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House of Lords holds ‘Commercialism over Literalism’- Siriusly!

09/09/2016 | Judith Ratcliffe

Judgments of the higher courts can raise important issues and the rare smile.  They can be striking, persuasive or simply memorable because of the manner in which a particular judge has expressed an opinion.  In this series of articles, I will look briefly at three such cases: Greenland Bank Limited (in Liquidation) (Neutral Citation Number: [2009] EWCA Civ 14 – Case No: A3/2008/0662), Sirius International Insurance [2004] UKHL 54, and Floe Telecomm Limited (in Liquidation) (Neutral Citation Number: [2009] EWCA Civ 47 – Case No: 1024/2/3/04).

The first article in this series looked at Greenland Bank Ltd and the way in which Counsel managed to persuade the Court of Appeal to allow him to present opposing arguments in different jurisdictions for the same Client (American Express) in the same case.

In this article I will consider the House of Lords judgment in Sirius International Insurance [2004] UKHL 54 and how it dealt with the issue of literalism.

Sirius International Insurance Company (Sirius) had taken on a number of insurance risks on behalf of FAI General Insurance Limited (FAI); in effect, this was a reinsurance agreement where Sirius was ‘fronting’ an arrangement supported by a back-to-back retrocession.

The commercial context is as follows:

Both Sirius and FAI are insurers and reinsurers. Sirius was incorporated in Sweden and FAI was incorporated in New South Wales. FAI was, in 2004, in provisional liquidation in Australia and England.

In 1997, Agnew, a Lloyds syndicate, wanted to reinsure the liabilities on its onshore energy account. FAI had offered to provide the necessary reinsurance, but did not have the required rating, as it was not ‘A’ rated; Sirius was ‘A’ rated, and agreed, in a letter dated 15 October 1997, to write the reinsurance policy for Agnew and so ‘fronting’ the reinsurance (for which, Sirius received an annual fee of US$65,000), and also transferring the risks that it reinsured under that policy, to FAI.

Sirius reinsured Agnew for 2 years, from 1 December 1996 to 31 December 1997 and 31 December 1997 to 31 December 1998; FAI wrote retrocessions for Sirius, covering these years. The insurance premium for the first year was US$2 million, and for the second year was US$1.6 million and payments for these premiums were made to FAI.

In summary, under their agreements, Agnew acted as insurer, Sirius acted as ‘fronting reinsurer’ and FAI acted as ‘retrocessionaire’, which means that, in its role as ‘fronting reinsurer’, Sirius took on the risk of being obliged to pay Agnew should FAI default on its responsibilities, or, become insolvent.

Sirius asked for security, by way of a letter of credit from a bank and, in a letter to FAI dated 3 September 1999 (the side letter), wrote:

“We [Sirius] … undertake that we will not agree or pay any claim presented to Sirius by [Agnew] without FAI’s prior agreement in writing, nor will we draw down under [the letter of credit], unless (1) FAI has agreed that Sirius should pay a claim but has not put Sirius in funds to do so, notwithstanding the simultaneous settlements clause in our retrocession contract (see below) or (2) [Agnew] obtains a judgment or binding arbitration award against Sirius which Sirius is obliged to pay.”

 Under paragraph 3 of this letter, FAI in a ‘simultaneous settlements clause’ FAI had agreed that it would pay its share of any loss under the retrocession at the same time as Sirius’ payment to Agnew.

FAI (acting through its parent company, HIH) handed over a draft letter of credit, which incorporated, in its terms, the ICC Uniform Customs and Practice for Documentary Credits (1993 Revision), and Sirius approved the terms.

An Australian Bank, Westpac Banking Corporation (Westpac), which had no knowledge of the terms of the side letter, provided an irreversible ‘standby letter of credit for US$5 million in the terms agreed by the parties’.

At First Instance, the beneficiary (Sirius) sought to claim under the letter of credit. The issuing bank resisted, saying that the conditions set out in the ‘side letter’ had not been met. Jacobs J decided that the conditions were met, but his decision was overturned by the Court of Appeal and Sirius appealed to the House of Lords.

The House of Lords found in favour of Sirius, with the overriding reason that the Court favoured a Commercial interpretation of the facts over a Literal one, as Lord Steyn confirms at paragraph 18 of the judgement:

“The inquiry is objective: the question is what a reasonable person, circumstanced as the actual parties were, would have understood the parties to have meant by the use of specific language. The answer to that question is to be gathered from the text under consideration and its relevant contextual scene.”

Lord Steyn reminds us that ‘The tendency should … generally speaking be against literalism’  and that ‘if possible it should be resisted in the interpretative process’, and demonstrates the dangers of a literal approach by reciting a tale from William Paley, whose moral philosophy is said to have influenced ‘thinking on contract’ in the 1800s:

The tyrant Temures promised the garrison of Sebastia that no blood would be shed if they surrendered to him. They surrendered. He shed no blood. He buried them all alive.

Lord Justice Carnwath, echoes Lord Steyn’s comments, at paragraph 25: ‘With due respect to the members of the Court of Appeal, their interpretation was uncommercial and literalistic.’

There is not a little irony in the judgment because while at paragraph 18, Lord Steyn makes it clear that the ‘aim’ of the judicial inquiry into the case is to ‘ascertain the contextual meaning of the relevant contractual language’, by which he means in a commercial sense, when he then goes on to talk about the tale of Sebastia’s garrison, he states ‘What is literalism? It will depend on the context’, which means that whether something is literal, or, commercial, in a contextual sense, will always be open to interpretation and that, as with American Express’ position in Greenland Bank Limited, while Counsel may not always be allowed by the Court to ‘ride two horses in opposite directions’ in the same case, a Court will often grant itself the permission to do so.

Since the UK joined the EU in 1973, there has been a noticeable movement from a literalistic approach to a more European ‘purposive’, or, teleological approach to the interpretation of legislative provisions.  It will be interesting to see whether, following Brexit, literalism retakes the reins.

This article should not be taken as definitive legal advice on any of the subjects covered.  If you do require legal advice in relation to any of the above, please contact Simon Walton on 020 7955 1455 or any member of the Rosenblatt Dispute Resolution Department. 

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