
approved the reasoning of Chitty J. in Cann v. Willson (1888) 39 Ch.D. 39),
and p. 529 (per Lord Devlin).
The decision in Hedley Byrne, and the statement of general principle
in that case, provided the opportunity to reconsider the question of concurrent
liability in contract and tort afresh, untrammelled by the ancient learning
based upon a classification of defendants in terms of status which drew
distinctions difficult to accept in modern conditions. At first that opportunity
was not taken. Groom v. Crocker [1939] 1 K.B. 194 “was followed by the
Court of Appeal in Cook v. Swinfen [1967] 1 W.L.R. 457. and again in
Heywood v. Wellers [1976] QB 446: though in the latter case Lord Denning
M.R. (at p. 459) was beginning to show signs of dissatisfaction with the
contractual test accepted in Groom v. Crocker a dissatisfaction which
crystallised into a change of heart in Esso Petroleum Co. Ltd. v. Mardon
[1976] QB 801. That case was concerned with statements made by
employees of Esso in the course of pre-contractual negotiations with Mr.
Mardon, the prospective tenant of a petrol station. The statements related to
the potential throughput of the station. Mr. Mardon was persuaded by the
statements to enter into the tenancy; but he suffered serious loss when the
actual throughput proved to be much lower than had been predicted. The
Court of Appeal held that Mr. Mardon was entitled to recover damages from
Esso, on the basis of either breach of warranty or (on this point affirming the
decision of the judge below) negligent misrepresentation. In rejecting an
argument that Esso’s liability could only be contractual. Lord Denning M.R.
dismissed Groom v. Crocker [ [1939] 1 K.B. 194 and Bagot v. Stevens Scanlan
Co. Ltd. [1966] 1 Q.B. 197 as inconsistent with other decisions of high
authority, viz. Boorman v. Brown (1842) 3 Q.B. 511. 525-526 per Tindal
C.J., and (1844) 11 Cl. & Fin. 1, 44 per Lord Campbell: Lister v. Romford
Ice and Cold Storage Co. Ltd. [1957] AC 555, 587 per Lord Radcliffe;
– 21 –
Matthews v. Kuwait Bechtel Corporation [1959] 2 Q.B. 57; and Nocton v.
Lord Ashbunon [1914] A.C. 932, 956, per Viscount Haldane L.C. He then
held that, in addition to its liability in contract, Esso was also liable in
negligence. The other members of the Court of Appeal. Ormrod and Shaw
L.JJ., agreed that Mr. Mardon was entitled to recover damages either for
breach of warranty or for negligent misrepresentation, though neither
expressed any view about the status of Groom v. Crocker [1939] 1 K.B. 194.
It was however implicit in their decision that, as Lord Denning held,
concurrent remedies were available to Mr. Mardon in contract and tort. For
present purposes, I do not find it necessary to comment on the authorities
relied upon by Lord Denning as relieving him from the obligation to follow
Groom v. Crocker, though I feel driven to comment that the judgments in
Esso Petroleum Co. Ltd. v. Mardon [1976] QB 801 reveal no analysis in
depth of the basis upon which concurrent liability rests. That case was
however followed by the Court of Appeal in Batty v. Metropolitan Property
Realisations Ltd. [1978] Q.B. 554, in which concurrent remedies in contract
and tort were again allowed.
The requisite analysis is however to be found in the judgment of Oliver
J. in Midland Bank Trust Co. Ltd. v. Hett, Stubbs & Kemp [1979] Ch. 384.
in which he held that a solicitor could be liable to his client for negligence
either in contract or in tort, with the effect that in the case before him it was
open to the client to take advantage of the more favourable date of accrual of
the cause of action for the purposes of limitation. In that case, Oliver J. was
much concerned with the question whether it was open to him, as a judge of
first instance, to depart from the decision of the Court of Appeal in Groom v.
Crocker [1939] 1 K.B. 194. For that purpose, he carried out a most careful
examination of the relevant authorities, both before and after Groom r.
Crocker, and concluded that he was free to depart from the decision in that
case, which he elected to do.
It is impossible for me to do justice to the reasoning of Oliver J.. for
which I wish to express my respectful admiration, without unduly prolonging
what is inevitably a very long opinion. I shall therefore confine myself to
extracting certain salient features. First, from his study of the cases before
Groom v. Crocker, he found no unanimity of view that the solicitor’s liability
was regarded as exclusively contractual. Some cases (such as Howell v.
Young (1826) 5 B.& C. 259) he regarded as equivocal. In others, he
understood the judges to regard contract and tort as providing alternative
causes of action (see In re Manby and Hawksford (1856) 26 L.J.Ch. 313, 317,
and Sawyer v. Goodwin (1867) 36 L.J.Ch. 578, 582, in both cases per Stuart
V.-C., and most notably Nocton v. Lord Ashburton [1914] A.C. 932, 956.
per Viscount Haldane L.C.). However Bean v. Wade (1885) 2 T.L.R. 157,
briefly reported in the Times Law Reports and by no means extensively
referred to, provided Court of Appeal authority that the remedy was
exclusively contractual; and it was that case which was principally relied
upon by the Court of Appeal in Groom v. Crocker [1939] 1 K.B. 194 when
– 22 –
reaching the same conclusion. Oliver J. put on one side those cases, decided
for the purpose of section 11 of the County Courts Act 1915. under which a
different statutory test had to be complied with, viz. whether the action was
one “founded on a contract” or “founded on a tort”.
It is evident that the early authorities did not play a very significant
part in Oliver J.’s decision (see [1979] Ch. 384, 411 C-D). He loyally
regarded Groom v. Crocker as prima facie binding upon him. His main
concern was with the impact of the decision of this House in Hedley Byrne
[1964] AC 465, and of subsequent cases in the Court of Appeal in which
Hedley Byrne had been applied. As he read the speeches in Hedley Byrne, the
principle there stated was not limited to circumstances in which the
responsibility of the defendant had been gratuitously assumed. He referred in
particular to the statement of principle by Lord Morris of Borth-y-Gest at pp.
502-503. which I have already quoted, and said, at p. 411 E-F:
“The principle was stated by Lord Morris of Borth-y-Gest as a
perfectly general one and it is difficult to see why it should be
excluded by the fact that the relationship of dependence and reliance
between the parties is a contractual one rather than one gratuitously
assumed, in the absence, of course, of contractual terms excluding or
restricting the general duties which the law implies.”
Oliver J. went on (p. 412) to quote from the dissenting judgment of Denning
L.J. in Candler v. Crane Christmas & Co. [1951] 1 K.B. 164. 179-180 (a
passage approved by Lord Pearce in Hedley Byrne [1964] AC 465. 538) and
said, at p. 413 B-D:
“Now, in that passage, I think that it is abundantly clear that
Denning L.J. was seeking to enunciate a general principle of liability
arising from the relationship created by the assumption of a particular
work or responsibility, quite regardless of how the relationship arose
. . .
“The inquiry upon which the court is to embark is ‘what is the
relationship between the plaintiff and defendant?’ not ‘how did the
relationship, if any, arise’ That this is so appears. I think, with
complete clarity from subsequent cases.”
Later he said, at p. 415:
“The matter becomes, in my judgment, even clearer when one looks
at the speech of Lord Devlin in the Hedley Byrne case [1964] A.C.
465, for he treats the existence of a contractual relationship as very
good evidence of the general tortious duty which he is there
discussing. He said, at pp. 528-529:
– 23 –
‘I think, therefore, that there is ample authority to justify your
Lordships in saying now that the categories of special
relationships which may give rise to a duty to take care in word
as well as in deed are not limited to contractual relationships or
to relationships of fiduciary duty, but include also relationships
which in the words of Lord Shaw in Nocton v. Lord Ashburton
[1914] A.C. 932, 972, are ‘equivalent to contract’, that is,
where there is an assumption of responsibility in circumstances
in which, but for the absence of consideration, there would be
a contract . . .’
He expressed his conclusion concerning the impact of Hedley Byrne on the
case before him in the following words, at p. 417 A-C:
The case of a layman consulting a solicitor for advice seems to me to
be as typical a case as one could find of the sort of relationship in
which the duty of care described in the Hedley Byrne case [1964] A.C.
465 exists: and if I am free to do so in the instant case. I would,
therefore, hold that the relationship of solicitor and client gave rise to
a duty in the defendants under the general law to exercise that care and
skill upon which they must have known perfectly well that their client
relied. To put it another way, their common law duty was not to
injure their client by tailing to do that which they had undertaken to
do and which, at their invitation, he relied upon them to do. That duty
was broken, but no cause of action in tort arose until the damage
occurred; and none did occur until August 17. 1967. I would regard
it as wholly immaterial that their duty arose because they accepted a
retainer which entitled them, if they chose to do so. to send a bill to
their client.”
I wish to express my respectful agreement with these passages in Oliver J.’s
judgment.
Thereafter, Oliver J. proceeded to consider the authorities since Hedley
Byrne. in which he found, notably in statements of the law by members of the
Appellate Committee in Arenson v. Arenson [1977] A.C. 405 and in the
decision of the Court of Appeal in Esso Petroleum Co. Ltd. v. Mardon [1976]
Q. B. 801, the authority which relieved him of his duty to follow Groom v.
Crocker [1939] 1 K.B. 194. But I wish to add that, in the course of
considering the later authorities, he rejected the idea that there is some general
principle of law that a plaintiff who has claims against a defendant for breach
of duty both in contract and in tort is bound to rely upon his contractual rights
alone. He said, at p. 420 A-B:
“There is not and never has been any rule of law that a person having
alternative claims must frame his action in one or the other. If I have
a contract with my dentist to extract a tooth, I am not thereby
– 24 –
precluded from suing him in tort if he negligently shatters my jaw:
Edwards v. Mallan [1908] 1 K.B. 1002.”
The origin of concurrent remedies in this type of case may lie in history; but
in a modern context the point is a telling one. Indeed it is consistent with the
decision in Donoghue v. Stevenson [1932] AC 562 itself, and the rejection
in that case of the view, powerfully expressed in the speech of Lord
Buckmaster (see, in particular, pp. 577-578), that the manufacturer or repairer
of an article owes no duty of care apart from that implied from contract or
imposed by statute. That there might be co-existent remedies for negligence
in contract and in tort was expressly recognised by Lord Macmillan in
Donoghue v. Stevenson, at p. 610, and by Lord Wright in Grant v. Australian
Knitting Mills Ltd., [1936] AC 85, 102-104. Attempts have been made to
explain how doctors and dentists may be concurrently liable in tort while other
professional men may not be so liable, on the basis that the former cause
physical damage whereas the latter cause pure economic loss (see the
discussion by Christine French in (1983) 5 Otago L.R. 236, 280-1). But this
explanation is not acceptable, if only because some professional men. such as
architects, may also be responsible for physical damage. As a matter of
principle, it is difficult to see why concurrent remedies in tort and contract,
if available against the medical profession, should not also be available against
members of other professions, whatever form the relevant damage may take.
The judgment of Oliver J. in the Midland Bank Trust Co. case [1979]
Ch. 384 provided the first analysis in depth of the question of concurrent
liability in tort and contract. Following upon Esso Petroleum Co. Ltd. v.
Mardon [1976] QB 801, it also broke the mould, fn the sense that it
undermined the view which was becoming settled that, where there is an
alternative liability in tort, the claimant must pursue his remedy in contract
alone. The development of the case law in other common law countries is
very striking. In the same year as the Midland Bank Trust Co. case, the Irish
Supreme Court held that solicitors owed to their clients concurrent duties in
contract and tort: see Finlay v. Murtagh [1979] I.R. 249. Next, in Central
Trust Co. v. Rafuse (1986) 31 D.L.R. 4th 481, Le Dain J., delivering the
judgment of the Supreme Court of Canada, conducted a comprehensive and
most impressive survey of the relevant English and Canadian authorities on
the liability of solicitors to their clients for negligence, in contract and in tort,
in the course of which he paid a generous tribute to the analysis of Oliver J.
in the Midland Bank Trust Co. case. His conclusions are set out in a series
of propositions at pp. 521-2 of the report: but his general conclusion was to
the same effect as that reached by Oliver J. He said, at p. 522:
“. . .A concurrent or alternative liability in tort will not be
admitted if its effect would be to permit the plaintiff to
circumvent or escape a contractual exclusion or limitation of
liability for the act or omission that would constitute the tort.
Subject to this qualification, where concurrent liability in tort
– 25 –
and contract exists the plaintiff has the right to assert the cause
of action that appears to be the most advantageous to him in
respect of any particular legal consequence.”
I respectfully agree.
Meanwhile in New Zealand the Court of Appeal had appeared at first,
in McLaren Maycroft & Co. v. Fletcher Development Co. Ltd. [1973] 2
N.Z.L.R. 100. to require that, in cases where there are concurrent duties in
contract and tort, the claimant must pursue his remedy in contract alone.
There followed a period of some uncertainty, in which differing approaches
were adopted by courts of first instance. In 1983 Miss Christine French
published her Article on the Contract/Tort Dilemma in (1981-84) 5 Otago
L.R. 236. in which she examined the whole problem in great depth, with
special reference to the situation in New Zealand, having regard to the “Rule”
in McLaren Maycroft. Her Article, to which I wish to pay tribute, was of
course published before the decision of the Supreme Court of Canada in the
Central Trust case. Even so. she reached a conclusion which, on balance.
favoured a freedom for the claimant to choose between concurrent remedies
in contract and tort. Thereafter in Rowlands v. Collow [1992] 1 N.Z.L.R.
178 Thomas J., founding himself principally on the Central Trust case and on
Miss French’s Article, concluded that he was free to depart from the decision
of the New Zealand Court of Appeal in McLaren Maycroft and to hold that
a person performing professional services (in the case before him an engineer)
may be sued for negligence by his client either in contract or in tort. He said.
at p. 190:
” The issue is now virtually incontestable; a person who has performed
professional services may be held liable concurrently in contract and
in negligence, unless the terms of the contract preclude the tortious
liability.”
In Australia, too, judicial opinion appears to be moving in the same direction.
though not without dissent: see, in particular. Aluminum Products (Qld.) Pty.
Ltd. v. Hill [1981] Qd.R. 33 (a decision of the Full Court of the Supreme
Court of Queensland) and Macpherson & Kelley v. Kevin J. Prunty &
Associates [1983] 1 V.R. 573 (a decision of the Full Court of the Supreme
Court of Victoria). A different view has however been expressed by Deane
J in Hawkins v. Clayton (1987-88) 164 C.L.P. 539. 585. to which I will
return later. In principle, concurrent remedies appear to have been accepted
for some time in the United States (see Prosser’s Handbook on the Law of
Torts. 5th ed. (1984) p. 666), though with some variation as to the application
of the principle in particular cases. In these circumstances it comes as no
surprise that Professor Fleming, writing in 1992, should state that “the last ten
years have seen a decisive return to the ‘concurrent’ approach” (see his Law
of Torts, 8th ed., p. 187).
– 26 –
I have dealt with the matter at some length because, before your
Lordships, Mr. Temple Q.C., for the managing agents, boldly challenged the
decision of Oliver J. in the Midland Bank Trust Co. case [1979] Ch. 384,
seeking to persuade your Lordships that this House should now- hold that case
to have been wrongly decided- This argument was apparently not advanced
below, presumably because Oliver J.’s analysis had received a measure of
approval in the Court of Appeal: see, e.g., Forster v. Outred & Co. [1982]
1 W.L.R. 86, 99, per Dunn L.J. Certainly there has been no sign of
disapproval, even where the Midland Bank Trust Co. case has been
distinguished: see Bell v. Peter Browne & Co. [1990] 2 Q.B. 495.
Mr. Temple adopted as part of his argument the reasoning of Mr. J.M.
Kaye in an article The Liability of Solicitors in Tort (1984) 100 L.Q.R. 680.
In his article, Mr. Kaye strongly criticised the reasoning of Oliver J. both on
historical grounds and with regard to his interpretation of the speeches in
Hedley Byrne. However, powerful though Mr. Kaye’s article is, I am not
persuaded by it to treat the Midland Bank Trust Co. case as wrongly decided.
First, so far as the historical approach is concerned, this is no longer of direct
relevance in a case such as the present, having regard to the development of
the general principle in Hedley Byrne. No doubt it is correct that, in the 19th
century, liability in tort depended upon the category of persons into which the
defendant fell, with the result that in those days it did not necessarily follow
that, because (for example) a surgeon owed an independent duty of care to his
patient in tort irrespective of contract, other professional men were under a
similar duty. Even so, as Mr. Boswood Q.C. for the Names stressed, if the
existence of a contract between a surgeon and his patient did not preclude the
existence of a tortious duty to the patient in negligence ‘there is no reason in
principle why a tortious duty should not co-exist with a contractual duty in the
case of the broad duty of care now recognised following the generalisation of
the tort of negligence in the 20th century.
So far as Hedley Byrne itself is concerned. Mr. Kaye reads the
speeches as restricting the principle of assumption of responsibility there
established to cases where there is no contract; indeed, on this he tolerates
no dissent, stating (at p. 706) that “unless one reads [Hedley Byrne\ with
deliberate intent to find obscure or ambiguous passages” it will not bear the
interpretation favoured by Oliver J. I must confess however that, having
studied yet again the speeches in Hedley Byrne [1964] AC 465 in the light
of Mr. Kaye’s critique, I remain of the opinion that Oliver J.’s reading of
them is justified. It is, I suspect, a matter of the angle of vision with which
they are read. For here, I consider, Oliver J. was influenced not only by
what he read in the speeches themselves, notably the passage from Lord
Devlin’s speech at pp. 528-529 (quoted above), but also by the internal logic
reflected in that passage, which led inexorably to the conclusion which he
drew Mr. Kaye’s approach involves regarding the law of tort as
supplementary to the law of contract, i.e. as providing for a tortious liability
in cases where there is no contract. Yet the law of tort is the general law, out
– 27 –
of which the parties can, if they wish, contract: and, as Oliver J.
demonstrated, the same assumption of responsibility may, and frequently does,
occur in a contractual context. Approached as a matter of principle,
therefore, it is right to attribute to that assumption of responsibility, together
with its concomitant reliance, a tortious liability, and then to enquire whether
or not that liability is excluded by the contract because the latter is
inconsistent with it. This is the reasoning which Oliver J., as I understand it,
found implicit, where not explicit, in the speeches in Hedley Byrne. With his
conclusion I respectfully agree. But even if I am wrong in this, I am of the
opinion that this House should now, if necessary, develop the principle of
assumption of responsibility as stated in Hedley Byrne to its logical conclusion
so as to make it clear that a tortious duty of care may arise not only in cases
where the relevant services are rendered gratuitously, but also where they are
rendered under a contract. This indeed is the view expressed by my noble
and learned friend Lord Keith of Kinkel in Murphy v. Brentwood District
Council [1991] 1 AC 398, 466, in a speech with which all the other
members or the Appellate Committee agreed.
An alternative approach, which also avoids the concurrence of tortious
and contractual remedies, is to be found in the judgment of Deane J. in
Hawkins v. Clayton (1987-88) 164 C.L.R. 539. 582-586. in which he
included, at p. 585:
On balance, however, it seems to me to be preferable to accept that
there is neither justification nor need for the implication of a
contractual term which, in the absence of actual intention of the
parties, imposes upon a solicitor a contractual duty (with consequential
liability in damages for its breach) which is co-extensive in content and
concurrent in operation with a duty (with consequential liability in
damages for us breach) which already exists under the common law of
negligence.”
It is however my understanding that by the law in this country contracts for
services do contain an implied promise to exercise reasonable care (and skill)
in the performance of the relevant services; indeed, as Mr. Tony Weir has
pointed out (XI Int. Encycl. Comp. L., ch. 12, para. 67), in the 19th century
the field of concurrent liabilities was expanded “since it was impossible for the
judges to deny that contracts contained an implied promise to take reasonable
care, at the least, not to injure the other party”. My own belief is that, in the
present context, the common law is not antipathetic to concurrent liability, and
that there is no sound basis for a rule which automatically restricts the
claimant to either a tortious or a contractual remedy. The result may be
untidy: but, given that the tortious duty is imposed by the general law, and
the contractual duty is attributable to the will of the parties, I do not find it
objectionable that the claimant may be entitled to take advantage of the
remedy which is most advantageous to him, subject only to ascertaining
whether the tortious duty is so inconsistent with the applicable contract that,
– 28 –
in accordance with ordinary principle, the parties must be taken to have
agreed that the tortious remedy is to be limited or excluded.
In the circumstances of the present case, I have nor regarded it as
necessary or appropriate to embark upon yet another detailed analysis of the
case law, choosing rather to concentrate on those authorities which appear to
me to be here most important. I have been most anxious not to overburden
an inevitably lengthy opinion with a discussion of an issue which is only one
(though an important one) of those which fall for decision; and, in the context
of the relationship of solicitor and client, the task of surveying the authorities
has already been admirably performed by both Oliver J. and Le Dain J. But,
for the present purposes more important, in the present case liability can, and
in my opinion should, be founded squarely on the principle established in
Hedley Byrne itself, from which it follows that an assumption of responsibility
coupled with the concomitant reliance may give rise to a tortious duty of care
irrespective of whether there is a contractual relationship between the parties,
and in consequence, unless his contract precludes him from doing so, the
plaintiff, who has available to him concurrent remedies in contract and tort,
may choose that remedy which appears to him to be the most advantageous.
(7) Application of the above principles in the present case
I have already concluded that prima facie a duty of care was owed in
tort on the Hedley Byrne principle by managing agents both to direct Names
and indirect Names. So far as the direct Names are concerned, there is
plainly a contract between them and the managing agents, in the terms of the
pre-1985 Byelaw form of agency agreement, in which a term falls to be
implied that the agents will exercise due care and skill in the exercise of their
functions as managing agents under the agreement. That duty of care is no
different from the duty of care owed by them to the relevant Names in tort:
and, having regard to the principles already stated, the contract does not
operate to exclude the tortious duty, leaving it open to the Names to pursue
either remedy against the agents.
I turn to the indirect Names. Here there is, as I see it, no material
distinction between the claims of the Names in the Merrett actions, and those
of the Names in the Feltrim actions. True, the former arise in the context of
the pre-1985 Byelaw forms of agency and sub-agency agreements, whereas the
latter arise in the context of the forms of agreement prescribed by the 1985
Byelaw. However in both cases there must be implied into the sub-agency
agreements a duty upon the managing agents to exercise due skill and care.
A similar responsibility must rest upon the members’ agents under the 1985
Byelaw form of agency agreement, and I will assume that the same applies
under the pre-1985 Byelaw form (though the point does not arise for decision
by your Lordships). In neither case, however, is there any material difference
between the relevant contractual duty and any duty which is owed by the
managing agents to the relevant Names in tort. It is however submitted on
behalf of the managing agents that the indirect Names and the managing
– 29 –
agents, as parties to the chain of contracts contained in the relevant agency
and sub-agency agreements, must be taken to have thereby structured their
relationship so as to exclude any duty of care owed directly by the managing
agents to the indirect Names in tort.
In essence the argument must be that, because the managing agents
have, with the consent of the indirect Names, assumed responsibility in
respect of the relevant activities to another party, i.e. the members’ agents,
under a sub-agency agreement, it would be inconsistent to hold that they have
also assumed responsibility in respect of the same activities to the indirect
Names. I for my part cannot see why in principle a party should not assume
responsibility to more than one person in respect of the same activity. Let it
be assumed (unlikely though it may be) that, in the present case, the managing
agents were in a contractual relationship not only with the members’ agents
under a sub-agency agreement but also directly with the relevant Names,
under both of which they assumed responsibility for the same activities. I can
see no reason in principle why the two duties of care so arising should not be
capable of co-existing.
Of course I recognise that the present case presents the unusual feature
that claims against the managing agents, whether by the members’ agents
under the sub-agency agreement or by the indirect Names in tort, will in both
cases have the purpose, immediate or ultimate, of obtaining compensation for
the indirect Names. In these circumstances, concurrent duties of care could,
in theory at least, give rise to problems, for example in the event of the
insolvency of the managing agents or the members’ agents. Furthermore, as
Mr. Temple Q.C. suggested in the course of his submissions on behalf of the
managing agents, questions of contribution might, at least in theory, arise.
But your Lordships’ task, like that of the courts below, is to answer the
questions of principle raised by the issues presented for decision: and in these
circumstances it would be quite wrong to embark upon the examination of
questions which do not arise on those issues, and indeed may never arise in
practice. For myself, I am all the more reluctant to do so since, because the
liability (if any) of the managing agents will in each case flow from claims by
the indirect Names, it may well be that practical problems such as these will,
it they arise, find a practical solution.
I wish however to add that I strongly suspect that the situation which
arises in the present case is most unusual; and that in many cases in which
a contractual chain comparable to that in the present case is constructed it may
well prove to be inconsistent with an assumption of responsibility which has
the effect of. so to speak, short circuiting the contractual structure so put in
place by the parties. It cannot therefore be inferred from the present case that
other sub-agents will be held directly liable to the agent’s principal in tort.
Let me take the analogy of the common case of an ordinary building contract,
under which main contractors contract with the building owner for the
construction of the relevant building, and the main contractor sub-contracts
with sub-contractors or suppliers (often nominated by the building owner) for
– 30 –
the performance of work or the supply of materials in accordance with
standards and subject to terms established in the sub-contract. I put on one
side cases in which the sub-contractor causes physical damage to property of
the building owner, where the claim does not depend on an -assumption of
responsibility by the sub-contractor to the building owner; though the sub-
contractor may be protected from liability by a contractual exemption clause
authorised by the building owner. But if the sub-contracted work or materials
do not in the result conform to the required standard, it will not ordinarily be
open to the building owner to sue the sub-contractor or supplier direct under
the Medley Byrne principle, claiming damages from him on the basis that he
has been negligent in relation to the performance of his functions. For there
is generally no assumption of responsibility by the sub-contractor or supplier
direct to the building owner, the parties having so structured their relationship
that it is inconsistent with any such assumption of responsibility. This was the
conclusion of the Court of Appeal in Simaan General Contracting Co. v.
Pilkington Glass Ltd. (No. 2) [1988] QB 758. As Bingham L.J. put it, at
p. 781:
“I do not, however, see any basis on which the defendants [the
nominated suppliers] could be said to have assumed a direct
responsibility for the quality of the goods to the plaintiffs [the building
owners); such a responsibility is, I think, inconsistent with the
structure of the contract the parties have chosen to make.”
It is true that, in this connection, some difficulty has been created by the
decision of your Lordships’ House in Junior Books Ltd. v. Veitchi Co. Ltd.
[1983] 1 AC 520. In my opinion, however, it is unnecessary for your
Lordships to reconsider that decision for the purposes of the present appeal.
Here however I can see no inconsistency between the assumption of
responsibility by the managing agents to the indirect Names, and that which
arises under the sub-agency agreement between the managing agents and the
members’ agents, whether viewed in isolation or as part of the contractual
chain stretching back to and so including the indirect Names. For these
reasons, I can see no reason why the indirect Names should not be free to
pursue their remedy against the managing agents in tort under the Medley
Byrne principle.
I Merrett and Feltrim Appeals
B. Fiduciary Duty
The question arising under this issue is whether Merretts acting as
managing agents (whether or not they are also members’ agents) owed the
Names a fiduciary duty to conduct the underwriting for the account of the
Names with reasonable skill for the 1979 to 1985 underwriting years of
account (inclusive) equivalent to the alleged duty of care in tort.
– 31 –
Both Saville J. and the Court of Appeal declined to address this
question since having regard to the manner in which they decided the issue on
the tortious duty of care, the question did not arise. Having regard to the
conclusion which I have reached on the tortious duty, I likewise do not think
it necessary for your Lordships’ House to address the question of fiduciary
duty.
II. Feltrim and Gooda Walker Appeals
Liability of members’ agents to Names during the period 1987-1989
Saville J. held that this issue should be decided against the members’
agents, and his decision was affirmed by the Court of Appeal, for the same
reasons. As a result it was held that, under agency agreements in the form
prescribed by Lloyd’s Byelaw No. 1 of 1985, members’ agents are responsible
to the Names for any failure to exercise reasonable skill and care on the part
of managing agents to whom underwriting has been delegated by the
members agents; and that the members agents are not required to exercise
skill and care only in relation to those activities and functions which members’
agents by custom and practice actually perform for the Names personally.
This issue raises a question of construction of the prescribed form of
agency agreement. Since however the prescribed forms of agency and sub-
agency agreements together constitute the contractual regime established by
the Byelaw, it follows that the agency agreement should not be considered in
isolation, but as forming, together with the sub-agency agreement, a coherent
whole which, in a case concerned with indirect Names, regulates the
contractual relationship between Name, members’ agent and managing agent.
Furthermore it is not to be forgotten that, in a case concerned with a
combined agent, the agency agreement may fulfil the dual function of
regulating the functions of the combined agent both in its role as members
agent, and in its role as managing agent in respect of any Syndicate under its
management of which the Name is a member.
In order to consider this question of construction I think it desirable
that I should, like Sir Thomas Bingham M.R., first set out the terms of the
most relevant provisions of the prescribed forms of agency and sub-agency
agreements. These are as follows.
AGENCY AGREEMENT
1. DEFINITIONS:
In this agreement the under mentioned expressions shall
where the context so requires or admits have the following meanings:-
– 32 –
(a) The expression ‘the Syndicate’ shall mean the
syndicate or, if more than one, each of the respective syndicates of
which the Name is for the time being a member under the provisions
of this agreement, being the syndicate or syndicates specified in the
Schedule(s) attached hereto ….
2. APPOINTMENT OF THE NAME’S AGENT AT
LLOYD’S:
-
-
-
The agent shall act as the underwriting agent for
the Name for the purpose of underwriting at Lloyd’s for the account
of the Name such classes and descriptions of insurance business, other
than those prohibited by the Council, as may be transacted by the
Syndicate (hereinafter referred to as ‘the underwriting business’). -
In acting as underwriting agent for the Name the
Agent shall at all times comply with the byelaws, regulations and
requirements for the time being of the Council affecting the Name as
an underwriting member of Lloyd’s. Provided that if and to the extent
that any provision of this Agreement shall be inconsistent with any
such byelaw, regulation or requirement such inconsistent provision
shall be deemed to be modified or cancelled so far as may be
necessary or appropriate to the intent that the byelaw, regulation or
requirement in question shall prevail and have full effect.
-
-
. . .
4 POWERS OF THE AGENT
(a) The agent is authorised …. to exercise such
powers as the agent may consider to be necessary or desirable in
connection with or arising out of the underwriting business, including
without prejudice to the generality of the foregoing:
(i) the acceptance of risks and the effecting
of reinsurance, including reinsurance for the purpose of clause 5(g)
hereof;
. . . .
(b) Without prejudice to the generality of the
provisions of sub-clause (a) of this clause, the agent shall have the
following customary and/or special powers in connection with the
conduct and winding-up of the underwriting business:
. . . .
(G) Delegation of agent’s powers:
– 33 –
Power, subject to any requirements of the
Council, to appoint or employ any person, firm or body corporate to
carry on or manage the underwriting business or any part thereof, and
to delegate to or confer upon any person, firm or body corporate all
or any of the powers, authorities and discretions given to the agent by
this agreement including this power of delegation and the other powers
contained in this paragraph.
5. CONTROL OF UNDERWRITING BUSINESS:
(a) The agent shall have the sole control and
management of the underwriting business and the Name shall not in
any way interfere with the exercise of such control or management.
. . . .
(g) In order to close the underwriting account of any
year the agent may:
(i) reinsure all or any outstanding liabilities
in such manner as the agent shall think fit, including the debiting of
such account and the crediting of the underwriting account of the next
succeeding year with such reinsurance premium as the Agent in its
absolute discretion (subject to any requirements of the Council) thinks
fair or
(ii) reinsure all or any outstanding liabilities
into the underwriting account of any other year then remaining open
or in any other manner which the agent (subject as aforesaid) thinks
fair.
. . . .
8. REMUNERATION:
(a) The Name shall pay to the agent as remuneration for
the services of the agent a fee at the rate per annum specified in the
Syndicate Schedule.
. . . .
9. UNDERTAKING BY THE NAME TO PAY ALL
LIABILITIES AND OUTGOINGS:
(a) The Name shall keep the agent at all times in
funds available for the payment of the liabilities, expenses and
outgoings of the underwriting business . . . .”
– 34 –
“SUB-AGENCY AGREEMENT
W H E R E A S the agent is the underwriting agent at
Lloyd’s for certain underwriting members of Lloyd’s and it has been
arranged between the agent and the sub-agent that the sub-agent shall
act as the sub-underwriting agent for one or more of such underwriting
members upon the terms hereinafter mentioned.
NOW IT IS HEREBY AGREED AND DECLARED between
the parties hereto as follows :-
. . . . .
-
-
-
The sub-agent shall act as sub-agent for the agent for the
purpose of conducting in the names and for the account of each of the
agent’s Names that part of the underwriting business as defined in
clause 2(a) of the agency agreement which is to be transacted by such
Name as a member of the Syndicate (hereinafter called ‘the Syndicate
underwriting business’); …. -
(a) The sub-agent shall underwrite for the agent’s
Names as part of the Syndicate ….
-
-
(b) The individual premium income limit to be
allocated to the Syndicate in respect of each of the agent’s Names shall
be agreed from time to time between the sub-agent and the agent . .
. .
5. (a) The agent delegates to the sub-agent the
performance of all such duties and the exercise of all such powers,
authorities and discretions imposed or conferred upon the agent by the
agency agreement (including without prejudice to the generality of the
foregoing the power of delegation contained in that agreement) as it
may be appropriate or necessary for the sub-agent to perform or
exercise for the purpose of carrying on the Syndicate underwriting
business.
. . . .
7. (a) The sub-agent shall conduct the Syndicate
underwriting business in such manner as to comply with the provisions
of the agency agreement and Lloyd’s byelaws and regulations and is
to have regard for Lloyd’s Codes of Conduct or similar forms of
guidance for the Lloyd’s market.
. . . .
– 35 –
12. (a) The agent undertakes to put and keep the sub-agent
in funds to such extent as the sub-agent shall in its sole discretion
determine for payment of all liabilities, expenses and outgoings from
time to time payable in connection with the Syndicate underwriting
business but (subject to any supplementary provision) only to the
extent that the agent shall be able to enforce against a Name the
provisions of the agency agreement.
. . . . “
The rival contentions of the parties centred upon the construction to be
placed upon clause 2(a) of the agency agreement. For the Names in the
Feltrim actions, it was submitted by Mr. Boswood Q.C. that clause 2(a)
contains an express undertaking by the underwriting agent to act as the
underwriting agent of the Name, with the effect that (except to the extent that,
where the agent is a combined agent, it acts as managing agent of a Syndicate
of which the Name is a member) members’ agents are as such bound to
underwrite insurance business for the Name. It was conceded that, if that
submission was correct, there was an implied term that such underwriting
should be carried out with reasonable care and skill. Mr. Boswood’s
argument on this point was supported by Mr. Vos Q.C. for the Names in the
Gooda Walker actions.
This argument was accepted by the courts below. But before the
Appellate Committee it was subjected to a powerful attack by Mr. Eder Q C
for the Gooda Walker members’ agents, supported by Mr. Rowland for the
Feltrim members agents. The argument ran as follows:
(1) Mr. Eder began with clause 2(a) of the agency agreement, under which
it is provided that the agent shall act as ‘underwriting agent’ for the Name.
He then drew upon the definitions of ‘underwriting agent’ in Byelaw No. 4 of
1984, and in paragraph l(c) of the Interpretation Byelaw No. 1 of 1983 (as
amended), as showing that an underwriting agent may be either a member’s
agent or a managing agent, and submitted that appointment under clause 2(a)
as underwriting agent’ did not of itself indicate in which capacity the agent
was agreeing to act.
(2) Next he turned to clause 2(b). Here again he invoked Byelaw No. 4
of 1984, and the definitions in Part A of both ‘managing agent’ and
members agent’ which show (1) that a managing agent performs for an
underwriting member the function of (inter alia) underwriting contracts of
insurance at Lloyd’s and (2) that a members’ agent does not perform any of
the functions of a managing agent. Further, under paragraph 4(a) of Part B
of the Byelaw, there is a prohibition against any person acting as a managing
agent who is not registered as such under the Byelaw. Building on this
prohibition, Mr. Eder developed an argument to the effect that, on a true
construction of clause 2(a), members’ agents could not as such have agreed
– 36 –
to do underwriting on behalf of the Names, when that was a prohibited
activity under the relevant Lloyd’s legislation.
(3) Turning to clause 4 of the agency agreement, he stressed that the
clause is concerned not with duties but with powers conferred upon the agent,
specifying powers the exercise of which the agent may consider to be
‘necessary or desirable’. It followed from the fact that a member’s agent is
prohibited from acting as a managing agent that the exercise, in particular, of
the power to accept risks and effect reinsurances could not properly be
regarded as necessary or desirable for a members’ agent. Furthermore, clause
4(b)(G) falls into two parts, the former being concerned with a power to
appoint another person to carry on or manage the underwriting business, and
the latter with a power to delegate or confer upon another the powers, etc.,
given to the agent. It was the submission of Mr. Eder that the effect of this
sub-clause was, first, that the members’ agent can appoint a managing agent
to carry on the actual underwriting for the Name, even though the members’
agent has itself no power to do so; and that the delegation of the broad
authority conferred by clause 4(a) on the members’ agent would have the
effect of authorising the managing agent to underwrite on the Name’s behalf.
In his submission, clause 4(b)(G) envisaged that the person so appointed
would be acting directly on behalf of the Name.
(4) There was nothing in the agency agreement, and in particular nothing
in clause 5, to indicate that the members’ agents contracted to underwrite or
to be responsible for the underwriting in the sense advanced by the Names.
Impressed though I was by Mr. Eder’s argument, in the end I feel
unable to accept it.
I start, like him, with clause 2(a). This is the central provision, which
makes available to Names the opportunity of participating in underwriting at
Lloyd’s. Consistently with that evident object, it does not merely appoint the
agent as “the underwriting agent” for the Name, but does so “for the purpose
of underwriting at Lloyd’s for the account of the Name such classes and
descriptions of insurance business …. as may be transacted by the Syndicate
(hereinafter referred to as ‘the underwriting business’).” Next. I have in the
forefront of my mind the fact that, as I have already pointed out, the agency
agreement is designed to enable it to perform a dual purpose so that it may
apply not only to the functions of a members’ agent as such, but also to the
functions performed by a combined agent when it acts as managing agent in
respect of a Syndicate of which the Name is a member. I have a feeling that
this duality of function may lie at the root of the somewhat elliptical language
in which clause 2(a) is expressed. However it follows in my opinion that
appointment of the agent as underwriting agent under clause 2(a) must, in the
case of a combined agent, impose upon it the duty of carrying out
underwriting on behalf of the Name if entered as a member of a syndicate of
which the agent is the managing agent. Furthermore, I find it very difficult
to see how the same words in clause 2(a) can impose any different obligation
– 37 –
on the members’ agent when the relevant Syndicate is not managed by it,
either because it is a pure members’ agent, or because the Syndicate in
question is managed by some other managing agent. Here, I draw attention
to the definition of ‘the Syndicate’ in clause l(a) of the agency agreement,
under which no distinction is drawn in this context between Syndicates
managed by a combined agent in its capacity as managing agent, and
Syndicates managed by some other managing agent, in which the Name is
entered as member pursuant to a sub-agency agreement with the members’
agent.
That the same obligation is in such circumstances imposed on the
members’ agent is, in my opinion, made clear beyond doubt when we read the
agency agreement together with the sub-agency agreement, and discover from
clause 2 of the latter that the managing agent acts as sub-agent for the
members’ agent in conducting the relevant part of the underwriting business
as defined in clause 2(a) of the agency agreement. The position under clause
2(a) is therefore that the obligation imposed on the members’ agent under the
clause with regard to underwriting is the same, whether it is acting as
members agent or is a combined agent acting as managing agent in respect
of a Syndicate of which the Name is a member. The only difference is that
in the former case it carries out the underwriting through the agency of a
managing agent, under the terms of the prescribed form of sub-agency
agreement, whereas in the latter case it carries it out itself.
Furthermore, like Saville J., I cannot see that such performance of its
obligations by a members’ agent can constitute any breach of the prohibition
in paragraph 4 of Part B of the underwriting agents Byelaw, since in each case
the function of managing agent will always be performed by a managing
agent: indeed, on my understanding of the position, this is precisely what was
intended by the draftsman of the agency and sub-agency agreements, who
plainly intended that there should be no breach of the Byelaw.
There is another consideration which strongly supports the conclusion
that clause 2(a) of the agency agreement must be read as imposing
responsibility on the members’ agent in respect of underwriting for the Name.
It is plain from the two prescribed forms of agreement that, in a case
involving an indirect Name, they create no contractual relationship between
the Name and the managing agent. On the contrary, as I have already
indicated, there is a clear structure by virtue of which, under clause 2(a) of
the agency agreement, the members’ agent is appointed the Name’s
underwriting agent for the purpose set out in the sub-clause; and, under clause
2 of the sub-agency agreement, it is provided (here mirroring the recital to
that agreement) that the sub-agent (the managing agent) shall act as sub-agent
for the agent (the members’ agent). Consistently with these provisions, under
clause 4 of the agency agreement all the necessary powers are vested in the
underwriting agent (the members’ agent), including the power to delegate
contained in clause 4(b)(G); and clause 5(a) of the sub-agency agreement
provides for the delegation by the agent (the members’ agent) to the sub-agent
– 38 –
(the managing agent) of the performance of all duties and the exercise of all
powers, authorities and discretions imposed or conferred upon the agent by the
agency agreement as may be appropriate or necessary.
It was submitted by Mr. Eder on behalf of the members’ agents before
Saville J. and the Court of Appeal, and again before the Appellate Committee,
that in cases involving indirect Names there was indeed a contractual
relationship between the Names and the managing agents, under which the
managing agents were contractually responsible for the proper performance
of the underwriting for the Names. In this connection, Mr. Eder relied in
particular upon the fact that the recital to the sub-agency agreement recites
that it has been arranged between the agent and the sub-agent that the sub-
agent shall act as the sub-underwriting agent for the Names.
However, the substantive provisions of the sub-agency agreement (in
particular, clauses 2, 3, and 5) make it perfectly clear that, although the sub-
agent has power to underwrite for the agent’s names, i.e. to bind the Names
to contracts of insurance, nevertheless there is no contractual relationship
between the sub-agent and the Names, the only relevant contractual
relationship of the sub-agent being with the agent. In this connection the true
position in law is, in my opinion, accurately stated by Professor F.M.B.
Reynolds in Article 36(3) of the 15th edition (1985) of Bowstead on Agency,
p. 131, as follows:
“But there is no privity of contract between a principal and a sub-agent
as such, merely because the delegation was effected with the authority
of the principal; and in the absence of such privity the rights and
duties arising out of any contracts between the principal and the agent,
and between the agent and the sub-agent, respectively, are only
enforceable by and against the immediate parties to those contracts.
However, the sub-agent may be liable to the principal as a fiduciary,
and possibly in other respects.”
Of the three authorities cited by Mr. Eder in support of his submission
on this point De Bussche v. Alt (1877) 8 Ch.D. 286, Powell & Thomas v.
Evan Jones & Co. [1905] 1 K.B. 11 and Tarn v. Scanlan [1928] A.C. 34, the
first two were concerned with the accountability of a sub-agent for secret
profits, and the third with liability for income tax. Each was a decision on its
own specific facts, and none provides Mr. Eder with assistance in the form
of general guidance on the circumstances in which a contractual relationship
may come into existence between a principal and a sub-agent. I am satisfied
that no such relationship came into existence between the Names and their
sub-agents in the present case.
In these circumstances, Mr. Eder’s argument leads to the extraordinary
conclusion that, under the prescribed forms of agency and sub-agency
agreements, neither members’ agents nor managing agents assumed any
contractual responsibility to the Names for the underwriting which was the
– 39 –
principal purpose of these agreements. Such a conclusion is, in my opinion.
so improbable that it adds considerable support for the view that Mr. Eder’s
argument cannot be right, and that the true position must be that, on a true
construction of clause 2(a) of the agency agreement, members’ agents did
indeed undertake to carry out underwriting for the Names, as was held by
both courts below.
I recognise, of course, that it might have been thought right to
structure the agreements differently, so that the managing agents were put into
a direct contractual relationship with indirect Names who are members of
Syndicates under their management. This was what was in fact done under
the new forms of agreement brought into force as from 1 January 1990. But
it is plain that this was not the intention under the forms of agreement now
under consideration under which, in cases involving indirect Names, the
managing agent acts as sub-agent of the members’ agent, and all the necessary
powers, etc. are vested in the members’ agent which then delegates the
performance of them to the managing agent.
In truth, once it is appreciated that the obligation to underwrite under
clause 2(a) of the agency agreement may be performed by the underwriting
agent either by itself in a case involving direct Names, or otherwise through
a managing agent under the terms of the sub-agency agreement, everything
falls into place. This is particularly true of clause 4 of the agency agreement,
when read in conjunction with clauses 2 and 5 of the sub-agency agreement.
As far as clause 4(b)(G) of the agency agreement is concerned, on which Mr.
Eder placed such reliance, this can be seen to reflect precisely the position
under clauses 2(a) and 4(a); the effect of the sub-clause is, as obviously
contemplated by the draftsman of the two agreements, that under the first part
the members agent will appoint the managing agent to act as its sub-agent for
the purpose of conducting the relevant part of the underwriting business, under
clause 2 of the sub-agency agreement, and under the second part delegate to
it under clause 5(a) the performance of the relevant powers, etc., which,
significantly, are vested in the members’ agent under clause 4(a) of the agency
agreement. The vesting of these powers in the members’ agent is, in my
opinion, a strong pointer against the construction of the agreements for which
Mr. Eder contends. Had that construction represented the draftsman’s
intention, he would surely, in this respect at least, have drafted the agreements
differently.
For these reasons, which I understand to be the same as those given
by Saville J., which were accepted by the Court of Appeal, I would on this
issue accept the argument advanced on behalf of the Names, and reject that
advanced on behalf of the members’ agents.
III Merrett Appeals
Reinsurance to Close.
– 40 –
On this Issue, I can see no answer to the conclusion reached by Saville
J. and the Court of Appeal. I agree with the submission advanced by Mr.
Borwood Q.C. on behalf of the Names in the Merrett Appeals that when
Names on the 1985 underwriting year reinsured Names on the 1984 year,
although the 1984 Names were running off their business, the 1985 Names
were writing new insurance business which could only be done pursuant to the
1985 Byelaw form of agreement in force as from 1 January 1987, as held by
the courts below.
Conclusion
For these reasons, I would answer all the questions in the same manner
as Saville J. and the Court of Appeal, and I would dismiss the appeals of the
members’ agents and the managing agents with costs.
LORD BROWNE-WILKINSON
My Lords,
I have read the speech of my noble and learned friend Lord Goff of
Chieveley, with which I am in complete agreement. I add a few words of my
own on the relationship between the claim based on liability for negligence
and the alternative claim advanced by the Names founded on breach of
fiduciary duty.
The decision of this House in Hedley Byrne & Co. Ltd. v. Heller and
Partners Ltd. [1964] AC 465, was, to a substantial extent, founded on the
earlier decision of this House in Nocton v. Lord Ashburton [1914] A.C. 932.
In that case, Lord Ashburton sought to be relieved from the consequences of
having loaned money to, amongst others, his solicitor Nocton. Lord
Ashburton’s pleadings were based primarily on an allegation of fraud; in
particular, there was no allegation on the pleadings either of breach of
contract by Nocton or of negligence. The lower courts treated the case as
being wholly dependent on proof of fraud. But in this House Nocton was held
liable for breach of a fiduciary obligation owed by him as solicitor to his
client. However, although the decision was based on breach of fiduciary
duty, both Viscount Haldane L.C. and Lord Shaw expressed such fiduciary
duty as being but one example of a wider general principle, viz., that a man
who has voluntarily assumed to act on behalf of, or to advise, another in law
assumes a duty to that other to act or to advise with care. Viscount Haldane
said, at p. 948:
“Although liability for negligence in word has in material respects
been developed in our law differently from liability for negligence in
act, it is nonetheless true that the man may come under a special duty
to exercise care in giving information or advice. I should accordingly
be sorry to be thought to lend countenance to the idea that recent
– 41 –
decisions have been intended to stereotype the cases in which people
can be held to have assumed such a special duty. Whether such a duty
has been assumed must depend on the relationship of the parties, and
it is at least certain that there are a good many cases in which that
relationship may be properly treated as giving rise to a special duty of
care in statement.”
Viscount Haldane gave a further explanation of the decision in Nocton v. Lord
Ashburton in Robinson v. The National Bank of Scotland Ltd. [1916] S.C.
(H.L.) 154. 157:
“. . .I wish emphatically to repeat what I said in advising this House
in the case of Nocton v. Lord Ashburton, that it is a great mistake to
suppose that, because the principle in Derry v. Peek clearly covers all
cases of the class to which I have referred, therefore the freedom of
action of the courts in recognising special duties arising out of other
kinds of relationship which they find established by the evidence is in
any way affected. I think, as I said in Nocton’s case, that an
exaggerated view was taken by a good many people of the scope of the
decision in Derry v. Peek. The whole of the doctrine as to fiduciary
relationships, as to the duty of care arising from implied as well as
expressed contract, as to the duty of care arising from other special
relationships which the courts may find to exist in particular cases, still
remains, and I shall be very sorry if any word fell from me which
suggests that the courts are in any way hampered in recognising that
the duty of care may be established when such cases really occur.”
It was these passages from the speeches of Viscount Haldane, and others.
which this House in Hedley Byrne took up and developed into the general
principle there enunciated as explained by my noble and learned friend, Lord
Goff of Chieveley.
This derivation from fiduciary duties of care of the principle of liability
in negligence where a defendant has by his action assumed responsibility is
illuminating in a number of ways. First, it demonstrates that the alternative
claim put forward by the Names based on breach of fiduciary duty, although
understandable, was misconceived. The liability of a fiduciary for the
negligent transaction of his duties is not a separate head of liability but the
paradigm of the general duty to act with care imposed by law on those who
take it upon themselves to act for or advise others. Although the historical
development of the rules of law and equity have, in the past, caused different
labels to be stuck on different manifestations of the duty, in truth the duty of
care imposed on bailees, carriers, trustees, directors, agents and others is the
same duty: it arises from the circumstances in which the defendants were
acting, not from their status or description. It is the fact that they have all
assumed responsibility for the property or affairs of others which renders them
liable for the careless performance of what they have undertaken to do, not
the description of the trade or position which they hold. In my judgment, the
– 42 –
duties which the managing agents have assumed to undertake in managing the
insurance business of the Names brings them clearly into the category of those
who are liable, whether fiduciaries or not, for any lack of care in the conduct
of that management.
Secondly, in my judgment, the derivation of the general principle from
fiduciary duties may be instructive as to the impact of any contractual
relationship between the parties on the general duty of care which would
otherwise apply. The phrase “fiduciary duties” is a dangerous one, giving rise
to a mistaken assumption that all fiduciaries owe the same duties in all
circumstances. That is not the case. Although, so far as I am aware, every
fiduciary is under a duty not to make a profit from his position (unless such
profit is authorised), the fiduciary duties owed, for example, by an express
trustee are not the same as those owed by an agent. Moreover, and more
relevantly, the extent and nature of the fiduciary duties owed in any particular
case fall to be determined by reference to any underlying contractual
relationship between the parties. Thus, in the case of an agent employed
under a contract, the scope of his fiduciary duties is determined by the terms
of the underlying contract. Although an agent is, in the absence of contractual
provision, in breach of his fiduciary duties if he acts for another who is in
competition with his principal, if the contract under which he is acting
authorise him so to do, the normal fiduciary duties are modified accordingly:
see Kelly v. Cooper [1993] A.C. 205, and the cases there cited. The
existence of a contract does not exclude the co-existence of concurrent
fiduciary duties (indeed, the contract may well be their source); but the
contract can and does modify the extent and nature of the general duty that
would otherwise arise.
In my judgment, this traditional approach of equity to fiduciary duties
is instructive when considering the relationship between a contract and any
duty of care arising under the Hedley Byrne principle (of which fiduciary
duties of care are merely an example). The existence of an underlying
contract (e.g. as between solicitor and client) does not automatically exclude
the general duty of care which the law imposes on those who voluntarily
assume to act for others. But the nature and terms of the contractual
relationship between the parties will be determinative of the scope of the
responsibility assumed and can, in some cases, exclude any assumption of
legal responsibility to the plaintiff for whom the defendant has assumed to act.
If the common law is not to become again manacled by “clanking chains” (this
time represented by causes, rather than forms, of action), it is in my judgment
important not to exclude concepts of concurrent liability which the courts of
equity have over the years handled without difficulty. I can see no good
reason for holding that the existence of a contractual right is in all
circumstances inconsistent with the co-existence of another tortious right,
provided that it is understood that the agreement of the parties evidenced by
the contract can modify and shape the tortious duties which, in the absence of
contract, would be applicable.
– 43 –
For these reasons, in addition to the much wider considerations
addressed by Lord Goff of Chieveley, I would dismiss the appeals.
LORD MUSTILL
My Lords.
I have had the advantage of reading in draft the speech prepared by my
noble and learned friend Lord Goff of Chieveley, and for the reasons which
he gives, I too would dismiss the appeals of the Members’ Agents and the
Managing Agents with costs.
LORD NOLAN
My Lords.
I have had the advantage of reading in draft the speech prepared by my
noble and learned friend Lord Goff of Chieveley, and for the reasons which
he gives, I too would dismiss these appeals with costs.
– 44 –
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