Governor and Company of the Bank of Scotland v Euclidian (No 1) Ltd and others [2007] EWHC 1732 (Comm), [2007] All ER (D) 330 (Jul)
Queen’s Bench Division (Commercial Court)
Field J
20 July 2007
The High Court has ruled that the words “on any grounds whatsoever…including without limitation” in an insurance certificate between underwriters and a bank concerning funding of conditional fee agreements (CFAs) mean what they said: they include any refusal by the underwriters to accept that they are bound to pay in accordance with the certificate’s terms when a claim has failed to succeed.
David Bailey QC, Frederick Phillpott and Jawdat Khurshid (instructed by Eversheds LLP) for the claimant.
Andrew Popplewell QC and Harry Matovu (instructed by CMG Law) for the defendant.
The proceedings concerned conditional fee agreements (CFAs) for personal injury claims. There were three aspects to such agreements: (i) a CFA between the claimant and a solicitor; (ii) the availability of a loan from a funder to cover the claimant’s disbursements and other costs; and (iii) insurance to cover the claimant for his own disbursements, the defendant’s costs, the insurance premium and the loan interest should the claim fail.
The claimant bank acted as the funder for a number of schemes including the one at issue in the instant case, which was operated by Claims Bureau UK Ltd (CBUK). The insurer was a Lloyd’s syndicate whose members formed some of the defendants. Condition 2(c) of the master certificate of insurance provided:
“Where Underwriters avoid or repudiate the Certificate or deny payment of any claim under the Certificate on any grounds whatsoever, whether fraudulent or not, including without limitation non-disclosure, misrepresentation, breach of Certificate or Master Certificate terms and Conditions or the application of any Exclusion, the Underwriters shall without delay indemnify the Funder to the extent of the amount of the outstanding loan (together with accrued interest payable thereon to the Funder by the Assured) due at the date of avoidance, repudiation or denial aforesaid…This Condition shall constitute a separate agreement between the Funder and Underwriters.”
The scheme collapsed and the bank brought proceedings against the underwriters seeking more than £11.3m in respect of outstanding loans relating to some 5,500 unsuccessful claims that were admitted into the scheme. The court ordered the trial of preliminary issues. It was accepted that condition 2(c) constituted a collateral contract between the bank and the defendant in its own right.
The issues included whether the defendants would be entitled to refuse to indemnify the bank under cl 2(c) in different circumstances such as when the personal injury claimant did not exist, his signature was forged, or the loan agreement was void under the principle of non est factum.
MR JUSTICE FIELD:
It was important to bear in mind that the bank had advanced the loans on the basis that it (the bank) would in the vast majority of cases be repaid either out of the damages and costs recovered on the borrower’s behalf from a defendant or, if the claim failed, as assignee of the insurance represented by the certificate.
Given those routes to repayment the bank was prepared to advance the loans without giving the borrower a credit score, which was an important aspect of the scheme because many claimants might have been refused a loan if their credit rating had to come up to scratch. It was appreciated all round that when making the loans the bank would place no or virtually no reliance on the prospects of recovering the loan from the borrower under the loan agreement.
In his lordship’s view, the words “on any grounds whatsoever…including without limitation” meant what they said and included any refusal by the underwriters to accept that they were bound under a certificate to pay in accordance with the certificate’s terms when a claim had failed to succeed. All that was necessary, was that there was a certificate issued in respect of the loan for which an indemnity was sought under the clause. It was not necessary for there to be an assured as defined in the master certificate.
As for the second part of the clause, the sole function of the words “to the extent of the amount of the outstanding loan (together with accrued interest payable thereon to the Funder by the Assured) due at the date of avoidance, repudiation or denial aforesaid” was to define the extent of indemnity by reference to the terms contained in the loan agreement accepted by the bank, whether or not that agreement was enforceable by the bank against the borrower.
As noted, it was appreciated all round that when making the loans the bank would place no or virtually no reliance on the prospects of recovering the loan from the borrower under the loan agreement. It followed that when agreeing to the clause the parties could not have placed much, if any reliance on the value to the underwriters of any subrogation right to enforce non-status loans.
The parties were therefore not to be taken to have agreed that the underwriters would only make good such loss as the bank would have been entitled to recover from the borrower. On the contrary, in light of the background reasonably available to both of them, the parties were to be taken to have agreed that the underwriters would make good any loss suffered as a result of any refusal to pay under the insurance certificate.
His lordship appreciated that the effect of his construction of the clause was that, as between the bank and the underwriters the risk of loss resulting from mismanagement of the CBUK scheme, particularly in the vetting of claims, was thrown on the underwriters, yet the bank had considerable control over the operation of the scheme under the client funding agreement.
However, it was up to the underwriters whether they agreed to the clause or not. They had decided to agree to the clause and accept the risks involved in doing so. Thus his lordship’s construction of the clause was not so commercially unreasonable that it required clearer words than appeared in the clause.
