England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		03/06/2008

Mr. Justice Teare:

1. This is the judgment of the Court in two separate actions. The issues in the two actions are very similar and the defendants to both actions are the same. For these reasons the two actions have been tried together.

The Claimants

2. The first Claimant is Markel International Insurance Company Limited ("Markel"), a UK insurance company which is part of the Markel Corporation, a United States insurance group.^[1] The second Claimant is QBE Insurance (Europe) Limited ("QBE"), a UK insurance company which is part of QBE Insurance, an Australian insurance group. The third Claimant is Amalfi Underwriting Limited ("Amalfi"), a managing general agency established in 2005 to act for underwriters who wrote speciality lines of business.^[2]

The Defendants

3. There are six defendants to each action.^[3] The first defendant is Surety Guarantee Consultants Limited ("SGC"), an underwriting agent. The action against that company has been stayed because it is in liquidation. The second Defendant is Timothy Higgins, a director of SGC. He was represented at trial by counsel. The third Defendant is Barry Williams. He was also a director of SGC. He represented himself at the trial. He had been represented in the past but I was told that he was unable to continue funding that representation. The fourth Defendant is Clifford Felstead. He was an employee of SGC in a management or administrative role. He was not represented at the trial and did not appear at the trial. He wrote to the Court on the opening day of the trial indicating that his means were such that he could not afford to travel to court and that he had a heart condition. By a letter dated 13 February 2008 a Dr. James of the Pall Mall Surgery (in Leigh-on-Sea) informed me that Mr. Felstead was under investigation and treatment for an atrial fibrillation problem and that, unless it was necessary, it would be much better for him to avoid daily attendance at Court. The fifth defendant was Ralph Brunswick. He was a director of Templeton Insurance Limited ("Templeton"), an insurance company incorporated in the Isle of Man, from June 1994 until June 2006. Until the opening day of the trial Mr. Brunswick was represented by counsel. But on that day I was told that he was no longer able to continue funding that representation and so his counsel (who had submitted a lengthy Skeleton Argument and bundle of authorities the previous week) withdrew from Court, as did Mr. Brunswick himself. He indicated that he would not be giving evidence but reserved the right to comment on the issues in the case if he wished. At the end of the third week of the trial he informed me and the other parties that he would attend Court on 3 March 2008 (the beginning of the fourth week) to be cross-examined. In the event he gave evidence on 4 and 5 March 2008. Thereafter he remained in Court and represented himself. The sixth defendant was General Commercial Limited, a company registered in the British Virgin Islands. QBE had entered judgment in default of defence against the sixth defendant and I gave leave for Markel to do so on the opening day of the trial.

The claims

4. The Claimants allege that the Defendants practised a fraud on Markel, QBE and Amalfi between January 2005 and August 2006 in connection with the writing of surety bonds. The burden of proving this fraud lies upon the Claimants who must do so on the balance of probabilities. But cogent evidence, commensurate with the gravity of the allegations made against the defendants, is required to prove the allegation on the balance of probabilities; see Ikarian Reefer [1995] 1 Lloyd's Rep. 455 and Re. H [1996] AC 563.
5. Surety bonds are undertakings given at the request of a client by the surety (usually an insurance company or a bank) to pay the beneficiary a sum of money (up to a stated limit) in certain events, usually the failure by the client to discharge his contractual obligations to his customer, the beneficiary. In the construction industry the type of bonds normally required are advance payment bonds, performance bonds, maintenance bonds and retention bonds. A premium is paid by the client to the surety as the surety's fee for bearing the risk implicit in issuing the surety bond. The UK surety market is relatively small and specialised. The premium income accruing to insurance companies from the writing of surety bonds is unlikely to exceed £100m. per annum. Clearing banks also provide surety bonds. Their income from such business is thought to be about three times that of the insurance companies.
6. Markel granted SGC a Binding Authority commencing on 1 January 2005 authorising SGC "to bind surety bonds" for the account of Markel. The principal reason for granting this Binding Authority was that Mr. Higgins was known to have much experience in writing surety business and was regarded as being skilled and successful in doing so. But Markel's speciality underwriter left to join Amalfi and in the light of indications that SGC's business was to follow him the Binding Authority was terminated by Markel by letter dated 1 November 2005. QBE granted Amalfi a Binding Authority commencing on 1 October 2005 "to bind surety bonds" for the account of QBE and Amalfi in turn entered into an Underwriting Management Agreement with SGC commencing on 1 October 2005 which authorised SGA "to submit for approval Surety Bonds." The agreement between Amalfi and SGC was terminated by Amalfi on 21 August 2006.
7. The Claimants allege that SGC wrote bonds which exceeded the limits, in particular the financial limits, of the Binding Authority with Markel and of the Management Agreement with Amalfi. This exposed the Claimants to greater liabilities than they had agreed to bear and enabled SGC to obtain premium payments in excess of those to which they would have been entitled had they kept to the terms of the agreements. The excess was not paid to the Claimants. In these actions the Claimants seek to recover their losses and the unpaid premium from the four individual Defendants. Several causes of action are relied upon; breach of fiduciary duty (against all four save Mr. Brunswick), conspiracy to defraud, dishonest assistance in breach of trust or fiduciary duty by SGC and procurement of a breach of contract by SGC. The Claimants allege that each of the four defendants acted dishonestly.
8. The four individual defendants deny that they practised a fraud on the Claimants. Mr. Higgins, Mr. Williams and Mr. Felstead deny that they owed any fiduciary duties to the Claimants. Each defendant denies that he acted dishonestly. A theme common to the defences of Mr. Higgins, Mr. Williams and Mr. Felstead (but not Mr. Brunswick) is that Templeton was a "silent co-surety" on those bonds which exceeded the financial limits so as to ensure that the Claimants' ultimate liability did not exceed those limits.

The facts not in dispute

9. Mr. Higgins had been a leading figure in one sector of the surety bond market, namely, the writing of bonds for small to medium construction companies in the UK and Ireland. His business was incorporated as College Hill Underwriters Ltd. ("College Hill"). From 1995 until 2003 he had written surety business for Euler Hermes, part of the Allianz Group and one of the small number of underwriters in the surety bond market. In 2003 that arrangement came to an end when Euler Hermes purchased Mr. Higgins' business.
10. At some stage Mr. Higgins had begun to write surety business for Templeton. Templeton had reinsurance for such business and prior to June 2004 Markel had participated on a quota share reinsurance of the surety bond account written by Templeton.
11. As a result of Mr. Higgins' wish to continue his involvement in the surety bond business he had discussions with Mr. Brunswick (of Templeton), Mr. Felstead (who had had some experience of the surety bond business) and Mr. Godwin (a general insurance broker). These discussions led to the incorporation of SGC on 6 February 2004 and to the incorporation of Godwin Higgins Insurance Brokers Limited ("GHIBL") on 9 February 2004. SGC was to conduct business as an underwriting agent in the surety bond business and GHIBL was to provide insurance for the construction industry on the strength of contacts made by SGC in the surety bond business.
12. On 30 June 2004 there was a meeting between Mr. Peter Smith, the speciality underwriter at Markel ("Mr. Smith"), Mr.Higgins and two representatives of the brokers PWS, Mr. Pease and Mr. Ansari. A note of this meeting records that Mr.Higgins was having difficulty "signing up certain clients because Templeton's security is not good enough". The suggestion was made that Markel might participate in the bond market directly by writing bonds introduced by SGC. There was discussion of the possible limits to such bonds and of the possible premium income. It was suggested that Mr.Smith "sign off each risk".
13. On 20 October 2004 Mr. Pease and Mr. Ansari presented a proposal to Mr.Smith headed "Tim Higgins Bond Account – Markel Facility". Mr.Higgins' experience in the bond market was described, as was his need for "A rated paper" because many clients would not accept Templeton paper. The proposal was for Mr. Higgins, through SGC, to present business to Markel, whose paper would be acceptable in the market. Under the "Proposed Structure" it was envisaged that the financial limits would be £2m. any one bond and £5m. any one obligor and that the facility would sit alongside the "current Templeton facility".
14. Mr.Smith then produced a business plan for Markel on 27 October 2004. Mr.Smith saw the proposal which had been put to him as one which would enable Markel to expand its surety bond business. Initially Markel was not attracted but in December 2004 Markel decided to grant a Binding Authority to SGC subject to limits of £1m any one bond and £2.5m any one contractor. Mr. Smith reported these limits to Mr. Higgins and Mr. Felstead at a meeting on 2 December 2004, saying that Markel were "slightly nervous" about the size of the limits originally requested but that he aimed to "build these limits up to £2.5m. per bond and £5m. per obligor asap - subject to results being acceptable." Mr.Higgins advised Mr. Smith that he would be writing marketing material that would state that he could look at business with a limit of up to £10m. "This is purely to attract interest".
15. Mr. Smith was aware that SGC would continue to write business for Templeton. He had a concern about this which he set out in an e-mail dated 11 January 2005 to Mr. Felstead as follows:

"[SGC] have taken the decision to move their portfolio to the next level and involve an A rated carrier. This is for the long term and continues where they left off with Euler Hermes. They do have loyalties with their expiring arrangement with Templeton and will cede business to the restructured arrangement where possible. Hence, the issue of anti-selection arises…………….

"Should the contractor accept Templeton security, a single surety bond will be issued as normal by [SGC] stating the equal percentage shares of both [Merkel] and Templeton, each have joint and several liability. This ensures that for those instances where Templeton are still acceptable security, both facilities participate in equal shares."

16. Mr.Felstead replied by e-mail dated 12 January 2005 to the effect that Mr.Smith's "information" was "both accurate and well constructed."
17. On 12 and 13 January 2005 the Binding Authority was signed. Mr.Smith signed on behalf of Markel and Mr.Williams signed on behalf of SGC.
18. Section 3 of the Binding Authority dealt specifically with the persons within SGC who were to operate the Binding Authority, administer the surety bond business and sign the bonds. It provided as follows:

"PERSONS RESPONSIBLE FOR OPERATION OF THE AGREEMENT

i) Notwithstanding 3.2, 3.3 and 3.4 below the person(s) named in item 3.1 of the Schedule is(are) responsible for the overall operation and control of the Agreement;

ii) The person(s) authorised to administer surety bond business hereunder is(are) named in item 3.2 of the Schedule;

iii) The person(s) authorised to sign and issue surety bonds bound in accordance with this Agreement is(are) named in item 3.3 of the Schedule;

iv) The person(s) authorised to exercise any claims authority granted by the Agreement is(are) named in item 3.4 of the Schedule;

v) The Coverholder shall notify the Underwriters immediately it becomes apparent that any of the persons named in items 3.1 to 3.4 of the Schedule have ceased or, will within 30 days cease, to be in a position to undertake their respective duties other than for reasons of leave or sickness not exceeding, or not anticipated to exceed, 14 days."

"Schedule 3.1 The person(s) responsible for the overall operation and control of the Agreement:

Mr Barry Williams

Mr John Godwin

Mr. Tim Higgins

Schedule 3.2 The person(s) authorised to administer any surety bond Business:

Mr Barry Williams

Mr.John Godwin

Mr. Tim Higgins

Schedule 3.3 The person(s) responsible for issuing surety bonds:

Mr Barry Williams

Mr.John Godwin

Mr Tim Higgins"

19. Section 4 of the Binding Authority authorised SGC to bind surety bonds for the account of Markel. Sections 8, 9 and 11 imposed limits on the period of the bonds, on the maximum liability that could be written under the bonds and on territories in which the principals must be domiciled. Those limits were particularised in the Schedule. The maximum period was "3 years (unless specially accepted)", the principals had to be domiciled in UK and Ireland and the financial limits were £1m. any one bond and £2.5m. any one group/principal.
20. Section 22 of the Binding Authority provided as follows:

"No "joint surety bonds" shall be issued in respect of any surety bond business. For the purposes of the Agreement "joint surety bonds" means a surety bond evidencing [cover]^[4] accepted under the Agreement on behalf of the Underwriters and which also evidences a proportion of surety bond accepted for other insurers."

21. On 13 and 14 January 2005 another document described as a Binding Authority Agreement but sub-titled "Modus Operandi" was agreed between Markel and SGC. This provided for reporting arrangements by means of monthly bordereaux to be provided by SGC to Markel and for ordered files to be kept by SGC. It envisaged meetings between SGC and Mr. Smith initially on a fortnightly basis and less frequently as "comfort levels" increased. It also provided for accounting arrangements, including in particular that SGC would maintain a separate IBA account for Markel. Importantly, in the context of this case, paragraph 4 entitled "Accepting the business" provided as follows:

"Any business introduced by Tim Higgins that accepts Templeton security will be split 50/50 between the Templeton and Markel facilities. Markel will only be able to accept the entire Tim Higgins order in instances where Templeton paper is not acceptable to the original client."

22. The "modus operandi" agreement does not purport to be an amendment to the Binding Authority. On the contrary it purports to be a description of how the Binding Authority is to be operated. It does however evidence an agreement reached between Mr. Smith on behalf of Markel and Mr. Williams on behalf of SGC. The brokers PWS were also party to it.
23. Mr.Smith did not disclose the modus operandi agreement to Markel.
24. On 26 January 2005 a meeting took place between, amongst others, Mr. Smith, Mr. Higgins and Mr. Felstead. The "start-up" was discussed and the note of the meeting recorded that Mr. Smith seemed "very happy with the current situation".
25. On 17 February 2005 Mr. Williams and Mr. Brady (SGC's compliance controller) took advice from Clyde and Co. as to whether the FSA would approve of Mr. Felstead, who had a conviction for fraud, carrying out "controlled functions". They were advised that the FSA would not. Even if he were carrying out non-controlled functions there had to be clear systems and controls to check and validate what he was doing.
26. During Markel's negotiations with their reinsurers it became necessary for certain changes to be made to the Binding Authority. These were agreed with SGC in a meeting between Mr.Smith, Mr. Felstead, Mr.Higgins, Mr.Brunswick and Mr.Pease on 23 February 2005. A note of that meeting records that there was also mention of "Templeton's 50/50 arrangement". Mr. Higgins and Mr. Smith are recorded as confirming that "all bonds will be issued on a 50/50 basis". Mr. Higgins is recorded as confirming that bonds will be issued "on a several basis not joint and several."
27. The Binding Authority was formally amended on 7 March 2005. Mr. Godwin had been named as one of three persons responsible for the operation of the Binding Authority. The others were Mr. Higgins and Mr. Williams. But Mr. Godwin had left Godwin Higgins and so Mr. Felstead was now named in the revised schedule as the third person responsible for operating the Binding Authority. The financial limits remained essentially the same but there were some changes. The limits were described in Euros and US$ as well as in sterling. Separate aggregate limits were stated for certain classes of business, namely, rent guarantee bonds and school and rail projects. Provision was also made that any greater aggregate limits in those classes of business "must first be agreed with" Markel. The territorial limits were expanded to include the Isle of Man and the Channel Islands. Certain types of bonds were expressly excluded, namely, "on demand" bonds, private finance initiatives and financial guarantees.
28. SGC commenced to write bonds pursuant to the Binding Authority. Some were not within the financial limits of the Binding Authority. The Schedule to Markel's Re-Amended Particulars of Claim which details the bonds in respect of which complaint has been made is far too voluminous and detailed even to be annexed to this Judgment. But annexed to this Judgment as Annex 1 is a schedule of the smaller number of bonds which were focused upon at trial. Annex 1 shows 33 bonds that were written with values in excess of the agreed financial limits between 11 February and 14 November 2005. By way of example they included the following. On 11 February 2005 a bond was written at the request of PC Harrington in favour of OHN Construction in the sum of £2,000,000. On 1 April 2005 a bond was written at the request of Curzon in favour of Intercontinental in the sum of £2,400,000. On 13 April a bond was written at the request of Interhealth in favour of SS Health in the sum of £10,000,000.
29. Bordereaux were produced each month on a cumulative basis by SGC. Mr.Smith visited SGC's offices to review them. The bordereaux were intended to be the means by which Mr.Smith was to check that the business produced by SGC was within the limits of the Binding Authority. Thus a note of a meeting on 23 February 2005 (attended by Mr. Smith, Mr. Higgins, Mr. Felstead, Mr. Brunswick and Mr. Pease of the brokers PWS) records that Mr. Felstead showed bordereaux of bound and quoted risks. It is common ground that the bordereaux produced over the period of the Markel Binding Authority did not show that the Markel exposure on any bond was in excess of the agreed financial limits (save for two which were shown as being slightly over £1m., namely one for £1,083,416 and another for £1,006,170). The Markel exposure on the PC Harrington bond issued on 11 February was shown in the sum of £1m., the Markel exposure on the Curzon bond was shown in the sum of £1m., and the Markel exposure on the Interhealth bond was shown in the sum of £1m.
30. In April 2005 Mr. Martin Gray, who had over 30 years' experience in the London insurance market, embarked on establishing Amalfi. He had identified Mr.Smith as someone whom Amalfi wished to recruit as an underwriter.
31. In addition to SGC Mr.Smith had three other sources of underwriting business. They were travel, reinsurance of political risk and extreme sports, as described by Mr. Harrington, the active underwriter at QBE, who discussed Mr. Gray's plans with him. Mr. Smith accepted in cross-examination that he was "looking to leave" Markel. He procured from his four sources of underwriting business letters dated between 25 and 27 April. He accepted that these were "letters of support". The letter from SGC, signed by Mr. Higgins and Mr.Felstead, contemplated SGC reaching a gross fee income in the first year of £3m., £6m in the second year and "with increased limits say £5million any bond/£15million in the aggregate we should exceed this figure without compromising our underwriting criteria." Mr. Smith accepted that his pitch to Amalfi was that he would bring these four sources of his underwriting business with him to Amalfi.
32. On 3 June 2005 Mr.Gray met Mr.Smith with Mr. Peter Grove, the chief underwriting officer at QBE. An old colleague of Mr. Gray's had suggested that QBE might be interested in Amalfi's ideas with regard to Mr.Smith. Subsequently, after a detailed written presentation to QBE by Amalfi, frequent meetings and the generation of manuals, methodologies, reporting requirements, regulatory controls, accounting procedures and other matters QBE, in the person of Mr. Mark Harrington, the active underwriter of Limit Underwriting Limited Syndicate 2000 (part of the QBE Group), was able to provide a letter of intent to Mr.Gray dated 9 August 2005. This letter enabled Mr.Smith to resign from Markel, which he did on 10 August 2005, and to accept Amalfi's offer of employment.
33. QBE required a New Proposal Questionnaire to be completed by SGC. Mr.Smith passed it to Mr.Felstead and asked him to have it completed on behalf of SGC. It was returned to Mr. Smith but he had to complete or correct certain information in it. One of the sections asked whether any of the "principle personnel (sic) have any criminal convictions for dishonesty or breach of trust." The reply which was returned to Mr.Smith said "none".
34. On 22 and 23 September 2005 respectively, a Management Agreement was entered into between Amalfi and SGC and a Binding Authority was entered into between QBE and Amalfi. The commencement date of each was 1 October 2005.
35. The Binding Authority between QBE and Amalfi authorised Amalfi to "bind surety bonds" for QBE. The limits were the same as in the Binding Authority between Markel and SGC save that the maximum period of a bond was said to be 5 years (not 3 years). Section 5 provided that the authority granted to bind surety bonds could not be delegated.
36. Section 21 provided as follows:

"No "joint surety bond" shall be issued in respect of surety bond bound. For the purposes of the Agreement "Joint Surety Bond" means a surety bond or other document evidencing surety bond coverage accepted under the Agreement on behalf of Underwriters and which also evidences a proportion of the surety bond accepted for Lloyd's Underwriters or insurance companies."

37. The Management Agreement between Amalfi and SGC authorised SGC "to submit for approval Surety Bonds." Such bonds were subject to the same limits as those between QBE and Amalfi, including the maximum period being 5 years.
38. Section 21 provided:

"No "joint surety bond" shall be issued unless prior agreed in writing by [Amalfi]."

39. Mr. Higgins, Mr. Williams and Mr. Felstead were identified in the schedule as the persons authorised to sign the bonds, as they had been under the (amended) Markel Binding Authority.
40. On 29 September 2005 Mr. Gray, Mr.Smith and Mr. Felstead travelled to the Isle of Man to meet Mr. Brunswick. It appears that the meeting came about because Mr. Felstead had enquired of Mr. Smith whether Amalfi might be interested in looking at Templeton's overall portfolio. This was the first occasion on which Mr. Gray met either Mr. Felstead or Mr.Brunswick. He noted that it was obvious that Mr. Felstead and Mr. Brunswick were well known to each other. Although Mr. Gray had subsequent meetings with Mr. Brunswick in London prior to Christmas 2005 nothing came of these meetings.
41. On 19 October 2005 Mr. Middleton, the managing director of the Speciality Division of Markel, met Mr. Higgins and Mr. Felstead. The meeting was ostensibly to discuss the future but Mr. Middleton was sure at the time that Mr. Smith would be taking SGC's business with him. The meeting was also attended by Mr. Pease who took a note. The meeting is of some significance because the note records that Mr. Higgins stated that he needed a "silent co-surety agreement". Although Mr. Middleton gave evidence that the word "silent" was not used the contemporaneous note clearly shows that it was. Whilst the note suggests that a question was asked about the effect of such an arrangement on premium there does not appear to have been any detailed discussion of the concept. From Mr. Middleton's point of view he did not foresee that Markel would benefit from SGC's business after Mr. Smith's departure from Markel and in any event he did not understand how a bond could be written by co-sureties.
42. On 24 October an addendum to the Management Agreement between Amalfi and SGC was agreed. It provided that "all rights, obligations and duties extended to [Amalfi] by [SGC] under this [Management Agreement] shall also be extended in their entirety to [QBE]. This was known as the "cut through" agreement and enabled QBE to exercise the rights of Amalfi under the Management Agreement.
43. In late October 2005 QBE received information that an employee of SGC had a conviction for fraud. Mr. Smith was asked to investigate. He spoke by telephone to Mr. Higgins and Mr. Felstead. An e-mail dated 27 October 2005 from Mr. Smith states that he asked them "have you ever been convicted of insurance fraud"? Both replied "no, never". Shortly thereafter QBE obtained a report from a publication named Insurance Security Insider which said that Mr. Felstead had been convicted of an insurance fraud in 1997 and had been sentenced to 3 years imprisonment.
44. The Markel Binding Authority was terminated by letter dated 1 November 2005 which gave 30 days' notice of termination. On 7 November Markel requested that no bonds be written during the notice period. However, on 14 November 2005 a bond was written at the request of Sun Opta in the sum of Euros.4.7m. signed by Mr. Williams and Mr. Felstead. It did not feature in the bordereaux. On 29 November Mr. Williams acknowledged the request of 7 November and confirmed that no bonds had been issued since 31 October.
45. A meeting was arranged on 14 November 2005 at the offices of Amalfi which was attended by Mr.Smith and Mr. Gray, the chairman of Amalfi, and Mr. Higgins and Mr. Williams. Mr. Higgins and Mr.Williams confirmed that the report relating to Mr. Felstead's conviction was true. The following day Mr.Higgins wrote to Mr. Gray stating that Mr. Felstead would "leave SGC with immediate effect". He was to have "no further involvement with the issuance of bonds and/or the administration of our bond account."
46. Nevertheless Mr. Felstead not only remained physically in the office (because he continued to work for GHIBL who shared the office) but continued to be involved in SGC's surety bond business (to such an extent that Mr. Higgins stated in a letter dated 18 August 2006 that Mr. Felstead had remained a consultant at SGC).
47. On 16 November 2005, a month and a half after the commencement of the Management Agreement between SGC and Amalfi, a further addendum was agreed to the Management Agreement. It provided as follows:

"Where Templeton Insurance Company paper is acceptable to the client, the bond will be issued by Surety Guarantee Consultants Ltd. to that client with the following security

QBE Insurance (Europe) Ltd. 50%

Templeton Insurance Ltd. 50%

QBE Insurance (Europe) Ltd.'s obligations under such surety bonds are several and not joint and are limited solely to the extent of their individual subscription. QBE Insurance (Europe) Ltd. is not responsible for the subscription of any co-surety who for any reason does not satisfy all or part of its obligations."

48. Mr.Smith did not disclose this addendum to QBE.
49. On 24 November 2005 an amended Management Agreement was signed. Mr. Felstead was removed from the list of persons authorised to sign bonds and so the revised schedule provided as follows:

Schedule 3.1 The person(s) responsible for the overall operation and control of the Agreement:

Mr Barry Williams

Mr Tim Higgins

Mr Paul Brady

Schedule 3.2 The person(s) authorised to administer any surety bond Business:

Mr Barry Williams

Mr Tim Higgins

Mr Peter Smith

Schedule 3.3 The person(s) responsible for issuing surety bonds:

Mr Barry Williams

Mr Tim Higgins

Mr Peter Smith

50. Otherwise the amended Management Agreement was in the same terms as the original save that the maximum period of the surety bonds was reduced to 3 years.
51. Also on 24 November 2005, following the meeting at which the amended Management Agreement was signed, Mr. Smith sent an e-mail to SGC which summarised the limits of the bonds which were the subject of the Management Agreement and reminded SGC "to ensure full compliance with all terms and conditions of our agreement together."
52. On 30 November 2005 Mr. Smith informed SGC that he wished to introduce a number of compliance measures. In essence these were to be contained in a "full risk review sheet for each and every file/bond" which would include "all pertinent information regarding the bond and its compliance with the signed underwriting agreement eg bond value, current principal aggregate before bond issuance, principal aggregate after bond issuance, period, type of bond and bond category number etc." There was to be provision for a signature by Mr. Higgins and by "the Compliance Director". This system was introduced. The review sheets also provided for Mr. Smith's signature where he approved a bond for a period in excess of 3 years.
53. In December 2005 Markel requested an audit of the risks which had been bound and arranged for this to be done on 15 December 2005. In the same month Mr. Brunswick of Templeton signed documents ("the Templeton bonds") that purported to be bonds in favour of the beneficiaries of many of the Markel bonds listed in Annex 1 for a sum equal to the difference between the value of the Markel bonds and the agreed limit of Markel's liability in the Binding Authority. Some of these had been sent to Templeton in July but had not been signed at that time.
54. At about the same time copies of the Markel bonds in the bond files of SGC were replaced with copies of documents ("the Markel dummy bonds") that purported to be bonds written in Markel's name but for a sum which did not exceed the agreed limit of Markel's liability in the Binding Authority. The debit notes referring solely to Markel were also replaced by debit notes making reference to Templeton also. Premium advice notes addressed to Templeton were also placed on the file.
55. Neither the Templeton bonds nor the Markel dummy bonds were delivered to the beneficiaries.
56. The Markel audit took place. 14 sample files were chosen at random. The auditor reported that "there would appear to be no significant issues with the reporting and submission of Risks Bound and Premium Settlement Bordereaux." The bonds which had been issued for sums in breach of the limits were not discovered. They were not on the file. In their place were the Markel dummy bonds and the Templeton bonds.^[5]
57. Bonds were also written in the name of QBE/Amalfi which exceeded the financial limits. They are set out in Annex 2 to this Judgment. By way of example the following may be noted. On 1 October 2005 a bond was issued at the request of Gala in the sum of £4,242,000 and on 22 December 2005^[6] two bonds were written at the request of Canadian Shipping in the sum of Euros 5,176,470.
58. In late December 2005/January 2006 Templeton bonds were signed by Mr. Brunswick in favour of certain of the beneficiaries of the QBE/Amalfi bonds (for a sum equal to the difference between the QBE/Amalfi bond and the agreed limit of QBE/Amalfi's liability under the Management Agreement) but were not delivered to the beneficiaries. By way of example one of these was purportedly in favour of Gala in the sum of £3,242,000 (i.e. £4,242,000 less £1,000,000).
59. On 17 May 2006 SGC requested Templeton to sign more such bonds but on the same day Mr. Brunswick resigned from Templeton and no further Templeton bonds were signed.
60. Throughout the life of the agreement between SGC and Amalfi monthly bordereaux were prepared for and presented to Mr. Smith. It is common ground that there was not shown on any bordereaux a bond issued in the name of QBE/Amalfi which exposed QBE/Amalfi to liability for a sum in excess of the limits set out in the Management Agreement. Thus the Gala bond in the sum of £4,242,000 was shown as exposing QBE/Amalfi to £1m. The Canadian Shipping bonds in the sum of Euros 5,176,470 were shown as exposing QBE/Amalfi to Euros 1,035,294 (the Euro limit per bond was Euros 1.5m.).
61. In May 2006 Markel carried out a further audit of SGC's Markel files. As in December 2005 the bonds which had been issued for sums in breach of the limits were not discovered because they were not on the file. In their place were the Markel dummy bonds and the Templeton bonds.
62. In June 2006 Amalfi commenced an audit of SGC. This did not reveal that bonds had been written in excess of the agreed limits because the files contained copies of documents that purported to be bonds written within the limits ("the QBE dummy bonds"). However, the audit was regarded as unsatisfactory because of the poor state of SGC's records. Thus the Management Agreement between Amalfi and SGC was terminated by Amalfi by letter dated 21 August 2006 with effect from 20 September 2006. This followed the unsatisfactory audit of SGC and discovery that the Canadian Shipping bonds had been written in breach of the financial limits.
63. Shortly afterwards the beneficiary of the Canadian Shipping bonds contacted QBE and informed it that there was a claim on the bonds. At about the same time Tozer Gallagher, who had been appointed by SGC (in breach of section 24 of the Binding Authority) to handle a claim on the Curzon bond issued in the name of Markel contacted Markel who then learnt that a bond had been written in breach of the financial limits.
64. In accordance with the report and recommendations of the Commercial Court Long Trials Working Party I invited the parties to structure their submissions with reference to the List of Issues. I shall in turn consider and resolve the listed issues.

Issue 1

On the true construction of the binding authorities and the side agreement, and in the pleaded circumstances, what limits were placed on SGC's authority to issue bonds on behalf of Markel and QBE/Amalfi ?

65. Markel: The Binding Authority between SGC and Markel, both that dated 12 January and that dated 7 March 2005, placed clear limits, in particular financial limits, on the surety bonds that could be written by SGC. Those limits are summarised in paragraphs 19 and 27 above. Whether or not clause 4 of the modus operandi agreement (referred to in Issue 1 as the side agreement) altered those limits is a question which was mentioned from time to time during the course of the hearing. However, the modus operandi agreement does not purport expressly to alter the financial limits on the bonds that could be written by SGC for the account of Markel. Nor does it do so by any process of implication necessary to make the agreement work. Mr. Williams commented in his evidence that the second sentence of paragraph 4 ("Markel will only be able to accept the entire Tim Higgins order in instances where Templeton paper is not acceptable to the original client.") could be interpreted as permitting bonds to be written without limit where Templeton paper was not acceptable to the client. But very clear words would be required to override the express financial limits in the schedule to the Binding Authority. There are no such words.
66. The context in which clause 4 of the modus operandi agreement was agreed was that, to the knowledge of both Mr. Smith and SGC, the latter had an existing facility with Templeton. Having regard to that context it seems likely that the aim and object of paragraph 4 was to ensure that where the client could accept both Templeton and Markel paper the business would be split 50/50 between Templeton and Markel so as to ensure that bad risks were not allocated to Markel exclusively. This was indeed a concern of Mr. Smith. The second sentence provided that it was only in circumstances where Templeton paper was not acceptable to the client that the business would be allocated exclusively to Markel. Clause 4 was not concerned with limits.
67. What the modus operandi does not explain is the mechanism by which, in those circumstances where the business was to be split 50/50, such split was to be achieved. Such a spilt could be achieved by having two bonds, one in the name of Markel for 50% of the sum guaranteed and one in the name of Temple for the other 50%. Or the split could be achieved by having a single bond for 100% of the sum guaranteed with Markel accepting liability for 50% of that sum and Templeton accepting liability for the other 50%. The modus operandi does not identify either method as the preferred method.
68. Mr. Smith's e-mail dated 11 January 2005 shows that he envisaged the use of a single bond. By contrast Mr. Middleton, the managing director of Markel's Speciality Division and Mr. Smith's superior, gave evidence that he did not contemplate any concept of co-surety because he could not envisage how any such concept could work. It is to be noted that he had not been made aware of the modus operandi agreement. However, it appears from the evidence of Mr. Brown, the impressive expert surety bond underwriter called by the Claimants, that single bonds underwritten by two co-sureties, as contemplated by Mr. Smith, do exist in the market.
69. There was a suggestion that section 22 of the Binding Authority provided that such joint bonds could not be written under the Binding Authority. The bonds which were excluded were described as "a surety bond evidencing [cover] accepted under the Agreement on behalf of the Underwriters and which also evidences a proportion of surety bond accepted for other insurers." I have not found the meaning of this definition clear but the construction of section 22 which I have ultimately preferred is that it excluded joint bonds in which Markel undertook liability not only for its share of the bond but also for that share underwritten by the other surety. The words "and which also evidences a proportion of surety bond accepted for other insurers" are more suggestive of a bond which provides that Markel accepts liability for the share underwritten by the "other insurers" (i.e joint liability) than of a bond which provides for Markel to be liable for its share of the bond and for the "other insurers" to be liable for their proportion of the bond (i.e. several liability).
70. QBE/Amalfi: The Management Agreement between Amalfi and SGC placed the same limits on the bonds that could be proposed by SGC as clearly as did the Binding Authority between Markel and SGC. The addendum dated 16 November 2005 appears similar to clause 4 of the modus operandi between SGC and Markel. However, it goes further in two respects. Firstly, it envisages (by the use of the words "the bond") that when Templeton paper is acceptable there will be a single bond issued. Secondly, it expressly states that QBE's liability under such bond will be limited to its individual subscription, that is, 50%. As with the modus operandi agreement there is nothing in the addendum which affects the limits in the Management Agreement.
71. It was submitted on behalf of Mr. Higgins that the limits were as stated in the Binding Authority and Management Agreement but subject to such variations as were agreed with Mr. Smith. I will deal with Mr. Higgins' case that Mr. Smith varied the limits below.

Issue 2

Did SGC issue bonds in Markel's name and/or in QBE/Amalfi's name which were prima facie in breach of those limits ? If so, which bonds.

72. Markel: There can be no dispute that bonds were written which were in breach of those limits, subject to any express agreement to the contrary. Annex 1 lists the Markel bonds which were dealt with specifically at trial. It shows, in particular, the bonds which exceeded the financial limits. I have already given examples of such bonds.
73. In addition the territorial limits were broken, an example being the Cape Industrial bonds.
74. There was a dispute as to whether any of the bonds were "on demand" bonds and therefore in breach of the limits on that account. Annex 1 gives two examples, one in favour of Bug-Alu Technic and one in favour of MJ Gleeson. I have been asked to consider whether these two bonds were in breach of the limits.
75. The essence of an on demand bond is that the beneficiary does not have to prove the amount of the loss sustained by him or the amount of debt owed to him. He may simply "demand" a sum. No doubt he must act in good faith and comply with any conditions in the bond as to the format of the demand but he need not prove the amount of the sum due to him in debt or by way of damages.
76. The "Bug Alu Technic" bond dated 13 May 2005 recited that the Guarantor (Markel) had agreed to guarantee the performance of the obligations of the Sub-Contractor to the Contractor (Bug Alu Technic). The bond provided as follows:

"1. The Guarantor guarantees to the Contractor that in the event the Contractor advises that the Guarantor of a breach of the Sub-Contract the Guarantor shall subject to the provisions of this bond satisfy and discharge the damages and/or loss and/or expense sustained or incurred by the Contractor as indicated by the Contractor to the Guarantor

……………

8. The Contractor undertakes to repay to the Guarantor only any sums which the Guarantor may pay to the Contractor under this Bond and which exceed the actual damages losses expenses sustained or incurred by the Contractor by reason of the Sub-Contractor's breach or the determination of the Sub-Contract."

77. The reference to the Contractor advising of a breach and indicating the damages or loss or expense sustained suggests that this bond may be an on demand bond. That is because advising of a breach or indicating the damages or loss or expense sustained is very different from having to prove the breach or the amount of the damages, loss or expense. However, clause 8 ensures that the ultimate liability of the Guarantor will not exceed the actual damages, losses or expenses sustained or incurred by reason of a breach of the sub-contract. Thus, although the Guarantor has to pay such sum as is indicated by the Contractor, he can ultimately recover the difference between what he pays and the actual amount of the damages etc.
78. For this reason I do not consider that the Bug Alu Technic is a true "on demand" bond. Ultimately, the Contractors can only retain the sum paid by the Guarantor to the extent that such sum equals the actual damages sustained.
79. The "M.J.Gleeson" bond, a Retention Guarantee in lieu of Retentions, provides that Markel irrevocably undertakes to repay to M.J.Gleeson Group Plc

"on demand, an amount not exceeding £144,000 upon receipt by us of your first demand in writing accompanied by a statement of the current retention amount which has been waived, and a copy of the latest payment certificates together with:

1. Your declaration that the Sub Contractor has failed to comply with the requirements of the Sub Contract ………..and detailing the relevant reasons.

2. A Certification, that the Sub Contractor has been given 10 working days written notice of his liability for the amount demanded by the Contractor and that the Sub Contractor has not discharged that liability…………..

For the purposes of this Guarantee the said declaration shall be conclusive evidence of the failure of the Sub Contractor."

80. This bond plainly is an on demand bond. The undertaking is expressly to pay "on demand". The documents to be provided shall be "conclusive evidence" of the failure of the Sub Contractor". Thus the failure need not be proved. It is sufficient that M.J.Gleeson declares the failure. The amount to be paid will be identified in the demand accompanied by a statement of the current retention amount which has been waived and a copy of the latest payment certificate. Beyond those requirements there is no requirement to prove the amount of the retention.
81. This bond was therefore issued in breach of the restriction in the Binding Authority as to "on demand" bonds.
82. QBE/Amalfi: As with Markel there can be no dispute that, subject to any express agreement to the contrary, bonds were written which were in breach of the limits in the Management Agreement. They are set out in Annex 2 to this Judgment and I have already given examples of such bonds.
83. In addition to the breaches of the financial and territorial limits there was also a delegated Binding Authority in favour of IWA dated 11 July 2006, which was excluded by section 5 of the Management Agreement. I note that the Annex 2 also includes two bonds alleged to "on demand" and one alleged to be a financial guarantee. However, these were not relied on at trial and so I make no findings about them.
84. It was submitted on behalf of Mr. Higgins that where bonds were written in breach of the limits Mr. Smith knew of such bonds and approved them. I will deal with Mr. Higgins' case that Mr. Smith knew of such bonds and approved them below.

Issue 3

Did SGC issue bordereaux that prima facie misstated the true position ? If so, in what respects ?

85. Markel: It is clear that they did. The principal misstatement was that where a bond had been issued in the name of Markel for an amount in excess of the financial limits the amount of Markel's exposure was stated to be within the limits. Some bonds were not reported at all, namely, (so far as is presently known) the Verry bonds and the Sun Opta bond.
86. QBE/Amalfi: Again, it is clear that the bordereaux misstated the true position. The principal misstatement was that where a bond had been issued in the name of QBE for an amount in excess of the financial limits the amount of QBE's exposure was stated to be within the limits. In addition, the Canadian bonds, although written in December 2005 did not appear on the bordereaux until April 2006 and the territory was stated to be UK rather than Canada. Two bonds in favour of PC Harrington for £4.078m. and £1m. were not mentioned though their bond numbers did appear in respect of bonds with an exposure of £1160 and £1400 respectively. Finally, the delegated Binding Authority in favour of IWA was not mentioned.
87. It was submitted on behalf of Mr. Higgins that the bordereaux did not misstate the true position as SGC appears to have understood it. I shall deal with this submission below when considering the involvement of Mr. Smith.

Issue 4

Has SGC prima facie failed to account fully to Markel and/or QBE/Amalfi for premium that is due on any of the bonds in respect of Markel's and/or QBE/Amalfi's share (as the case may be) of the risk in relation to the bonds ?

88. The Claimants submitted that SGC did fail to account fully to Markel and QBE/Amalfi in respect of premium that was due to them for bonds issued in their name.
89. Markel: Subject to consideration of Mr. Higgins' case that Mr. Smith varied the limits and knew of and approved those bonds which were apparently issued in breach of the limits the expert accountancy evidence (which I accept) is that SGC failed to account fully to Markel for the premium that was due to them. The extent of such failure has been assessed as being £963,304, $285,406 and Euros.73,281.
90. QBE/Amalfi: Again, subject to consideration of Mr. Higgins' case that Mr. Smith varied the limits and knew of and approved those bonds which were apparently issued in breach of the limits the evidence of Mr. O'Shea, the claims adjuster for Syndicate 2000, part of the QBE Group, (whose evidence I accept) is that SGC failed to account fully to QBE/Amalfi for the premium that was due to them. The extent of such failure has been assessed as being £864,170.53.

Issue 5

Did Mr. Smith have actual or ostensible authority on behalf of (a) Markel and (b) QBE/Amalfi to waive limits or ratify bonds written in excess of limits?

91. The Claimants submit that he did not have such authority but Mr. Higgins submits that he did.
92. Mr. Middleton of Markel gave evidence that Mr. Smith did not have authority to exceed the limit of £1m. per bond. I accept that evidence. The Binding Authority between QBE and Amalfi stated what the limits of Amalfi's authority were. It did not invest either Amalfi or Mr. Smith with authority to exceed the limit of £1m. per bond.
93. However, the terms of the Binding Authority with Markel contemplated that the maximum period of a surety bond could be longer than the stated maximum where "specially accepted". Similarly it contemplated that the aggregate financial limits for certain classes of business could be exceeded where "first agreed" with Markel. The Binding Authority does not expressly contemplate that any other limits may be exceeded by agreement. The same is true of the Management Agreement with Amalfi but with the variation that there was no provision for the period to be "specially accepted". It also contemplated joint surety bonds could be issued where "agreed in writing" by Amalfi (see section 21 of the agreement).
94. So far as SGC was concerned Mr. Smith was the person who spoke to them on behalf of Markel and QBE/Amalfi. He signed the Binding Authority in favour of SGC on behalf of Markel and the Management Agreement with SGC on behalf of Amalfi. He also signed the modus operandi agreement with SGC and the addenda to the Management Agreement with SGC on behalf of Markel and Amalfi respectively. Further, he visited the office of SGC to discuss the operation of the agreements with SGC. By permitting Mr. Smith to take these actions both Markel and QBE/Amalfi held out Mr. Smith as having authority to agree to such variations as were expressly permitted by the Binding Authority and Management Agreement.
95. I therefore hold that Markel and Amalfi conferred actual authority on Mr. Smith to vary the limits in the very few ways contemplated by the Binding Authority and the Management Agreement. I have identified these above.
96. The limits of a Binding Authority or Management Agreement are of course very important. Mr. Brown, the experienced and impressive expert witness called by the Claimants to explain the surety bond market, said that:

"It is an absolute anathema that you do not go outside the terms of your reinsurance agreement or your Binding Authority. That is basically alphabet stuff that is instilled into any competent underwriter from day one."

97. Having regard to the reverence accorded to the limits of a Binding Authority in the market I do not consider that it can be realistically contended that either Markel or QBE/Amalfi held out Mr. Smith as having any wider authority to vary the limits. They only held out Mr. Smith as having such authority where the Binding Authority and Management Agreement expressly contemplated that the limits may be exceeded. To regard Markel or QBE/Amalfi as holding out Mr. Smith as having a general and unlimited authority (actual or ostensible) to exceed the stated limits would ignore the importance which those in the surety bond business attach to the limits of a Binding Authority.
98. Counsel for Mr. Higgins relied upon the words and conduct of Mr. Smith in support of their submission that he had actual or ostensible authority to exceed the stated financial limit per bond. It is clear that Mr. Smith had no actual authority to exceed that limit. Any ostensible authority to exceed that limit must be founded upon a representation made by Markel or QBE/Amalfi to SGC that Mr. Smith had authority to exceed the financial limit per bond; see Freeman & Lockyer v Buckhurst Park Properties Ltd. [1964] 2 QB 480 at pp 503 and.505-506 per Diplock LJ and Armagas v Mundogas [1986] 1 AC 717 at p.778 per Lord Keith. Representations by Mr. Smith as to his own authority cannot assist SGC because he had no actual authority to make such representations on behalf of Markel or QBE/Amalfi. Thus whatever words or conduct of Mr. Smith are relied upon by Mr. Higgins cannot assist him in establishing that Mr. Smith had ostensible authority to vary the financial limits per bond.

Issue 6

If so:

(i) Was Mr. Smith aware that SGC was writing all or each of the non-compliant bonds?

(ii) Did Mr. Smith in fact consent to SGC writing all or each of the non-complaint bonds ?

(iii) In any event, did Mr. Smith lead Mr. Higgins to believe that he did consent to SGC writing all or each of the non-compliant bonds ?

99. Issues 6(a) and (b) do not strictly arise. However, issue 6(c) does arise (because it is relevant to the question of honesty) and the matters covered by issues 6(a) and (b) are relevant to issue 6(c). The Claimants say that the answer to all three issues is No. Mr. Higgins says that the answer to all three issues is Yes. His case on these issues is central to his defence to the claims brought against him.
100. Mr. Higgins gave evidence that Mr. Smith was aware of any bond that exceeded the agreed limits and consented to SGC writing such bonds. Mr. Smith said that he was not aware of any such bonds and did not consent to SGC writing them. Mr. Williams had no knowledge of what Mr. Smith did or not do in the company of Mr. Higgins but gave evidence that when he, Mr. Williams, was asked to sign a bond he asked if Mr. Smith had agreed to it and was told by Mr. Higgins that Mr. Smith had. Mr. Felstead did not appear at the trial to give evidence. I therefore do not consider that his written statement is part of the evidence before the Court. No party applied to admit it pursuant to the Civil Evidence Act. In any event, if it were part of the evidence in the case, I could not accord it any significant weight because Mr. Felstead chose not to attend to court and therefore was not available to be cross-examined on his statement. The medical evidence to which I referred at the beginning of this judgment does not say that his state of health prevented him from doing so. Thus the answer to Issue 6 depends upon the evidence of Mr. Higgins and Mr. Smith, assessed in the context of the contemporaneous documentary evidence and having regard to the probabilities.
101. I shall begin with the evidence of Mr. Higgins. Mr. Higgins is 71 years of age. He has worked in the surety bond business for most of his working life. He ran his own underwriting agency business as College Hill from 1981. His particular field was the construction business. From 1995 until 2003 he wrote surety business for Euler Hermes, part of the Allianz Group and one of the small number of underwriters in the specialist surety bond market. In 2003 that arrangement came to an end when Euler Hermes purchased Mr. Higgins' business. He did not however wish to end his long involvement with the surety bond market and from 2004 continued to be involved through SGC.
102. Most unfortunately for him and his family, Mr.Higgins has been diagnosed as suffering from Alzheimer's Disease. This is the view of two psychiatrists who have examined him and is not in dispute. He was first diagnosed as suffering from Alzheimer's Disease in 2007 but the psychiatrists agree that there would have been symptoms prior to 2007. They agree that it is likely that Alzheimer's Disease could have been diagnosed for a period of some years before 2007. They agree that his memory is "moderately severely impaired." Where they differ is that Dr. Kennedy describes the overall severity of Mr. Higgins' dementia as "mild" whilst Professor Bannerjee considers it is "more moderate in severity".
103. This diagnosis is relevant in at least two respects. First, it must be borne in mind when assessing the evidence he has given to the Court. Secondly, it must be borne in mind when considering his actions in 2005 and 2006. At this stage in my judgment I am concerned with the first respect.
104. Professor Bannerjee has said that Mr. Higgins has a clinically significant impairment of his ability to recall events within the time of his illness and from the period before his illness. Dr. Kennedy has said that those suffering from Alzheimer's Disease have difficulty recalling information acquired prior to the onset of their disease but that events from the most recent past are remembered less well than the distant past. There is also, he says, a deficit in executive functions, that is, the concurrent manipulation of information, concept formation and problem solving.
105. It must follow that in assessing Mr. Higgins' evidence as to events in 2005 and 2006 the Court must bear in mind that Mr. Higgins' ability to recall those events is significantly impaired. Whereas a witness who says he cannot recall a significant event in the recent past may be seeking to avoid answering a question lest his answer damages his case this cannot fairly be said in the case of Mr. Higgins. Similarly where a witness can only give vague or unparticularised evidence about an important part of the case which one would expect him to recall in greater detail it may be inferred that he is not telling the truth. That also would be an unfair approach in the case of Mr. Higgins.
106. There was a passage in the early part of Mr.Higgins' cross-examination in which his answers caused me surprise and which caused Counsel for Markel to submit that Mr. Higgins played upon his condition when giving evidence:

"Q. Let us turn to this case a little more generally and try to understand your defence to the allegations against you. Let us see if I can summarise things in this way and see whether you agree.

A. Sorry, can I just interrupt you there for a second. What are the allegations against me ?

……….

Q. So your evidence to his Lordship is that you really were not sure why you are here; is that right ?

A. Yes, it is really."

107. It was because these answers caused me surprise that I asked Dr. Kennedy whether it is possible that Alzheimer's Disease could account for Mr. Higgins' apparent failure to recollect what the serious charges were against him or why he was in Court. He replied as follows:

"His inability to remember specific pieces of information could be impaired by Alzheimer's disease. Indeed, his explicit memory, ie. you could tell him the allegations and then at an interval later he might not be able to repeat them to you. That would be a more complicated type of memory test if you see what I mean. So he could forget that. That would not be an unreasonable thing for him to have said."

108. As to the second answer given by Mr. Higgins Dr. Kennedy was not able to give so clear an answer.

"I can't completely answer the question. I think to guide you I think one has to, perhaps, take all of his testimony in its whole and to look very carefully at it to see how much of it there seems to be consistency and following things through and understanding things and points. Even though he would describe these very definite things that he cannot do and his memory is ineffective, the way they actually impact into real life is sometimes to cause intermittent things that he cannot remember and where he may need some prompt.

So in trying to get a better sense of what he did some time ago, it is clearly to explore what he said about and to filter that with what I have tried to guide you towards as the sorts of memory problems he might have, and to remember that those failures may not be constant failures; they may be intermittent failures.

Then I think to look at what evidence there might be about whether there was a series of decisions to be made in order to account for his behaviour and so forth as sort of direct or indirect more pointers as to what he was able to achieve and manage from a cognitive perspective."

109. My understanding of this answer was that it was not so much an answer as a guide to me in answering my own question. The Court should look at Mr. Higgins' evidence as a whole to see if he demonstrated consistency and understanding. If such matters were demonstrated that might suggest that Alzheimer's Disease did not account for his failure to remember why he was in Court. However, his condition does not necessarily result in constant memory failure but can result in intermittent failure such that he might need from time to be prompted.
110. There were some long passages in his evidence when Mr. Higgins answered questions fully and consistently. The fact that he was able to do so might suggest that his statement that he did not know why he was in court was false and that he was playing on his condition. On the other hand there were other passages when he failed to understand the question put to him and needed prompting. It is to be remembered that the psychiatrists are agreed that when they examined Mr. Higgins it was very unlikely that Mr. Higgins was either feigning the deficits of Alzheimer's Disease or exaggerating its impact. When Professor Bannerjee examined Mr. Higgins on 31 October 2007 he asked about the case. He reported that Mr. Higgins was very unsure of the broad aspects of the case as well as the detail, at one point asking "has someone made allegations?"
111. I consider that I should reach the serious conclusion suggested by Counsel for Markel only if it is safe and fair to do so. Whilst there were times in Mr. Higgins' evidence that I wondered whether he was being frank with the Court I do not consider that in the light of his medical condition and the description of it given by the psychiatrists it would be safe or fair to conclude that when giving evidence Mr. Higgins was playing upon his condition.
112. Counsel for QBE/Amalfi submitted that his condition was irrelevant because Mr. Higgins was not claiming to have forgotten what happened but rather was putting forward a version of events which was false. Whilst, as will be shortly be seen, I am compelled to reject much of Mr.Higgins' evidence, in particular, that Mr. Smith signified his consent to the limits being exceeded either orally or by signing a document, it does not follow that his condition is irrelevant. It would have been unfair to listen to his evidence without having his condition well in mind.
113. In his statement dated 27 September 2007, which formed part of his evidence in chief, Mr. Higgins described how and why he wrote surety bonds in the name of Markel in excess of the financial limits in the Binding Authority with Markel where Templeton paper was not acceptable to the client or beneficiary. He employed an arrangement which he described as "silent co-surety". Templeton was the silent co-surety and would issue a bond for the difference between the amount of the bond written in the name of Markel, say £2m., and the financial limit which Markel had agreed to accept, namely, £1m. Thus, on this example, Templeton would issue a bond for £1m. That bond would not however be known to either the client or the beneficiary. Hence it was "silent". Mr. Higgins said that "clearly Markel and Templeton knew and agreed to this arrangement" and that "Markel was only really on risk for £1m., as Templeton effectively agreed to indemnify (or reinsure) Markel for the other £1m." He said that "Mr. Smith knew about this arrangement and agreed to the same." When Mr.Smith moved from Markel to Amalfi "this silent co-surety arrangement also moved seamlessly to the Amalfi/QBE period and continued as it always had. At all times Peter Smith was the key person who knew all about this and gave his approval for it to continue." He said that Mr.Smith "happily provided 'special acceptances' (where bonds to be written were over the Markel/QBE binder) as and when we requested them." Mr. Higgins explained that if he knew that he was writing a bond which would exceed the limits he would make sure that Peter Smith had agreed to that and, if necessary, that some co-surety/reinsurance was involved.
114. In his further statement dated 26 October 2007 he said that breaches of the financial limits and period limits would be orally agreed by Mr. Smith "although in the case of the QBE/Amalfi binder, I am sure in several cases Peter Smith would sign off the Bond Risk Review Sheets to confirm such exceptions."
115. In his oral evidence he gave similar evidence:

"There is no way that I would have exceeded the limits unless I had obtained approval from Markel or whoever, I think it was Peter Smith or somebody. The practice was that mainly Peter Smith would come into the office and look at individual cases. When I wanted to go above the agreed

limit of £1 million, I think it was £1 million under the contract, he would say yes, no or whatever and I would explain why. Then he would initial the facing slip and I would proceed on that because I thought he was acting - well, he was acting on behalf of Markel."

116. He described the slip as a document that set out the details of the contract in question. He also referred to the slip as a facing sheet. At a late stage in his evidence (which was given over 3 days) he said that the document initialled by Mr. Smith was in the form of the bond risk review sheets though he added that there might have been occasions when Mr. Smith signed the actual bond file.
117. The reliability of Mr. Higgins' recollection with regard to Mr. Smith initialling a slip, review sheet or bond file can be tested by examining whether any such initialling is apparent on the documents obtained from SGC's office. The only document which contains Mr. Smith's signature is the bond risk review sheet in relation to bonds issued during the Amalfi/QBE period when the duration of the bond exceeded 3 years. By way of example reference was made in the course of Mr. Higgins' cross-examination to the bond risk review sheet issued on 4 May 2006 in favour of St.George Central London Limited at the request of Ardmore Construction Limited. The standard form of the bond risk review sheet provides for the contract period to be identified and, if it is in excess of 3 years, for Mr. Smith to sign, effectively noting his agreement to the duration of the bond. In this case the contract period was for 5 years and so the sheet bears Mr.Smith's signature above the manuscript words "noted and agreed". (There was a provision in the Binding Authority between Markel and SGC that contract periods in excess of 3 years may be specially accepted, though this provision was not repeated in the Management Agreement between QBE/Amalfi and SGC.) The bond was stated to be for the sum of £2,461,300 "split with Templeton". The sheet also stated the manner in which that sum was split, namely, Templeton taking 59.37% or £1,461,300 and QBE taking 40.63% or £1m. Thus Mr. Smith, when signing the sheet would know that a bond had been issued for a sum in excess of £1m., but he would also understand that QBE's liability under that bond was limited to £1m. There is nothing on the sheet to suggest that Mr. Smith would have appreciated that the bond had been issued in the name of QBE for £2,461,300.
118. Three consequences flow from the fact that the only documents bearing Mr.Smith's signature are the bond risk review sheets. Firstly, any assent by Mr. Smith to breaching the agreed limits during the Markel period can only have been oral because the review sheets were not in use during the Markel period. Secondly, Mr. Higgins' recollection that Mr. Smith signified his acceptance of bonds which exposed QBE to a liability in excess of the stated limits must, at the least, be mistaken because the bond risk review sheets contain no such acceptance. Thirdly, if his recollection as to the review sheets is mistaken in that respect, it casts doubt on his recollection that Mr. Smith orally assented to breaching the agreed limits during the Markel period.
119. Counsel for Mr. Higgins realistically accepted that he could not ask the Court to accept the evidence of Mr. Higgins that Mr. Smith had signified his consent to limits being exceeded by initialling a document in relation to each bond.
120. However, it was submitted on behalf of Mr. Higgins that when one had regard to the involvement of Mr. Smith in overseeing the operation of the Binding Authority with Markel and of the Management Agreement with Amalfi it was apparent that Mr. Smith must have known and accepted that bonds were being "over written" and that Templeton was being used as a silent co-surety. This case was put in cross-examination of Mr. Smith. It was developed over 60 pages in Counsel's closing submissions. I have considered those submissions in their entirety but the central pillars of the case are as follows:

a) The bond files at SGC were available to be inspected by Mr. Smith who accepted that he did "on occasion" look at them. It would have been apparent to him that the bonds being written in the name of Markel were for amounts in excess of the stated limits.

b) The reason Mr. Smith made no objection to this was that he must have known that Templeton was being used as a silent co-surety.

c) Nor did Mr. Smith make any objection to the fact that, as shown on the bordereaux, business was not being split 50/50 between Markel and Templeton. On the contrary, Templeton was often taking a considerably greater share of the bond exposure than Markel.

d) He permitted bonds to be written for periods in excess of 3 years yet in many cases he only signed them off some months after issue.

e) Mr. Smith also permitted the Management Agreement between Amalfi and SGC to be operated as if it were a Binding Authority, yet it was not. Amalfi merely authorised SGC "to submit for approval surety bonds". This demonstrated a willingness on Mr. Smith's part to depart from the strict terms of the Management Agreement. Similarly, Mr. Smith's willingness to sign off for bonds in excess of 3 years when the Amalfi/SGC Management Agreement did not allow for such special acceptance (whilst the Markel/SGC Binding Authority did) demonstrated a willingness on Mr. Smith's part to depart from the strict terms of the Management Agreement. His management of SGC was so "lax" that he must have given SGC the impression that there was nothing improper in what SGC was doing.

f) Mr. Smith did not care about the co-surety arrangement so long as, ultimately, Markel would be liable for no more than the stated limits, more business would be written and his participation in the profits of Amalfi would be increased. If he did not know and approve of the silent co-surety agreement he nevertheless gave the impression of being content with it.

g) Mr.Smith denied that he knew that bonds were being written in the name of Markel for sums in excess of the limits or that Templeton was being used as a silent co-surety. However, he was less than frank in several aspects of his evidence. His account of his move from Markel to Amalfi was not full and frank. The documents show that he solicited the four elements of his speciality portfolio to follow him to Amalfi; yet he sought to deny that he had done so. He was also less than frank with Markel. He failed to inform them of the modus operandi agreement. He was less than frank with Amalfi. He did not inform them that Mr. Felstead continued to have a role in the surety business after his conviction had been revealed.

h) With regard to certain discussions and meetings his evidence was not consistent with the documents.

i) In 2005 SGC wrote a very large bond (£10m.) at the request of Interhealth. 75 % of it was reinsured. Mr. Smith denied knowing about this bond until it was raised in this litigation. Yet a series of documents from 26 October 2004 until March 2005 make reference to discussions between Mr. Smith and Mr. Felstead on the subject. In cross-examination Mr. Smith was unable to accept what these documents said. He said he had no recollection of discussing Interhealth and the documents did not assist him to recollect doing so. The bond is referred to in the bordereaux from May 2005 and a note of a meeting on 20 January 2006 attended by Mr. Smith records discussion of Interhealth.

ii) Similarly, a number of e-mails and other documents show that Mr. Smith met Mr. Felstead and a Mr. Andreas Wesemann. At this time Mr. Felstead was discussing with Mr. Wesemann the writing of some very large bonds. Yet Mr. Smith denied meeting Mr. Wesemann in October 2005 notwithstanding what the documents showed.

iii) Mr. Smith did not accept that he knew that Mr. Felstead was still involved in the surety bond business after the discovery of his conviction for fraud yet the e-mail correspondence, notes of meetings and diary notes showed that he must have been.

iv) The Canadian bonds were shown on the bordereaux in April 2006 and yet Mr. Smith claimed only to have learnt about them in August 2006.

121. It is convenient to deal first with the criticism of Mr. Smith as a witness. Counsel for Markel chose not to address that criticism (preferring to say in effect that it led nowhere) but counsel for QBE/Amalfi did address the criticism. He described Mr. Smith as "paralysed and frozen" when giving evidence and realistically accepted that he was not an impressive witness. I must agree that Mr. Smith was not an impressive witness. He appeared to have determined in advance of giving evidence that he must be wary of accepting that he had discussed with SGC, in particular Mr. Felstead, any of the "over-written" bonds which are the subject of this action. He kept to this line despite the contemporaneous documentation regarding the Interhealth bond and the discussions with Mr. Wesemann both of which were contrary to his evidence. Similarly, his reluctance to accept that he knew that Mr. Felstead was still involved in the surety business in 2006, when the e-mail correspondence, notes of meetings and diary notes showed that he must have known, suggested that he was not seeking to give truthful evidence. Counsel for Mr. Higgins suggested that one explanation for the contemporaneous documentation was that it was part of an elaborate deception by SGC, in particular Mr. Felstead, to implicate Mr. Smith in matters in which in truth he was not implicated. But he submitted that this was highly unlikely given the number and variety of references to Mr. Smith and counsel for the Claimants did not suggest that this was a likely explanation.
122. In the result I am bound to exercise considerable caution before accepting Mr. Smith's evidence. The need for caution was also shown by the absence of any contemporary notes kept by Mr. Smith of meetings attended by him (save for a few such notes). This is odd given that Markel's solicitors stated on 18 January 2008 that Mr. Smith's normal practice when attending a meeting was to make notes and have them typed up. The need for caution was also shown by his lack of frankness when dealing with the circumstances of his move to Amalfi and by his failure in his first statement to mention that he had a significant role in answering the Amalfi questionnaire.
123. However, there is no clear evidence that he was ever told that any bonds were to be written in terms which exposed Markel or QBE/Amalfi to sums which exceeded the limits in the Binding Authority with Markel and in the Management Agreement with Amalfi. (I do not regard the "Energybuild" bond episode as clear evidence that Mr. Smith (or anyone else within QBE/Amalfi) appreciated that SGC was ignoring the limits in the Management Agreement. It is true that the beneficiary of the bond which had been issued in the name of QBE by SGC for £3.1m. required it to be signed by QBE rather than by SGC on behalf of QBE and that in due course the Company Secretary did so. But the debate which ensued was not about the amount of the bond but as to why it was necessary for QBE itself to sign the bond. There was no clear evidence that Mr. Smith was aware of the amount of this bond.)
124. Further, it is necessary to keep well in mind that the submission that Mr. Smith knew and accepted that bonds were to be "over-written" so that Markel and QBE would be liable to the beneficiaries of those bonds for sums in excess of the agreed limits is necessarily linked with the submission that Mr. Smith knew and accepted that the Templeton would be used as a silent co-surety. That is because a "silent co-surety" was to be the means by which Markel's and QBE's ultimate liability was to be kept at the agreed limits.
125. In my judgment this linked submission lacks any cogency at all.
126. Firstly, in order for the concept of a silent co-surety to "work" there has to be an agreement between Markel and Templeton so that Markel has a right to be indemnified by Templeton in respect of any liability beyond the limits agreed with SGC. Mr. Higgins appreciated this. Under cross-examination he explained his understanding of the co-surety arrangement as it had been explained to him by Paul Stanford of St. Paul Insurance Company:

"On a co-surety normally you would have two sureties named in the document: company A and company B for their respective amounts. It was Paul Stanford who actually said to me, "We can do it by way of a silent co-surety with a separate agreement but there is only one company mentioned in the bond document, but we have an agreement between ourselves that in the event of any problems arising we would put in the same position as if we were co-surety"."

127. There is no evidence of any such agreement. Clause 4 of the modus operandi agreement with Markel could not sensibly have been regarded by Mr. Higgins as authorising the suggested silent co-surety arrangement. Mr. Smith was aware that where Templeton paper was acceptable, Templeton would be a co-surety with Markel, with each being liable for its own share of the bond. But it cannot be said, on the basis of clause 4 or for any other reason, that he was aware that where the required bond was in excess of the agreed limits and Templeton paper was not acceptable, Markel would be liable to the beneficiary for the whole amount of the bond. Thus Mr.Smith had no reason to agree with Templeton that in such circumstances Markel would have a right to be indemnified by Templeton in respect of liability beyond the agreed limits. There is no evidence that there was any agreement between Markel and Templeton to that effect. On the contrary, Mr. Higgins made clear to Mr. Smith at the meeting on 23 February 2005 that where bonds were issued with Templeton they would be issued on a several basis. That assurance was contrary to what is implicit in the silent co-surety arrangement, namely, that where a bond is issued for a sum in excess of the relevant limit Markel is liable to the beneficiary for the whole sum.
128. Counsel for Mr. Higgins suggested that the required agreement between Templeton and Markel came about when Mr. Higgins telephoned Mr. Brunswick, informed him of the bond he wished to write and, on behalf of Markel or QBE/Amalfi secured his agreement, on behalf of Templeton, to being a silent co-surety for the difference between the value of the bond and £1m., the latter being the maximum per bond to which SGC could commit Markel. But Mr. Brunswick said there was no such agreement. He regarded bonds signed by Templeton as being bonds upon which the beneficiary could sue. Moreover, commercial common sense requires that where a silent co-surety is employed, the documentary evidence should be in place from the moment that Markel is at risk under the bond issued to the beneficiary. Yet no such documentary evidence was in place. It was said that the bonds issued by Templeton in an amount equal to the difference between the value of the Markel bond and £1m. were evidence of Templeton being a silent co-surety. But they do not evidence the necessary agreement to indemnify Markel and in any event were not issued until December 2005. Thus the Markel bonds which were "over-written" (that is, for a sum in excess of the financial limits) during 2005 stood alone and without the benefit of any documentary evidence that there was a silent co-surety.
129. Secondly, it is improbable that major insurers such as Markel would be content to accept liability for bonds in excess of limits in exchange for a right to be indemnified by a much smaller insurance company.
130. Thirdly, whilst the concept of a silent co-surety is known in the market Mr. Brown gave evidence that there will usually be a co-surety agreement which deals with "everything from underwriting to claims control to salvage distribution and disputes." There was no such agreement in this case.
131. Fourthly, there is no credible evidence that Mr. Smith assented, or acted as if he was assenting, to any such arrangement. On the contrary the evidence of the meeting with Mr. Middleton in October 2005 suggests that far from the silent co-surety arrangement having been agreed with Mr. Smith Mr. Higgins was suggesting it in October 2005 as being an arrangement that he would like to adopt in the future.
132. Fifthly, if there had been any such silent co-security arrangement or if Mr. Higgins had believed that Mr. Smith had assented to any such arrangement it is very difficult to envisage a reason (and none was suggested) why it was necessary for there to be placed on the SGC file in December 2005, in place of copies of the bonds as delivered to the beneficiary for a sum in excess of the limits, copies of bogus Markel bonds for £1m., the agreed limit.
133. So far as the QBE/Amalfi period is concerned it is clear that Mr. Smith had not agreed to the concept of "silent co-surety". The addendum no.2 to the Management Agreement between Amalfi and SGC dated 16 November 2005 expressly states that QBE was "not to be responsible for the subscription of any co-surety who for any reason does not satisfy all or part of its obligations." This is contrary to the notion of a co-surety being "silent" because if the co-surety were silent then QBE would be responsible to the beneficiary for the entire value of the bond even if it were in excess of the financial limits. Further, the limits were expressly mentioned by Mr. Smith in his e-mail dated 24 November 2005 headed "Key Agreement Points". It is highly improbable that he would emphasise the limits if they could be overridden in the manner suggested. The bond review sheets introduced during the Amalfi period do not assist Mr. Higgins' case. When signed by Mr. Smith they show that he was agreeing to an extension of the period of the bond. He was not assenting to QBE being exposed to 100% liability on a bond written for a sum in excess of the limits.
134. If, as I have found, there was no silent surety agreement between Markel (or QBE/Amalfi) and SGC then the case that Mr. Smith assented to bonds being written in excess of the financial limits must fall away. For it is wholly improbable that he would have assented to such bonds being written without any protection for Markel or QBE/Amalfi.
135. I shall nevertheless deal briefly with the other pillars of Mr. Higgins' case. Whilst Mr. Smith may have looked "on occasion" at the files there is no evidence that he did so systematically and in any event there is evidence (from Mr. Hodgins of Reynolds Porter Chamberlain) that when he visited the offices of SGC in 2006 the files were hardly in an order that facilitated an ordered inspection. Whilst Mr. Smith was prepared to accept (for whatever reason) that the respective exposure of Markel and QBE/Amalfi, on the one hand, and Templeton, on the other hand, was often not 50/50 and often delayed in signifying his consent to bonds being written for periods in excess of 3 years, such conduct cannot be translated into an acceptance of an exposure which exceeded the financial limit per bond. Again, whilst Mr. Smith may have operated the Management Agreement with Amalfi as if it were a Binding Authority, that also cannot be translated into an acceptance of an exposure which exceeded the financial limit per bond.
136. In summary, therefore, there is no clear evidence that Mr. Smith knew or accepted that bonds would be written which bound Markel or QBE/Amalfi to sums in excess of the agreed financial limits. Further, there is no cogent or contemporary evidence that Mr. Smith accepted that Templeton was to be a silent co-surety or that Templeton actually was a silent co-surety. The probabilities suggest very strongly that Templeton was not a silent co-surety and that Mr. Smith did not accept any such arrangement.
137. For these reasons I have concluded that Mr.Smith was not aware that SGC was writing non-compliant bonds (issue 6(i)) and that he did not consent to the writing of such bonds (issue 6(ii)).
138. As to issue 6(iii) I have concluded that Mr. Smith did not lead Mr. Higgins to believe that he did consent to SGC writing the non-compliant bonds. I consider that Mr. Smith certainly encouraged SGC, and in particular Mr. Felstead, to explore all possible sources of business. That is why he was involved in discussing the Interhealth bond and the Canadian bonds and why he had a meeting with Mr. Felstead and Mr. Wesemann. But there is no evidence that Mr. Smith, by words or conduct, caused Mr. Higgins to believe that he consented to SGC writing bonds in breach of the agreed financial limits. Mr. Smith may well have been "lax" in some respects in his management of the Binding Authority with Markel and of the Management Agreement with QBE/Amalfi but such laxness did not mean that he was prepared to waive, or that he gave the impression of waiving, the financial limits in those agreements.
139. Counsel for Mr. Higgins put forward an "alternative and charitable analysis" that Mr. Higgins explained his understanding of the silent co-surety arrangement to Mr. Smith and that he simply failed to grasp how it worked. However, there was no such arrangement to explain.
140. It was submitted on behalf of Mr. Higgins, in the further alternative, that Mr. Higgins believed that he had Mr. Smith's approval because of his "impaired recollection". For the reasons which I shall give when I deal with the effect of Alzheimer's Disease on Mr. Higgins in 2005-2006 I have rejected this submission.
141. Issue 6(iv) asks whether Markel and/or QBE/Amalfi authorised or ratified the production of the non-compliant bonds and/or waived any related breaches of contract and/or fiduciary duty. For all of the above reasons they did not (save where breaches of the 3 year period limit were agreed by Mr. Smith). Once the non-compliant bonds were discovered QBE decided to honour them but it did not, as against SGC, waive any of its rights against SGC.

Issue 7

If SGC issued bonds in breach of limits and the writing of any of those bonds has not been authorised or ratified or waived by (a) Markel and/or (b) QBE/Amalfi, has SGC thereby breached its authority and/or breached its fiduciary duties to Markel and/or QBE/Amalfi ?

142. It follows from my findings so far that SGC acted in breach of its Binding Authority from Markel and in breach of its Management Agreement with QBE/Amalfi when issuing bonds in breach of the agreed limits.
143. It is necessary at this stage to make findings as to why SGC issued bonds in breach of the agreed limits. It is apparent from the findings I have so far made that in conjunction with issuing bonds for sums in excess of the agreed limits SGC failed properly to account to Markel and QBE/Amalfi for the premium which it had collected on the bonds it had issued. The inescapable inference is that the bonds were "overwritten" in order to defraud Markel and QBE/Amalfi by making a secret profit. In effect SGC only paid to Markel and QBE/Amalfi the premium which they would expect to receive on the basis of the information contained in the bordereaux. That is why the bordereaux did not record that the limits had been exceeded and why Markel dummy bonds were put on the bond files in place of the original bonds in December 2005 in preparation for Markel's audit. In fact SGC received premium based upon the actual amount of the bonds. In my judgment the findings I have made are not consistent with an innocent explanation for them.
144. The fraud carried with it a risk of exposure in the event that a claim was made on a bond which had been written in excess of the limits. However, many frauds carry a risk of exposure and I am not persuaded that the existence of this risk makes it impossible or unreasonable to draw the inference from the facts I have found that SGC was seeking to defraud Markel and QBE/Amalfi.
145. Nor am I persuaded that the circumstance that SGC in some cases paid "premium" to Templeton in respect of Templeton bonds shows that the fraud did not take place. There was no formal or detailed accounting between SGC and Templeton save for one e-mail. Further, the internal accounts of Templeton did not record as gross written premium the sort of figures to be expected from the business apparently written by Templeton according to the SGC cash books. These are very odd features of the relationship between Templeton and SGC and deprive the payment of "premium" of what might otherwise have been its forensic force.
146. It has not been possible to identify where all the premium collected by SGC went. However, there is cogent evidence that some of it was paid to General Commercial Limited, a company incorporated in the British Virgin Islands. It will be necessary to return to these payments later.
147. Since SGC were agents of Markel and QBE/Amalfi it owed them duties as a fiduciary when issuing and administering the bonds in their name. It is clear that in making a secret profit SGC was acting in breach of its duties as fiduciary.
148. That, however, is not sufficient to bring home liability against the individual defendants. The Claimants seek to make the Defendants liable pursuant to one or more different causes of action. To this end further issues were identified for decision.

Issue 8

Were Mr. Higgins, Mr. Williams and/or Mr. Felstead aware of the limits in the Binding Authority and Management Agreement ?

149. Mr. Higgins: It is accepted on his behalf that Mr. Higgins was aware of the limits. But it is submitted that due to Alzheimer's Disease it is more likely than not that from about 2004 his defects in memory and executive functions led him either to confuse the limits with those of other and older binders or to forget the relevant binder limits.
150. There is, it seems to me, a difficulty with this submission made on behalf of Mr. Higgins. The case advanced on his behalf is that where the agreed limits were exceeded that was acceptable because Templeton stood as a silent co-surety. Thus, far from forgetting the limits, the system of business said to have been operated by Mr. Higgins required him to remember that there were limits and, where they were to be exceeded, to arrange for Templeton to stand as silent co-surety.
151. But putting that difficulty to one side, the particular submission made on his behalf under Issue 8 requires him to have confused or forgotten the limits on many occasions and to have greatly exceeded those limits. The limits acceptable to Markel were advised to Mr. Higgins in December 2004 and the Binding Authority was signed in January 2005 and amended in March 2005. Yet between February and April 2005 9 bonds were issued for sums in excess of the limits including the Interhealth bond for £10m. (see Annex 1 to this Judgment).
152. Similarly, the Management Agreement with QBE/Amalfi was agreed with effect from 1 October 2005 and contained the same limits as in the Markel Binding Authority. After the discovery of Mr. Felstead's conviction the limits were emphasised by Mr. Smith in his e-mail dated 24 November 2005 which he requested to be circulated "to everyone in the programme". The e-mail was provided to Mr. Higgins who, the following day, raised a question about the period of the bonds but not about the financial limits. Yet, as already mentioned on 1 October 2005 a bond was issued at the request of Gala in the sum of £4,242,000 and on 22 December 2005 two bonds were written at the request of Canadian Shipping in the sum of Euros 5,176,470. Annex 2 to this judgment lists the substantial number of bonds signed by Mr. Higgins on behalf of QBE/Amalfi in breach of the financial limits.
153. Professor Bannerjee and Dr.Kennedy agreed that it was likely that Mr. Higgins could have been diagnosed with Alzheimer's Disease for a period of some years before 2007. This suggests that he could have been diagnosed with the illness in 2004. The only material difference between their opinions was that Dr. Kennedy considered Mr. Higgins' dementia to be mild whereas Professor Bannerjee thought it more moderate in severity. The scale is mild, moderate and severe and there is no single measure for assessing the extent of Alzheimer's Disease. Dr. Kennedy relied upon "the mini-mental state examination, the WAIS R IQ tests and the neuro-imaging findings". Professor Bannerjee relied upon these matters but also on his assessment that Mr. Higgins had "very high pre-morbid functioning" together with memory tests and evidence concerning current limitations on functions such as driving and toileting. It is difficult to resolve the difference of opinion between the experts. But even if it were resolved there is uncertainty as to how one relates Mr. Higgins' condition back to previous years. The psychiatrists were agreed that "there is variability between individual patients with Alzheimer's Disease in terms of the evolution of impairments and so there is difficulty in making prediction of impairment either prospectively or retrospectively." Thus even if the difference of opinion could be resolved it would be difficult to make a reliable assessment as to the extent of impairment in 2005 and 2006, save that it is likely to have been less then that is now.
154. I had the advantage of listening to Mr. Higgins give evidence over 3 days. Whilst there were occasions when he did not follow the question or appeared to contradict himself there were many periods when he carefully explained his understanding of the issue under discussion and answered many questions on a particular issue. He did not appear to me to be someone whose memory and executive function (that is, his ability to manipulate information, form concepts and solve problems) were so impaired that he would, in the course of writing surety bond business in 2005 and 2006, regularly confuse or forget the limits on his underwriting authority. The importance of adhering to such limits would have been something of which he would have been aware throughout his professional life and so less likely to forget. Whether the scale of his present dementia be mild or moderate the manner in which he gave evidence strongly suggests that in 2005-2006 his dementia was not such as to cause him to confuse the limits on the Markel and QBE/Amalfi agreements with those of other and older binders or to forget the relevant binder limits.^[7]
155. Members of his family did notice incidents of forgetfulness, though there was uncertainty as to how many years back these went. I do not consider these instances to be inconsistent with the view I have formed having listened to him give evidence. Mr. Justice Cooke described Mr. Higgins as not well and to have very little recollection when giving evidence before him in Oxus Gold Plc v Templeton Insurance Ltd. [2006] EWHC 864 (Comm). Again, I do not consider that this assessment of Mr. Higgins' reliability as a witness in 2006 to be inconsistent with the view I have formed that in 2005 and 2006 Mr. Higgins is unlikely to have confused or to have forgotten the limits on his underwriting authority on a regular basis.
156. Mr. Higgins' son-in-law Mr. Ray, who had worked with him until the end of 2003, said that he regarded Mr. Higgins as a "sick man" since 1998 and doubted his ability to conduct surety bond business from 2003. Mr. Ray's evidence does not fit with the other family evidence because it puts the onset of Mr.Higgins' symptoms much earlier than other family members put it. It seems to me that Mr. Ray's evidence is probably best explained by serious differences between Mr. Ray and Mr. Higgins as to how to conduct the surety bond business rather than as a genuine sign of Alzheimer's disease significantly affecting his cognitive abilities.
157. I am therefore unable to accept the submission made on behalf of Mr. Higgins to the effect that it is more likely than not that from about 2004 his defects in memory and executive functions led him either to confuse or forget the relevant binder limits. On the contrary I find that it is more likely than not that, although he was suffering from the early stages of Alzheimer's disease in 2005 and 2006, Mr. Higgins was aware of the importance of adhering to the limits of his underwriting authority and that he remembered those set out in the agreements with Markel and QBE/Amalfi. The Markel and QBE/Amalfi limits were of course part of his recently acquired information and therefore more likely to be forgotten but his own case requires that where he exceeded those limits he was permitted to do so by ensuring that Templeton was a secret co-surety. There is in truth no evidence that he forgot the limits. His own case requires that he appreciated when the limits were to be exceeded and made provision for it. The submission that it is more likely than not that from about 2004 his defects in memory and executive functions led him either to confuse or forget the relevant binder limits ignores the reliance placed by Mr. Higgins on the supposed role of Templeton as silent co-surety and the reasons for such reliance. It is improbable that he simply wrote surety business without reference to limits and no such submission was made. He himself accepted in cross-examination that he was entirely conscious of the limits when underwriting.
158. For essentially the same reasons I have rejected the submission that Mr. Higgins believed he had Mr.Smith's approval of the writing of bonds in excess of the agreed limits because of "impaired recollection". This submission, in the context of Mr.Higgins' case, requires him, on the one hand, to appreciate when the limits are exceeded and make provision for that and yet, on the other hand, on each such occasion to think (as a result of impaired recollection) that Mr. Smith approved his actions. This is an improbable coincidence.
159. Mr. Williams: He signed the Binding Authority and Management Agreement on behalf of SGC. He accepts that he was fully aware of the limits under both agreements.
160. Mr. Felstead: He was present at the meeting on 2 December 2004 when Mr. Smith informed him and Mr. Higgins of the limits which Markel would accept. Those were the limits later incorporated into the Binding Authority with Markel. When SGC's business followed Mr. Smith to QBE/Amalfi it is more likely than not, having regard to his involvement in the surety bond business of SGC, that he was aware that the limits on SGC's authority remained the same. Indeed, by e-mail dated 7 October 2005 Mr. Smith told Mr. Felstead that "for the next few weeks until the year end, we should maintain a £2.5m. aggregate limit for 2005 underwriting year …………as though the insurer was unchanged." Mr.Smith's e-mail dated 24 November 2005, which listed the financial limits was one of the "key agreement points", was not addressed to Mr. Felstead and Mr.Williams did not say in his e-mail dated 25 November 2005 that he had passed it on to him but, given Mr. Felstead's continuing presence in the office, despite the discovery of his conviction, it is unlikely that it did not come to his attention.
161. I therefore find that Mr. Felstead was aware of the limits of SGC's underwriting authority.

Issue 9

Were Mr. Higgins, Mr. Williams and/or Mr. Felstead involved in the writing of bonds in breach of the limits ?

162. Mr.Higgins: In the Markel period Mr.Higgins did not sign any of the bonds in Annex 1 save for the Zakhem bonds (which were in excess of the financial limits and outside the territorial limits) and one of the sample "on demand" bonds (that in favour of MJ Gleeson). It was submitted on his behalf that he was not involved in the "over-writing" bonds in any significant sense. However, this is, in my judgment, an unrealistic submission. He was the person with great experience of the surety bond market. That was one of the principal reasons for Markel entering into its agreement with SGC. The notes of meetings in December 2004, January 2005 and February 2005 between Mr. Smith and SGC show that Mr. Higgins took a leading role in the discussions. Whilst he may not have signed many of the bonds in the Markel period it is clearly more likely than not that he was significantly involved in the writing of bonds in the name of Markel. In the QBE/Amalfi period Annex 2 shows that he signed many of the bonds. Plainly he was significantly involved in the writing of bonds in the name of QBE/Amalfi also.
163. Mr.Williams: Annex 1 and Annex 2 to this judgment show that Mr. Williams signed many of the bonds which were written in excess of the agreed limits. He has submitted that he was not involved in the writing of the bond because he was not the underwriter and was a second signatory. Whilst it is true that he was not the underwriter and regarded himself as a second signatory the fact that he signed so many of the bonds shows that he was involved in the writing of the bonds.
164. Mr.Felstead: During the Markel period Mr. Felstead signed many of the bonds which were "over-written"; see Annex 1. He had also attended the meetings in December 2004, January 2005 and February 2005. During the same period he was involved in arranging the Interhealth bond. During the QBE/Amalfi period he signed one bond only, the Gala bond issued on 8 November 2005. He signed no more because his criminal conviction came to light. However, it is clear that he continued to be involved in the business of SGC. Mr. Williams gave convincing evidence to that effect ("he ran the place") and the documentary record shows Mr. Felstead to have been involved in discussions about bonds. I therefore find that he too was involved in the writing of bonds in excess of the agreed limits in both the Markel and the QBE/Amalfi period.

Issue 10

Were Mr. Higgins. Mr. Williams and/or Mr. Felstead involved in the creation of bordereaux which misstated the true position ?

165. Mr. Higgins: It is submitted on his behalf that he was not involved in the creation of the bordereaux. This submission was certainly supported by Mr.Williams:

"Q. We have looked at the bond documentation and the debit note, who would produce the bordereaux?

"A. Liam Curran with some assistance or hindrance from Amy Vickers. Liam had the main bordereaux on his computer system and he would be the final person that entered in the details. Amy Vickers would sometimes try and access that bordereaux to enter in her own bonds. I can remember them two being at each other's throats on various occasions because duplicate numbers were used and things like that. "

166. He was asked whether Mr.Higgins had a role in producing the bordereaux and he replied:

"I don't think he would have a clue how to do it, my Lord."

167. Counsel for Markel relied on the note of the meeting on 26 January 2005 which records that "Liam sits with Tim every morning and goes though the account". Whilst this does not specifically refer to the bordereaux, Mr. Higgins accepted in cross-examination that he worked closely with others in relation to the bordereaux. Those with whom he worked were Mr. Felstead, Liam Curran (whom Mr. Higgins was training up) and Mr. Ward (the SGC accountant and Company Secretary). It was also apparent from his cross-examination that (as is to be expected) Mr. Higgins was well aware of the important role of bordereaux, namely, to provide information to Markel and QBE/Amalfi as to the business which was being written in their name. Thus, although (i) Mr. Higgins was only in the office for three days a week, and when in the office often took a leisurely lunch, (ii) he was not a user of the computer on which the bordereaux were prepared and (iii) he was suffering from the early stages of Alzheimer's Disease, I consider it is more likely than not he must have been involved in the production of the bordereaux and understood the information provided in them to Markel and QBE/Amalfi. I consider that Mr. Williams' answer which I have quoted above probably reflected Mr. Higgins' inability to create the bordereaux on a computer file.
168. Mr. Williams: The Claimants have not referred me to any clear evidence that Mr. Williams was involved in the creation of bordereaux which misstated the true position. He has submitted that he had no involvement in the preparation, reviewing, checking or submitting of the bordereaux. Surety bond business was not an area in which he was experienced (although he would, from his insurance background have understood the importance of bordereaux) and he was not involved in underwriting decisions (although he was a signatory to many of the bonds). The bordereaux were created on a computer file by Liam Curran. Whilst there is evidence that Mr. Higgins and Mr. Felstead liaised with Liam Curran in that task there is no clear evidence that Mr. Williams did so. He accepted in cross-examination that he knew that the bordereaux were submitted to Mr. Smith and that he knew what they looked like. Whilst it seems from his answers to questions about specific bonds that he appreciated the nature of the information contained in them he insisted that he was not involved in their preparation.
169. In the absence of any clear evidence that Mr. Williams was involved in the creation of the bordereaux I find that he was not so involved. However, it appears that he did understand the information they conveyed to Markel and QBE/Amalfi.
170. Mr. Felstead: It is clear from the evidence of Mr.Higgins and Mr. Williams that Mr. Felstead was involved in the creation of the bordereaux and I so find.
171. Issues 11 and 12 concern the question whether Mr. Higgins, Mr. Williams or Mr. Felstead were involved in the failure fully to account to Markel and/or QBE/Amalfi for premium and whether any of those persons could honestly have believed that their actions considered under issues 9 and 10 were justified. They are related issues. They are also related to the causes of action to be considered under Issues 13 and 14 (breach of fiduciary duty) and under Issue 15 (conspiracy, procuring breach of contract and dishonest assistance in breaches of fiduciary duty). I shall therefore deal with those issues together, beginning with an assessment of the involvement of each defendant in the fraud which was committed by SGC.

Mr. Higgins:

172. The Claimants submit that it can safely be inferred from his conduct that he must have been party to the fraud committed by SGC. Mr. Higgins has consistently denied any wrongdoing.
173. I have so far found the following:

i) Mr. Higgins was aware of the limits in the Binding Authority with Markel and in the Management Agreement with QBE/Amalfi.

ii) Mr. Higgins was involved in the writing of bonds in the name of Markel and QBE/Amalfi which were in breach of those limits.

iii) Mr. Higgins was involved in the creation of the bordereaux which misstated the details of the bonds written by SGC.

iv) Mr. Smith did not lead Mr. Higgins to believe that he consented to the writing of bonds in excess of the agreed limits.

v) SGC failed to account fully to Markel and QBE/Amalfi for the premium which was due on the bonds written in their name.

vi) By writing bonds in breach of the financial limits and failing to account fully in respect of the premium due on the bonds SGC obtained a secret profit, namely, the difference between the sum paid to it as premium and the premium in respect of which SGC accounted to Markel and QBE/Amalfi.

174. General Commercial Limited (GCL) is a company registered in the British Virgin Islands. Mr. Higgins accepted that he had a beneficial interest in GCL.
175. In March 2006 a payment of £200,000 was made to GCL and in May 2006 a payment of £288,000 was made to GCL. A Service Agreement existed between GCL and SGC pursuant to which GCL was to receive a 30% commission for the introduction of business. However, this appears to be a charade because there is no evidence that GCL introduced business to SGC. Moreover, there is evidence that the two sums paid to GCL represented premium income in respect of which there had been no accounting to Markel or QBE/Amalfi. Thus an analysis of SGC's records by an expert accountant suggests that the sum of £200,000 represents premium received by SGC. The same expert suggests that the sum of £288,000 represents premium on the Interhealth bond and on the PC Harrington bonds which had not been accounted for to Markel. There was no evidence to the contrary.
176. Mr. Higgins accepted in cross-examination that the monies received by GCL were to be split between himself, Mr. Brunswick and Mr. Felstead. This evidence is supported by manuscript notes of Mr.Higgins (on the back of the document which transferred the sum of £200,000) which provided as follows:

"Trust document needs sorting out.

Ralph 40%

Tim 40%

Cliff 20%"

177. I have reminded myself of the standard of proof required to prove the serious allegations made against Mr. Higgins. But in my judgment it is an irresistible inference from the facts that I have found, coupled with the evidence concerning GCL, the payments to it and Mr. Higgins' interest in GCL, that Mr. Higgins was involved in the failure to account fully to Markel and QBE/Amalfi in respect of premium, that he conspired with others to injure Markel and QBE/Amalfi by obtaining a secret profit and that he could not honestly have believed that his actions were justified. I am therefore compelled to reject Mr. Higgins' evidence that he was not involved in any dishonest or fraudulent activity.
178. Much time and energy was spent at the hearing investigating whether Mr. Higgins had acted in a similar way before. It was alleged that he had done so when writing business for Euler Hermes and it was alleged that he had in effect confessed to doing so when playing golf at Epsom Downs with Mr. Coyne. I have not relied on these matters in reaching my decision. There was no evidence from Euler Hermes and in the absence of such evidence it would be unsafe to make the suggested findings. Similarly, it would be unsafe to make findings of serious misconduct based upon what is said on a golf course.

Mr. Felstead

179. The Claimants submit that it can safely be inferred from his conduct that he must have been party to the fraud committed by SGC.
180. I have so far found the following:

i) Mr. Felstead was aware of the limits in the Binding Authority with Markel and in the Management Agreement with QBE/Amalfi.

ii) Mr. Felstead was involved in the writing of bonds in the name of Markel and QBE/Amalfi which were in breach of those limits.

iii) Mr. Felstead was involved in the creation of the bordereaux which misstated the details of the bonds written by SGC.

iv) When asked by Mr. Smith whether he had been convicted he lied to him by denying that he had been so convicted.

v) Notwithstanding the discovery of his conviction for fraud and his removal from the schedule of persons authorised to operate the Management Agreement with QBE/Amalfi (of which he must have known because he signed no further bonds thereafter) he continued to be involved in the operation of the Management Agreement.

vi) SGC failed to account fully to Markel and QBE/Amalfi for the premium which was due on the bonds written in their name.

vii) By writing bonds in breach of the financial limits and failing to account fully in respect of the premium due on the bonds SGC obtained a secret profit, namely, the difference between the sum paid to it as premium and the premium in respect of which SGC accounted to Markel and QBE/Amalfi.

181. The original Markel bonds in SGC's files were replaced with Markel dummy bonds in December 2005 prior to the audit by Markel. It is likely that Mr. Felstead was directly involved in this activity. Prior to the audit Mr.Williams observed that the files were being amended under the direction of Mr. Felstead. When questioned by Mr. Williams he said that he was "making sure that the files tied up with the bordereaux". Associated with the replacement of the true bonds by the Markel dummy bonds was the addition to the files of the Templeton bonds. Mr. Felstead was involved in obtaining these from Templeton.
182. The evidence to which I have already referred in the case of Mr. Higgins establishes that Mr. Felstead had an interest in the monies improperly received by GCL.
183. Although Mr. Felstead filed a defence alleging that he acted on Mr. Higgins' assurance that what he was doing was permissible he did not attend trial to give evidence to that effect. I have previously stated that the medical evidence to which I referred at the beginning of this judgment does not say that his state of health prevented him from doing so.
184. Just as with Mr. Higgins, so with Mr. Felstead, it is an irresistible inference from these facts that Mr. Felstead was involved in the failure to account fully to Markel and QBE/Amalfi in respect of premium, that he conspired with others to injure Markel and QBE/Amalfi by obtaining a secret profit and that he could not honestly have believed that his actions were justified. I am compelled to reject his denial in his pleaded defence of the allegation that he was involved in the making of a secret profit.
185. Mr. Williams
186. The following facts have been found concerning Mr. Williams:

i) Mr. Williams was aware of the limits in the Binding Authority with Markel and in the Management Agreement with QBE/Amalfi.

ii) Mr. Williams was involved in the writing of bonds in the name of Markel and QBE/Amalfi which were in breach of those limits.

iii) Mr. Williams was aware of the information contained in the bordereaux.

iv) SGC failed to account fully to Markel and QBE/Amalfi for the premium which was due on the bonds written in their name.

v) By writing bonds in breach of the financial limits and failing to account fully in respect of the premium due on the bonds SGC obtained a secret profit, namely, the difference between the sum paid to it as premium and the premium in respect of which SGC accounted to Markel and QBE/Amalfi.

187. Further, it was apparent from his own evidence that he knew that Mr. Felstead continued to be involved in the surety bond business, notwithstanding the discovery of Mr. Felstead's conviction for fraud and that in consequence Mr. Felstead was to have no further role in the operation of the Management Agreement. Indeed, Mr. Williams discovered that Mr. Felstead was altering the contents of the bond files prior to the Markel audit in December 2005. Further, prior to the Markel audit in May 2006, he signed a document stating that no documents relevant to Markel had been removed from the files when he at least knew that Mr. Felstead had been tampering with them.
188. However, there is no evidence that Mr. Williams benefited directly from the secret profit obtained by SGC. He was not a shareholder in SGC. Nor was he the holder of a beneficial interest in General Commercial Limited. The most that could be said in this context was that he accepted that he had requested a share in SGC and that Mr. Higgins said that Mr. Williams had been offered a share in SGC. But there was no evidence that he was granted a share of SGC in 2004 or that he had any real prospect of a share thereafter. His salary was paid by GHIBL.
189. If Mr. Williams had been party to the conspiracy to defraud Markel and QBE/Amalfi it is likely that he would, like them, have been a beneficiary of the sums paid to GCL. It is not suggested that he was. Whilst there are many other criticisms of Mr. Williams' conduct I am satisfied that he was not party to the conspiracy to defraud to which Mr. Higgins and Mr. Felstead were party. It was Mr. Williams' evidence that at the end of his career in insurance he wanted a "quiet life". Not only did I consider (having observed Mr. Williams give evidence over three days) that such evidence had a distinct ring of truth about it but counsel for QBE/Amalfi placed particular reliance upon it. It seems to me improbable that Mr. Williams, if he wanted a quite life, would enter into a conspiracy to defraud Markel and QBE/Amalfi when he did not stand to gain directly from it.
190. However, it does not follow that he honestly believed that he was entitled to act as he did.
191. In considering whether he did so believe it is first necessary to consider the law concerning dishonesty. This topic has been discussed in several recent cases, Royal Brunei Airlines v Tan [1995] 2 AC 378, Twinsectra Ltd v Yardley [2002] 2 AC 164 and Barlow Clowes International v Eurotrust International [2006] 1 WLR 1476. The issue was addressed most recently in AG of Zambia v Meer Care & Desai & Others [2007] EWHC 952 (Ch) by Peter Smith J. There is happily no dispute in the present case that I may take the law as stated extra judicially by Sir Anthony Clarke MR in an article entitled Claims against Professionals: Negligence, Dishonesty and Fraud [2006] 22 Professional Negligence 70-85, adopted by Peter Smith J in the last mentioned case at para.357.

"The test is an objective one, but an objective one which takes account of the individual in question's characteristics, experience, knowledge etc. ………It is a test which requires a court to assess an individual's conduct according to an objective standard of dishonesty. In doing so, a court has to take account of what the individual knew, his experience, intelligence and reasons for acting as he did. Whether the individual was aware that his conduct fell below the objective standard is not part of the test. "

192. Mr.Williams denied that in acting as he did he acted dishonestly. He submits that he sought an explanation regarding the operation of the Binding Authority from Mr. Higgins and Mr.Felstead and reasonably relied upon their explanations and considerable experience in the surety bond market. However, he accepts that alarm bells began to sound around May 2006 when Markel questioned the Templeton bonds.
193. Like his father, Mr. Williams spent his working life in the insurance business as a broker. He worked in the aviation field and rose to become deputy managing director of the aviation division of Lowndes Lambert Aviation. He left that position in 1998 at the age of 48. From 2000-2002 he sought to run his own broking house but that business foundered in the aftermath of the events of September 11, 2001. He wished to continue broking aviation business and was looking to join a small broking house. Mr. Felstead introduced him to Legal Risks Management ("LRM") where he met Mr. Brunswick. LRM placed legal expense insurance with Templeton. Mr. Williams was offered a job at LRM to develop their general insurance account. He tried to develop an aviation account but without success. He therefore began to look at other classes of business, including the surety bond business in which Mr. Felstead was involved. Through Mr. Felstead he met Mr. Higgins.
194. Following the incorporation of SGC and GHIBL Mr. Williams became a director of each. He received a salary from GHIBL. The latter was intended to provide and underwrite insurance for the construction industry on the strength of contacts made by SGC in arranging surety bonds in that industry. GHIBL was also to expand its book of general and aviation insurance. Mr. Williams described the surety bond business as being the "area" of Mr. Higgins and Mr. Felstead. He described them as specialists and said he "helped out when and where he was told".
195. Mr. Williams represented himself at the trial and gave evidence in support of his defence. He was cross-examined over 3 days. I consider that he made every effort to answer questions truthfully and to the best of his recollection. This caused him on occasion to accept that he had no answer to certain important allegations against him. Whilst the absence of an answer or explanation can be damning I considered that in his case it served to emphasise his frankness. He had made a very full study of the documents (causing counsel for Markel to refer to him at one point, without a hint of irony, as "my learned friend") and with his knowledge of the documents could have contrived explanations but he did not. Similarly he accepted that certain e-mails written by him in 2006, when SGC found itself in serious difficulties as Markel and QBE/Amalfi investigated the conduct of SGC's business, contained untruths. Whilst this shows that he is not averse to telling an untruth when in difficulty he accepted that he had done so and did not seek to provide a false explanation for what he had written. This also, in my judgment, illustrated his frankness when giving evidence. He struck me as someone who had taken the allegations very seriously (hence his extensive study of the documents), realised that there were matters for him to explain (primarily, the fact that he had signed the bonds which had breached the limits) and sought to give as full an account as he could of his actions.
196. However, in considering Mr. Williams' evidence and whether he acted dishonestly it is necessary to bear in mind that on his own account, although he became a director of SGC and GHIBL, he was "in it for a quiet life". He was planning to retire within 2-3 years and he enjoyed what he regarded as the lax attitude in those companies. It suited him "sit back, keep my head down and keep quiet." Thus, whilst he had raised his concerns about Mr. Felstead's role in SGC (having regard to his criminal record) he did nothing more about it, notwithstanding that Mr. Felstead continued to have an important role. He "decided to be quiet, accept the free lunches, afternoon drinking sessions and laid back life style". He was very frank about his attitude. In cross-examination it was put to him that "in other words wherever there was a problem you chose to ignore it ?" He replied that "to a certain extent I would agree with that. I would raise an issue, but if I received a response which I guess satisfied me I would not raise it again".
197. Mr.Williams gave evidence that he asked Mr.Higgins whether it was in order to sign bonds in excess of the limits. Mr. Higgins was the expert in the surety bond business and it is natural that Mr. Williams, who was not a surety bond underwriter, would ask such a question of Mr. Higgins when asked to sign such a bond. I accept Mr. Williams' evidence that he was told by Mr. Higgins that it was in order to sign bonds in excess of the agreed limits and that Mr. Smith had accepted that, when that was done, there would be a co-surety (Templeton) who would issue a bond for the difference between the value of the bond and the agreed limit of Markel's liability. It is possible that the modus operandi agreement was mentioned in this context, at least when the topic was first raised. On later occasions he asked: "Is Smithy happy with this? And it would be confirmed by either Mr. Higgins or Mr. Felstead or both".
198. The Claimants submit that whatever it was Mr. Williams was told, he had long experience of the insurance market and could not possibly have believed that it was in order to sign a bond in excess of the agreed limits. The limits were clear and were not affected by the modus operandi agreement. At best he cast a blind eye to the question whether it was in order to sign bonds in excess of the limits set out in the Binding Authority. Mr. Williams' evidence is that he "had no doubt, certainly during the Markel period" that what he had been told about Mr. Smith accepting the concept of a silent co-surety was "an accepted way of doing business". The issue for the Court to resolve is whether Mr. Williams really did have no doubt about what he was told (as he says) or whether (as the Claimants say) he either knew that what he was told could not be an accepted way of doing business or cast a blind eye to whether what he was told was true.
199. It is necessary to consider the Markel and QBE/Amalfi period separately, not least because Mr. Williams himself draws a distinction between them.

The Markel period

200. Mr. Williams submitted that in circumstances where he was told by Mr. Higgins and believed that Mr. Smith had consented to the signing of bonds in excess of the limits it could not properly be said that he had no honest belief that his actions were justified.
201. As I have already said, I accept Mr. Williams' evidence that he asked Mr. Higgins whether Mr. Smith agreed to the signing of bonds which exceeded the limits. The reason that he asked such a question must have been that he appreciated that SGC could not write bonds in excess of the limits. Although the surety bond business was not a type of business with which Mr. Williams was familiar he must have been familiar with the importance of limits in a Binding Authority. Indeed, he did not claim to be ignorant of their importance. Whilst I am willing to accept much of Mr. Williams' evidence I have difficulty in accepting that he really believed, as a result of speaking with Mr. Higgins, that it was in order to sign bonds in excess of the limits in the Binding Authority. He had had considerable experience of the insurance industry and, as his understanding of the documents in this case showed, is an intelligent man. Given that experience and intelligence it is very likely that he must have reacted with a degree of scepticism on being told that "Smithy" had agreed to bonds being written for sums in excess of £1m. when the limit was £1m. per bond. He stressed in his evidence that surety bonds were different from the orthodox types of insurance with which he was familiar. But, significantly, he did not identify any respect in which they differed with regard to the importance attached to adhering to the limits in a Binding Authority. If there was any such difference I have no doubt that Mr. Williams would have unearthed it in his study of this case. If, as I accept, he was told that it was in order to sign bonds in excess of the limits because Templeton would, as a co-surety, issue a bond for the difference between the value of the bond and the agreed limit of Markel's liability it is again very likely, given his experience and intelligence, that he would have reacted to such information with scepticism. He would surely have wondered how such an arrangement could work. I very much doubt that he would have been persuaded that clause 4 of the modus operandi agreement either provided the mechanism or explained why Mr. Smith was willing to agree to a breach of the limits. There was no document evidencing a silent co-surety agreement between Markel and SGC.
202. In my judgment it is very likely that, just as happened with the question whether it was in order for Mr. Felstead to be involved in the operation of the Binding Authority, Mr. Williams considered that so long as he raised the question and received an answer he had done enough to distance himself from the conduct in question and thereby live "a quiet life". Having received advice from Clyde and Co. that Mr. Felstead was performing a controlled function and could not be accepted by the FSA he raised the issue at a board meeting. Nothing Mr. Higgins said could have persuaded Mr. Williams that it was in order for Mr. Felstead to sign and issue bonds yet he allowed the matter to rest. The question of his own signing of bonds in excess of the limits in the Binding Authority was dealt with in the same way. He knew from his own knowledge and understanding of such limits that such bonds could not properly be signed. He very properly raised the question with Mr. Higgins and received an answer but it was one which could not have persuaded him that it was truly in order to sign such bonds. Yet he allowed the matter to rest there and signed the bonds. Although he did not have meetings with Mr. Smith, he escorted him to meetings with Mr. Higgins and Mr. Felstead. If he really had believed that it was in order to sign bonds in excess of the limits as a result of what he had been told by Mr. Higgins it is surely likely, given that he was a signatory to many of the bonds and appreciated the importance of limits in a Binding Authority, that he would have raised the topic with Mr. Smith. Yet he never did. It is likely that he did not do so because he did not want to create issues between Mr. Higgins and Mr. Smith. His desire to distance himself from responsibility for signing the bonds is reflected in his description of himself as a "second signatory" notwithstanding that both signatures are of equal force and effect.
203. So, just as Mr. Williams could not honestly have believed that it was in order for Mr. Felstead to perform "a controlled function" by signing bonds so, in my judgment, Mr. Williams could not honestly have believed that signing bonds in excess of the limits was justified. It is very probable that he had doubts or suspicions about the legitimacy of SGC's business but let the matter rest. This is a serious finding to make against Mr. Williams and I have kept well in mind the high standard of proof required before making this finding. In making this finding I have rejected his evidence that he had "no doubt" during the Markel period that Mr. Smith had accepted the concept of a silent co-surety and that that was "an accepted way of doing business". The reason I have rejected his evidence, notwithstanding the frank, candid and attractive manner in which he gave most of his evidence, is that the probabilities are wholly against it. It is possible that he had persuaded himself in the run up to the trial that he had had no doubt as to the propriety of signing bonds in excess of the limits, at any rate during the Markel period.

The QBE/Amalfi period

204. It seems clear that during the QBE/Amalfi period Mr. Williams' suspicion that SGC's business was not being conducted in an honest or proper manner increased. He accepts that this happened but the process probably started earlier than he accepted in evidence. Although he said in evidence that he regarded the terms of the addendum to the Management Agreement dated 16 November 2005 with QBE/Amalfi as to the same effect as clause 4 of the modus operandi agreement with Markel he must have doubted whether they were consistent with the suggested silent co-surety agreement. The meeting on 24 November and the e-mail dated that day from Mr. Smith emphasising the agreed limits must have increased his doubts. The continued involvement of Mr. Felstead in the surety bond business notwithstanding the discovery of his conviction and the assurance given to QBE/Amalfi that he would not be involved must have fuelled his suspicions.
205. Prior to the Markel audit in December 2005 he discovered that Mr. Felstead was tampering with the bond files. Similarly, in mid-2006 Amalfi carried out an audit. Mr.Williams accepted in cross-examination that in dealing with the audit queries he became aware that the QBE bond files had been tampered with and that the bonds in them were not the correct ones. These discoveries must have convinced him that the manner in which the surety bond business was being conducted was not proper. Indeed, he said in evidence that "at the time I thought there is something not right here". He said he raised the matter with Mr. Higgins but accepted that the answer he received was not satisfactory.
206. By July 2006 Mr. Williams found it necessary to be less than truthful when dealing with QBE/Amalfi. He suggested that some bonds that had been queried could be cancelled and replaced with bonds issued by Templeton or another surety. Not only would there be obvious difficulties in SGC being able to "cancel" a bond issued to a beneficiary but he accepted that there was no replacement surety (since Templeton were not providing bonds after the resignation of Mr.Brunswick).
207. By August 2006 he accepted that he knew the Templeton bonds required for the silent co-surety arrangement were missing yet he did not inform QBE/Amalfi of this. It seems more likely than not that, as submitted by Counsel on behalf of QBE/Amalfi, he did not do so because he knew that Mr. Smith had not authorised any such arrangement.
208. Mr. Williams' letter dated 20 September 2006 informed QBE/Amalfi that numerous bonds had been issued "outside the underwriting authority parameters". He said that these "special cases" were "always declared on the bordereaux" and any "special acceptance" was "always signed off by Peter." This is significant, firstly, because no attempt is made to justify what had happened by reference to an agreed silent co-surety arrangement and, secondly, because there was no warrant for saying that Mr. Smith had signed off the numerous bonds which had been written in excess of the financial limits.
209. For these reasons I have reached the conclusion that he did not honestly believe that his conduct in signing bonds in excess of the stated limits was justifiable. Moreover, his failure to ask more questions of Mr. Higgins or any questions of Mr. Smith amounted to deliberately closing his eyes to the danger that he was unjustifiably signing bonds in breach of the stated limits and so exposing Markel and QBE/Amalfi to a greater liability than they had agreed to bear. In this regard his conduct fell below the standards normally to be accepted in commerce. He was reckless as regards the rights and interests of Markel and QBE/Amalfi because the signing of bonds in excess of limits imposed by Markel and QBE/Amalfi exposed them to a greater risk than they had agreed to bear. Dishonesty can readily be inferred from these matters; see Royal Brunei v Tan [1995] 2 AC 378 at pp.389 and 390-1 per Lord Nicholls and Abou-Rahmah v Abacha [2007] 1 Lloyd's Rep 115 at p.133 (pre Pill LJ).
210. I have carefully considered whether this finding of dishonesty, together with many other matters relied on by the Claimants (eg the Canadian Shipping bonds – both the circumstances in which they were signed and what was said when questions were asked about them) should cause me to alter my finding that Mr. Williams was not party to the conspiracy to defraud Markel and QBE/Amalfi. I do not consider that they do. I remain of the view that it is most improbable that he would join in such a conspiracy when he did not stand to gain directly from it. What I consider to be more probable, and therefore find, is that from the time he commenced signing surety bonds in early 2005 he at least suspected that what he was told by Mr. Higgins did not justify the signing of bonds in excess of the agreed limits. In order to have a "quiet life" and because he regarded the surety bond business as that of Mr. Higgins and Mr. Felstead he chose not to raise the matter with Mr. Smith. Nor did he raise the matter when his suspicions began to be confirmed. As the fraud began to unravel his desire for a "quiet life" was frustrated and he was forced, in his words, to do "a bit of fire fighting" but which in fact meant lying to Markel and QBE/Amalfi.
211. Counsel for Markel said that the strongest indicators of Mr. Williams' participation in the conspiracy to defraud were the following matters (which I have re-arranged in chronological order):

i) That whatever explanation he was given by Mr. Higgins for signing bonds in excess of the limits could not stand up to analysis.

ii) That he issued the Sun Opta bond.

iii) That he tolerated interference with the bond files and instructed that premium advice notes be created in December 2005.

iv) That he gave false explanations of SGC's conduct in May and August 2006.

212. I do not consider that these matters prove, by necessary or reasonable inference, that Mr.Williams was party to the conspiracy to defraud Markel and QBE/Amalfi. I agree that whatever explanation Mr. Higgins gave could not stand up to analysis. This is an indicator of dishonesty on the part of Mr. Williams but not, necessarily, that he was party to the conspiracy. It is consistent with him appreciating that something was wrong, asking for reassurance and receiving an inadequate response. Mr. Williams did sign the Sun Opta bond in November 2005 notwithstanding that Markel had instructed that no more bonds be issued. Mr. Williams could not explain why he had done this. He described it as "this unfortunate saga" and had difficulty both in his evidence and in his closing submissions in suggesting a probable explanation for his conduct. However, whilst his action is consistent with his being party to the conspiracy, the more likely explanation, having regard to the totality of his evidence, is that it is an example of the lax manner in which Mr. Williams permitted himself to perform his duties as a director of SGC^[8]. The bond had been the subject of quotation some weeks before November 1. It is possible that Mr. Higgins and Mr. Felstead requested him to sign it and that he did so because in the matter of surety bonds he generally did what they said. I do not consider that Mr. Williams' signing of the Sun Opta bond, though a very striking act, necessarily points to his being party to the conspiracy to defraud. I agree that Mr. Williams was aware that Mr. Felstead interfered with the bond files. But I am not sure that it is right to say that he tolerated such conduct, because his evidence was that he told him not to do it. Mr. Williams did himself suggest that premium advice notes be inserted into the bond files. His explanation for doing so was that the debit notes used by SGC did not show how the premium was allocated between Markel and Templeman. He suggested that the premium advice note be used so as to show that it was allocated to accord with Markel and Templeton being co-securities. I agree that this episode is suspicious and is consistent with Mr. Williams being party to the conspiracy but, having regard to the totality of his evidence, I do not consider it sufficiently cogent to demonstrate that. Finally, his explanations of SGC's conduct in 2006 were false. They are consistent with his being party to the conspiracy but do not necessarily indicate that he was party. They are also consistent with a dishonest and misguided attempt to cover up the improper actions of SGC. All these matters must be viewed in the light of the admitted fact that Mr. Williams did not stand to benefit directly from the fraud.
213. Counsel for Markel argued that Mr. Williams can properly be held to have been party to the conspiracy to obtain secret profits at the expense of Markel if he acted dishonestly and was reckless as to the consequences to Markel. Whilst there may be circumstances in which recklessness is sufficient for this purpose I am not satisfied that Mr. Williams' state of mind amounted to being aware that Mr. Higgins and Mr. Felstead were party to a plan to "skim premium off Markel" (to use counsel's phrase) and lending his assistance to that enterprise. To be party to a conspiracy a person need not have the same role as the principal participants. Nor need he be party to the conspiracy from the beginning. But what is required is that when he assists the principal participants he has the same object as them albeit that his role may be different or that he may join the object or enterprise late in the day. On my findings Mr. Williams at no stage agreed "to skim premium off Markel". That was not his object at any time. I have found that he was reckless as to Markel's interests (because the signing of bonds in excess of the stated limits exposed Markel and QBE/Amalfi to a greater risk than they had agreed to bear, not because he appreciated that Mr. Higgins and Mr. Felstead were "skimming premium off") and acted dishonestly. Those findings will be of great significance when considering whether Mr. Williams acted in breach of a fiduciary duty and whether he dishonestly assisted SGC to breach its fiduciary duty. But they do not, in my judgment, show that he was party to the conspiracy to defraud Markel by making secret profits at the expense of Markel. That was the common plan or intent of Mr. Higgins and Mr. Felstead but it was not the plan or intent of Mr. Williams.
214. Counsel for QBE/Amalfi was perhaps less insistent than counsel for Markel that Mr. Williams was party to the conspiracy. Whilst he submitted that Mr. Williams was party to the conspiracy to defraud he submitted in the alternative that Mr. Williams was at any rate dishonest. The facts and matters upon which he relied to suggest complicity in the fraud were the same as those upon which he relied to submit that Mr. Williams did not act honestly. I have accepted that those facts and matters show that Mr. Williams did not act honestly. However, for the reasons I have given I am unable to accept that they show, to the requisite standard, that he was party to the conspiracy to defraud.
215. For the same reasons I do not accept that Mr. Williams was involved in the failure to account fully to Markel and QBE/Amalfi in respect of premium. He was not party to the conspiracy to divert premium from Markel and QBE/Amalfi and there was no evidence that he was aware of the role of GCL as a vehicle for receiving premium which should have been accounted to Markel and QBE/Amalfi or that he stood to benefit from sums received by GCL.
216. Having assessed the involvement of Mr. Higgins, Mr.Felstead and Mr. Williams in the fraud perpetrated by SGC I can now consider the various causes of action relied upon by the Claimants.

Issue 13

Did Mr. Higgins, Mr. Williams and/or Mr. Felstead personally owe any fiduciary duties to Markel and/or QBE/Amalfi ?

217. The Claimants' case that each of these three defendants personally owed fiduciary duties is based upon the provisions of the Binding Authority between SGC and Markel and of the Management Agreement between SGC and QBE/Amalfi which expressly concern them and name them (Section 3 and the Schedule which I have already quoted).
218. The submission made on behalf of the Claimants is that these provisions rendered the named persons agents of the underwriters, Markel and QBE/Amalfi and as such they owed fiduciary duties to the underwriters. Alternatively, if they were sub-agents of the underwriters they also owed fiduciary duties to the underwriters.
219. On behalf of Mr. Higgins it was submitted that he did not owe fiduciary duties to the underwriters. It was submitted that where there is a commercial relationship at arm's length, as there is between SGC and the underwriters, there is no place for fiduciary duties. Mr. Higgins' actions were on behalf of SGC who was the contracting party with the underwriters and owed duties to the underwriters as stated in the Binding Authority and Management Agreement. Mr. Williams adopted that submission.
220. The underwriters were not content that any employee of SGC should operate the Binding Authority and sign bonds on their behalf. They required that the persons who would do so should be identified in the schedule so that they could agree to those persons having that authority. The language of section 3 (in both the Binding Authority and the Management Agreement) expressly refers to persons being "authorised to sign and issue bonds".
221. The question raised by the Claimants' primary submission is whether the language of section 3 has the effect of constituting the named persons agents of the underwriters or sub-agents of the underwriters. Are they authorised by the underwriters to act on their behalf as their agents or are they authorised by SGC to act on behalf of SGC in its role as agent of the underwriter, such that they would be sub-agents of the underwriters ?
222. The effect of the Binding Authority and of the Management Agreement must be assessed by having regard to the whole of those agreements. The agreements confer authority on SGC to act on behalf of Markel and QBE/Amalfi. In that context the natural meaning of section 3, it seems to me, is that the persons named in the schedule are those who are authorised by SGC to carry out its functions under the agreements. The underwriters wish to know who will be operating the agency conferred on SGC so that they may agree or not, as the case may be, to such persons doing so. It does not follow that such persons must be agents, as opposed to sub-agents, of the underwriters. Were they agents, as opposed to sub-agents, one would expect provisions such as section 4 to refer to them and not just to SGC. I therefore hold that the named persons are sub-agents of the underwriters.
223. That being so, the next question is whether the named individuals owed duties as a fiduciary to the underwriters. In Bristol and West Building Society v Mothew [1998] Ch.1 at p.18 Millett LJ explained what a fiduciary was:

"A fiduciary is someone who has undertaken to act for or on behalf another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations…………

The nature of the obligation determines the nature of the breach. The various obligations of a fiduciary merely reflect different aspects of his core duties of loyalty and fidelity. Breach of fiduciary obligation, therefore connotes disloyalty or infidelity. Mere incompetence is not enough. A servant who loyally does his incompetent best for his master is not unfaithful and is not guilty of a breach of a fiduciary duty…………

Conduct which is in breach of this duty need not be dishonest but it must be intentional. An unconscious omission … does not constitute a breach of fiduciary duty, though it may constitute a breach of the duty of skill and care."

224. Although the persons named in the schedule were not party to the Binding Authority and Management Agreement they must have been aware that their names were in the schedule and that they, and not any other directors or employees of SGC, were being entrusted by the underwriters to administer the underwriters' surety bond business as sub-agents of the underwriters. These circumstances appear to me to be sufficient to give rise to a relationship of trust and confidence.
225. Counsel for the Claimants referred me to Powell & Thomas v Evan Jones [1905] 1 KB 11 in which one of two reasons for the decision in that case was that a sub-agent owed duties as a fiduciary to the ultimate principal; see pp.18 and 23 (per Collins MR and Mathew LJ). This illustrates that a sub-agent can owe duties as a fiduciary to the ultimate principal (cf Bowstead on Agency 18^th.ed Article 35 and the Comment thereon which is more hesitant).
226. Counsel for Mr. Higgins relied on the statement of principle in In re Goldcorp Exchange Ltd. ]1995]1 AC 74 at p.98 per Lord Mustill:

"Many commercial relationships involve just such a reliance by one party on the other, and to introduce the whole new dimension into such relationships which would flow from giving them a fiduciary character would (as it seems to their Lordships) have adverse consequences far exceeding those foreseen by Atkin LJ in In re Wait [1927] 1 Ch.606."

227. Counsel also cited a passage from Jackson & Powell on Professional Liability 6^th.ed. at para.2-131 to the effect that the courts will not impose fiduciary obligations to make good a failure by a party to a contract to obtain adequate protection of his interests which could have been achieved by the inclusion of appropriate contractual provisions.
228. Since the contractual relationships created by the Binding Authority and the Management Agreement are between SGC and Markel and between SGC and QBE/Amalfi I do not consider that a decision that the persons named in the schedule to those agreements owe duties as a fiduciary to Markel and QBE/Amalfi would infringe the principles invoked by Counsel for Mr. Higgins. Those persons are placed in a position whereby, although they have not contracted with Markel or QBE/Amalfi, they have the power to affect their interests and bind them to surety bonds in favour of others.
229. I therefore hold that Mr.Higgins, Mr. Williams and Mr. Felstead owed duties as a fiduciary to Markel by reason of the trust and confidence placed upon them, as opposed to other directors or employees of SGC, to sign bonds and to administer the Binding Authority. For the same reasons I hold that Mr. Higgins, Mr. Williams and Mr. Felstead owed duties as a fiduciary to QBE/Amalfi by reason of the trust and confidence placed upon them, as opposed to other directors or employees of SGC, to sign bonds and to administer the Management Agreement. However, Mr. Felstead ceased to be a fiduciary in respect of his conduct after the Management Agreement was amended to remove his name as one of the three persons in whom QBE/Amalfi placed trust and confidence.

Issue 14

If so, did they act in breach of those duties ?

230. Mr. Higgins and Mr. Felstead plainly did act in breach of those duties. They conspired to defraud Markel and QBE/Amalfi.
231. Mr. Williams was not party to that conspiracy but in my judgment he also acted in breach of his fiduciary duty to Markel and QBE/Amalfi. For the reasons I have given he cannot honestly have believed that what he was doing was an accepted way of business. When signing bonds in excess of the stated limits he was reckless as to the rights and interests of Markel and QBE/Amalfi. This was not mere incompetence, which would not amount to a breach of fiduciary duty. It plainly crossed the line. He neither acted honestly nor in the best interests of Markel and QBE/Amalfi.

Issue 15

Further or alternatively,

(1) Did Mr. Higgins, Mr. Williams and/or Mr. Felstead knowingly procure any breach of contract by SGC and, as a matter of law, can they be held personally liable for any such breach ?

(2) Did Mr. Higgins, Mr. Williams and/or Mr. Felstead dishonestly assist SGC in breaches of fiduciary duty ?

(3) Did Mr. Higgins, Mr. Williams and/or Mr. Felstead conspire with the other defendants with the predominant intention of injuring Markel and/or QBE/Amalfi and/or injuring Markel and/or QBE/Amalfi using unlawful means ?

232. Procuring a breach of contract. Mr. Higgins, Mr. Williams and Mr. Felstead knew of the contracts between SGC and Markel and between SGC and QBE/Amalfi. There plainly was a breach of contract by SGC in writing bonds in excess of the agreed financial limits. There can be no doubt that Mr. Higgins and Mr. Felstead intended to, and did, procure a breach of those contracts. So far as Mr. Williams is concerned he did not conspire to procure that breach but he must have realised that the natural consequence of his action in signing bonds which were in excess of the financial limits was that those contracts would be breached. Thus he both intended to procure and did procure a breach of those contracts.
233. The only point taken on the law in this context was that a director of SGC could not be liable for the tort of procuring a breach of contract where the contract breached was that of the company of which he was director. The director is "the directing mind and will of the company" and so is one and the same with the company for the purposes of the decision to breach the contract. There is no third party who has been induced; see Standard Chartered Bank v Pakistan Shipping Corporation [2003] 1 AC 959 at para.36.
234. In response to this submission it was said, firstly, where the director has acted fraudulently he has a personal liability for his own fraud and, secondly, where he is acting outside the scope of his authority and not bona fide he may incur a personal liability. The first point is supported by the actual decision of the House of Lords in Standard Chartered Bank v Pakistan Shipping Corporation [2003] 1 AC 959 as recognised by the Court of Appeal in Contex Drouzhba Limited v Wiseman and Another [2007] EWCA Civ 1201 at para.14. The second point is supported by Clerk & Lindsell on Torts 19^th.ed. para.25-44.
235. In view of my findings as to Mr. Higgins being party to a conspiracy to defraud it follows from the decision in Standard Chartered Bank v Pakistan Shipping Corporation [2003] 1 AC 959 that he can have no defence to the allegation that he is liable in tort for procuring a breach of contract by SGC. So far as Mr. Williams is concerned he was not party to the conspiracy to defraud. However, I have found that he acted dishonestly. He was not acting within the scope of his actual authority and was not acting bona fide. I have no doubt that his actions are properly to placed on that side of the line where there is personal liability for the tort of procuring a breach of contract; cf MCA Records Inc v Charley Records Limited [2001] EWCA Civ 1441 at para. 47 as discussed in Contex Drouzhba v Wiseman [2006] EWHC 2708 at paras. 94-98 (per Irwin J.)
236. I therefore find that Mr. Higgins, Mr. Williams and Mr. Felstead are liable in tort for procuring the breach of SGC's contracts with Markel and QBE/Amalfi.
237. Dishonest assistance. SGC owed duties as a fiduciary to Markel and QBE/Amalfi and those duties were broken by SGC obtaining a secret profit. Mr. Higgins and Mr. Felstead knowingly assisted SGC to breach its duties as a fiduciary by the making of a secret profit. They each acted dishonestly. Each is therefore liable for dishonestly assisting SGC to breach its duties as a fiduciary.
238. Mr. Williams did not have knowledge that SGC was to make a secret profit and so breach its fiduciary duty. Since knowledge is an essential ingredient of this equitable wrong (see Barnes v Addy (1874) LR 9 Ch.App 244 at pp.251-252, Royal Brunei Airlines v Tan [1995] 2 AC 378 at p. 382 and Abou-Rahmah v Abacha [2007] 1 Lloyd's Rep 115 at para.16) I am not satisfied that Mr. Williams is guilty of it with regard to the making of secret profits by SGC. However, for the reasons I have given, he is guilty of a breach of his own fiduciary duty.
239. Conspiracy. Mr. Higgins and Mr. Felstead also committed the tort of conspiracy to injure by unlawful means. They conspired together to obtain a secret profit from Markel and QBE/Amalfi and thereby intended to injure them. However, for the reasons which I have given Mr. Williams was not party to that conspiracy.
240. It was submitted that Mr. Williams was party to a conspiracy to mislead QBE/Amalfi as to the continuing role and involvement of Mr. Felstead after his conviction for fraud had been discovered. Mr. Williams was aware of Mr. Felstead's involvement in the surety bond business. However, Mr. Smith must also have been aware that he continued to be involved. He denied that he was but the e-mail correspondence, notes of meetings and diary notes showed that he must have been. I am not satisfied therefore that Mr. Williams can be said to have conspired to mislead QBE/Amalfi as to the continuing involvement of Mr. Felstead when Mr. Smith, their representative, was aware that he continued to be involved. In any event, this way of putting the case against Mr. Williams, who was unrepresented at trial, does not appear to have been pleaded against Mr. Williams (though it was pleaded against SGC).

Issue 16:

If, in the light of the foregoing, a fraud was perpetrated on Markel and/or QBE/Amalfi by SGC and/or by Mr. Higgins and/or Mr. Williams and/or Mr. Felstead:

(i) Did Mr. Brunswick procure any breaches of contract by SGC ?

(ii) Did Mr. Brunswick dishonestly assist any of the other Defendants in breaches of fiduciary duty?

(iii) Did Mr. Brunswick conspire to use unlawful means with the intention and/or effect of injuring or causing loss and damage to Markel and/or QBE/Amalfi.

241. The essential issue of fact to be determined is whether Mr. Brunswick was party to the fraud perpetrated by Mr. Higgins and Mr. Felstead. He denied that he was. In this regard it is necessary to examine, firstly, whether he had any interest in SGC, secondly, his evidence as to what he believed he and Templeton were doing with regard to the surety bond business and, thirdly, whether he had any interest in the premium diverted to General Commercial Limited.
242. The Claimants alleged that Mr. Brunswick had an interest in SGC. He denied that he did. The Claimants' case is supported by a note of a meeting on 3 February 2004 attended by Mr. Higgins, Mr. Williams and Mr. Felstead and others which stated that "IOM" (an acronym for the Isle of Man said by Mr. Higgins to be a reference to Mr. Brunswick) was to have a 49% interest in SGC. It is also supported by a Declaration of Trust dated October 14 2004 whereby Mr. Higgins stated that he held 66 shares in SGC for Mr. Brunswick. Finally, on 17 February 2005 Mr. Williams consulted Clyde and Co. about the "34% of shares" held by Higgins on trust for Mr. Brunswick. He wanted to know whether it should be reported to the FSA.
243. Mr. Brunswick accepted in cross-examination that he had been offered a share in SGC but said that he declined the offer. Yet in his statement dated 18 December 2005 he did not admit to this offer having been made and described the suggestion that he had an interest in SGC as "no more than nth.-hand gossip and innuendo" notwithstanding that, as he now accepts, such an interest had been, at the least, the subject of discussion between himself and Mr. Higgins. He had no explanation for the trust deed signed by Mr. Higgins.
244. The trust deed and the fact that Mr. Williams raised the matter of Mr. Brunswick's interest in SGC with Clyde and Co. are cogent evidence that he had an interest in SGC. His denial of such an interest lacks cogency because his reasons for such denial have changed between his statement in December 2005 and his evidence in cross-examination. I therefore find that Mr. Brunswick had an interest in SGC.
245. Mr. Brunswick gave evidence that he believed that he was signing, on behalf Templeton, genuine surety bonds which were to be delivered to the beneficiaries by SGC.
246. Mr. Brunswick had been involved in the surety bond business with Mr. Higgins before 2005. He attended the meeting on 23 February 2005 when the manner in which SGC was to deal with the existing Templeton facility and the new Markel facility was discussed. The manner in which he gave evidence showed that he is an intelligent man. I have no doubt that he understood the business context in which surety bonds were required. They would typically be required to be in place by the beneficiary, and therefore the client, at the inception of a contract or at any rate by a fixed date. Yet the striking feature of the surety bonds ultimately provided by Templeton in December 2005 is that although they were apparently agreed over the telephone at various times earlier in the year by Mr. Higgins and Mr. Brunswick, there was no apparent urgency in their production. Eventually they were provided in a batch of bonds. It is very difficult to reconcile these circumstances with the business context in which surety bonds are required.
247. The same difficulty is apparent with the Templeton bonds relating to the QBE/Amalfi period. Some were provided in early 2006 but the next batch of bonds which SGC required to be signed were not sent to Templeton until May 2006. The inception dates on some of these bonds were much earlier in the year. None of these was signed because Mr. Brunswick resigned from Templeton and the other directors were not willing to sign them.
248. These circumstances strongly suggest that the Templeton bonds were not intended to be genuine bonds. Mr. Brunswick, when giving evidence, did not have any plausible or realistic explanation for these circumstances.
249. The batch of bonds signed in December 2005 and the batch of bonds requested to be signed in May 2006 coincided with an audit to be conducted by Markel in December 2005 and by QBE/Amalfi in mid 2006. The Claimants submitted that the Templeton bonds were required by SGC for those audits. Mr. Brunswick said that bonds were signed in December 2005 because it was the year end and he wished to collect in monies owed to Templeton.
250. Templeton certainly had a relaxed attitude to the receipt of premium for the risks underwritten. Whilst it appears that some premium was paid to Templeton during the Markel period no premium was paid to Templeton during the QBE/Amalfi period (save that premium on one bond, the Gala bond, was apparently accounted for in an e-mail). Mr. Brunswick suggested that the premium had been received by SGC and was held on trust by SGC for Templeton. However, there was no formal or detailed accounting between SGC and Templeton in respect of premium save for one e-mail. Further, the internal accounts of SGC and of Templeton did not recorded as gross written premium the sort of figures to be expected from the business apparently written by Templeton. These are odd features of the relationship between Templeton and SGC if Templeton were issuing genuine bonds to beneficiaries as suggested by Mr. Brunswick.
251. During 2005 Mr. Brunswick was involved, with Mr. Ward (of SGC), in the incorporation of GCL. When being cross-examined Mr. Brunswick accepted that he had a one third interest in GCL, after repayment to Mr. Higgins of set up costs of Euros 300,000. This is different from the share of 40% indicated in manuscript on the back of the transfer of £200,000 to GCL but what is not disputed by Mr. Brunswick or by Mr. Higgins is that each had a beneficial interest in GCL.
252. GCL was the recipient of two payments of £200,000 and £288,000 to which I have already referred. They derive from premium received by SGC and not accounted for to Markel or QBE/Amalfi. There is, moreover, a very clear connection between Mr. Brunswick and the payment of £288,000, namely, two letters to SGC dated 12 August 2006 apparently signed by Mr. Brunswick relating to this sum. The first describes the sum as commission and requests that it be paid to GCL. The second describes the sum as collateral and requests that it be paid to GCL. The sum was neither commission nor collateral and these letters are dated after the sum was transferred. Mr. Brunswick had no recollection of signing these letters. He submitted that he did not sign either of these letters but there was no expert evidence that his signature was a forgery. Mr. Brunswick had no plausible explanation for the letters. One of them was in fact sent on by SGC to Continental Finance Limited who had incorporated GCL. In his oral evidence, when asked to explain why these documents did not show him to be party to fraud, he could only suggest that he had been "massively negligent" in signing them. That seems improbable. In his closing submissions he suggested that the letters might have been signed during his notice period when he was on anti-depressants. Assuming that they were so signed there was no evidence that at that time Mr. Brunswick did not understand what he was doing. The letters appear to be an attempt to justify the payment of £288,000. The two justifications put forward (commission or collateral) were untrue.
253. Although Mr. Brunswick denied involvement in any fraud I consider that the inevitable inference to be drawn from the above facts and matters is that Mr. Brunswick was party to the fraud committed by Mr. Higgins and Mr. Felstead. The fact that they each had a beneficial interest in GCL and that GCL received premium which had not been accounted for is the clearest evidence that they were in the fraud together. Mr. Brunswick's role was to provide bogus Templeton bonds for SGC's files so that auditors of SGC might be persuaded that the exposure of Markel and QBE/Amalfi was within the agreed limits.
254. In reaching that conclusion I have had well in mind the high standard of proof required in order to be able to reach such a conclusion on the balance of probabilities.
255. I have also had in mind the evidence of Mr. Corlett who was called to give evidence by Mr. Brunswick. He worked for Templeton and, in particular, worked closely with Mr. Brunswick. I considered that he was an honest witness who undoubtedly believed the Templeton bonds to be genuine. But there was a limit to the extent to which his evidence could assist Mr. Brunswick because his role was in essence administrative (although he was also a signatory to the Templeton bonds). His understanding of the Templeton bonds derived essentially from what Mr. Brunswick told him. He firmly believed that the delay in producing the signed Templeton bonds was because SGC were slow in producing the supporting documentation he required. However, he could not say why SGC waited until December before chasing up the signing of the bonds. With regard to supporting documentation he said that the contents of the bond files disclosed by Templeton did not match their contents when the files were in his custody. He said the files included supporting documentation because he would only have the bonds signed upon receipt of such documentation. However, if this evidence is true it means that one or more people at Templeton have both removed documents from, and added documents to, the bond files before the files were disclosed pursuant to an order of this Court. There was no evidence of this. Mr. Brunswick, on his own evidence, did not give any active consideration to the underwriting of risks beyond acting upon the advice of Mr. Higgins. In these circumstances one would not expect to find supporting information in the files of Templeton and there is no record of such material being sent or received. The surety bond business was only one part of Mr. Corlett's work. He was involved in collating supporting documentation for other aspects of his work. Although he did not accept the possibility it is, in my judgment, likely that his recollection in this regard was mistaken.
256. Mr. Brunswick himself was not an impressive witness. I have already rejected his denial of an interest in SGC. Although he answered many questions too many of his answers were implausible and there were too many matters which he could not explain for me to be able to regard him as a witness of truth. It is true that the payment of £288,000 was returned to SGC on 6 December 2006 (after freezing orders had been issued against Mr. Higgins, Mr. Williams, Mr. Felstead and Mr. Brunswick) but this does not cause me to view Mr. Brunswick in any more favourable light, notwithstanding his apparent involvement in procuring the return of the sum.
257. I have also taken into account the written opening submissions made by counsel on behalf of Mr. Brunswick (before counsel withdrew from the case) and the closing submissions made by Mr. Brunswick in person. But nothing in them has dissuaded me from reaching the conclusion I have expressed. Reliance was placed, in particular, on the circumstance that Templeton had reinsurance in respect of the Templeton bonds and had instructed loss adjusters in respect of a claim made on a bond. It was said that these matters supported the evidence of Mr. Brunswick that the Templeton bonds were genuine bonds. There were however oddities about this reinsurance. For example, the bordereaux provided to the reinsurers gave the impression that the bonds written by Templeton did not exceed £1m. per bond when in fact the Templeton bonds were often for sums in excess of £1m. The Claimants said that the reinsurance was to give a measure of protection if and when claims were made on the bonds issued by SGC and that loss adjusters were appointed to assist in settling a claim so that it did not have to be reported to Markel. I do not need to decide whether these submissions are correct. The fact of the reinsurance, in circumstances where its oddities which were not adequately or plausibly explained by Mr. Brunswick in evidence, does not dissuade me from drawing what I have described as an inevitable inference from the matters to which I have referred.
258. The submissions made by Mr. Brunswick's counsel in opening and by Mr. Brunswick himself in closing challenged evidence from a director of Templeton (Mr. Barrs) and an employee of Templeton (Mr. Wells). There is or appears to be a considerable dispute between Templeton and Mr. Brunswick regarding his conduct whilst at Templeton. When those witnesses gave evidence there was no cross-examination of them by Mr. Brunswick or by counsel on his behalf (because Mr. Brunswick and his counsel had withdrawn from the proceedings). In reaching my conclusions in this case I have not found it necessary to rely upon the evidence from Templeton which Mr. Brunswick states he challenges but did not in the event do so by cross-examination.
259. It is now possible to answer the three questions asked in Issue 16.
260. Conspiracy: I have found that Mr. Brunswick was party to the fraud perpetrated by Mr. Higgins and Mr. Felstead. He conspired with them to obtain a secret profit from Markel and QBE/Amalfi. He must have intended to injure them by the taking of a secret profit.
261. Procuring a breach of contract. Mr. Brunswick was present at the meeting on 23 February 2005 when the manner in which SGC would operate both the Markel and the Templeton facility was discussed. He therefore knew of the contract between SGC and Markel. By reason of his involvement in the fraud he must also have known of the contract between SGC and QBE/Amalfi. His readiness to sign the Templeton bonds was part of the mechanism by which Mr. Higgins and Mr. Felstead hoped that the secret profit would remain secret. He therefore provided valuable support to Mr. Higgins and Mr. Felstead in procuring breaches of SGC's contract with Markel and QBE/Amalfi. He must have intended that those contracts be breached because that was the means by which the secret profit was to be obtained and from which he hoped to benefit. He was therefore guilty of the tort of procuring a breach of contract.
262. Dishonest assistance. For the same reasons Mr. Brunswick assisted SGC to breach its fiduciary duties to Markel and QBE/Amalfi.

Issue 17

If, in light of the foregoing, a fraud was perpetrated on Markel and/or QBE/Amalfi:

(i) What loss and damage has Markel and/or QBE/Amalfi suffered as a result which Markel and/or QBE/Amalfi is entitled to recover ?

(ii) Is Markel and/or QBE/Amalfi entitled to an indemnity against further losses ?

(iii) is Markel and/or QBE/Amalfi entitles to an account and payment of benefits improperly received ?

(iv) What is the appropriate remedy if damages cannot presently be finally assessed?

263. Markel claims that £877,572.20 has been paid out in respect of unauthorised bonds. However, the quantification of this loss was not discussed at trial and counsel for Mr. Higgins described the attempt to quantify the claim as "chaotic" and including claims in respect of matters which had been abandoned (the PFI bonds). In the circumstances it is not appropriate to make any findings as to loss and damage so far suffered. An inquiry as to damages should be ordered, together with an indemnity in respect of future losses. I shall ask counsel to agree an appropriate form of order.
264. QBE has settled a claim on the Canadian Shipping bonds. Allowing for the sum obtained by way of reinsurance the loss has been quantified in the sum of £772,929.04 by Mr.O'Shea, the Claims Adjuster of QBE. However, it will fall to be reduced by dividend payments expected to be received from the bankruptcy of Canadian Shipping. In the circumstances it is sensible to order an inquiry as to damages, together with an indemnity in respect of future losses. I shall ask counsel to agree an appropriate form of order.
265. Mr. Higgins, Mr. Felstead and Mr. Brunswick have been found liable for the tort of conspiracy (and other civil wrongs). They shared the same object, namely, the obtaining of secret profits at the expense of Markel and QBE/Amalfi. Whilst they had different roles in that conspiracy they are each liable to the full extent of the losses caused by that conspiracy. For this reason I do not consider that Mr. Brunswick's liability is limited to those cases where there was a purported "silent co-surety" arrangement.
266. Mr. Williams was not party to that conspiracy but has been found liable for the tort of procuring a breach of contract. He is liable for the losses caused to Markel and QBE/Amalfi by that tort.
267. Thus each of the four defendants is liable for the sums reasonably paid out by Markel and QBE/Amalfi in settlement of claims made on unauthorised bonds.
268. The secret profits made at the expense of Markel and QBE/Amalfi have been found under Issue 4.
269. Mr. Higgins and Mr. Felstead are each liable for these secret profits by reason of having been found liable for breach of fiduciary duty. They are the very profits they sought to make by breaching their fiduciary duty. Had this been the only cause of action against Mr. Felstead his liability would have been limited to those bonds in respect of which he was a fiduciary. However, the secret profits on those bonds in respect of which he was not a fiduciary can be recovered from him by reason of the dishonest assistance he gave to SGC to breach its fiduciary duty in respect of those bonds.
270. Mr. Williams did not share the aim of Mr. Higgins and Mr. Felstead to make secret profits. However, he nevertheless acted in breach of his own fiduciary duty and that breach of duty enabled the secret profits to be made. But for his breach of fiduciary duty the secret profits would not have been made. He is therefore liable in respect of those secret profits, albeit that he did not receive or seek to receive them himself.
271. Although Mr. Brunswick was not in breach of a fiduciary duty he is liable in respect of the secret profits made in respect of unauthorised bonds by reason of the dishonest assistance he give to SGC to breach its fiduciary duty.
272. To the extent that the secret profits can be traced to funds presently held by the defendants they are impressed with a constructive trust in favour of Markel and QBE/Amalfi and an appropriate inquiry and account must be ordered. I shall ask counsel to agree an appropriate order.
273. I note that Markel seek an order for the payment of interim damages and that QBE/Amalfi might also seek such an order in circumstances where their damages have not been finally assessed. I shall consider such applications when all other applications for ancillary orders are made.
274. Where bonds were written in excess of limits other than the financial limits there was plainly a breach of contract by SGC. However, it does not follow that the four Defendants with whom I am concerned are liable in respect of them in the same way as they are in respect of the bonds issued in breach of the financial limits. There are not many of such bonds compared with the number of bonds written in excess of the financial limits. I shall therefore ask the parties to agree how to deal with these bonds in the light of my findings when drawing up the form of order to give effect to this judgment. Without expressing any final view there would appear to be grounds for treating such bonds differently. "On demand" bonds, for example, did not enable secret profits to be obtained in the same way as issuing bonds in breach of the financial limits whilst misrepresenting the bonds in the bordereaux.

Issue 18

Who is the owner and controlling mind of GCL ?

275. In the light of the findings I have so far made the owners and controlling minds of GCL are Mr. Higgins, Mr. Felstead and Mr. Brunswick.

Issue 19

On what basis and for what purpose were the following payments made ?

(i) On 24 January 2006 SGC transferred £200,000 from its Fixed Term deposit Account back to its IBA account. On 22 March 2006 SGC then transferred £200,000 from its IBA account to GCL

(ii) On 24 May 2006 SGC transferred a further £200,000 from its Fixed Term Deposit Account back to its IBA account. That same day SGC then transferred £288,800 from its IBA account to GCL.

Do the monies received by GCL represent the traceable proceeds of premium paid to SGC by third parties in respect of the bonds which SGC purported to issue in Markel's name and has GCL been unjustly enriched at Markel's expense.

276. In the light of the findings I have so far made the sum of £200,000 was premium received from unauthorised bonds issued in the name of QBE and the sum of £288,800 was premium received on the Interhealth bond and two PC Harrington bonds issued in the name of Markel. They are traceable proceeds of premium in respect of which GCL has been unjustly enriched.

Conclusion

277. The Claimants' losses

i) Mr. Higgins, Mr. Felstead and Mr. Brunswick are liable to the Claimants for conspiracy to defraud the Claimants.

ii) Mr. Higgins, Mr. Williams, Mr. Felstead and Mr. Brunswick are liable to the Claimants for procuring breaches of the contracts between the Claimants and SGC.

iii) Thus each of these four defendants is liable to the Claimants in tort for the sums reasonably paid out by them in settlement of claims made on unauthorised bonds.

278. The secret profits

i) Mr. Higgins and Mr. Felstead are liable to the Claimants for breaching their fiduciary duties by the making of secret profits.

ii) Mr. Williams also acted in breach of his fiduciary duty. His breach enabled the secret profits to be made. But for his breach of fiduciary duty they would not have been made.

iii) Mr. Higgins, Mr. Felstead and Mr. Brunswick are liable to the Claimants for knowingly assisting SGC to breach its fiduciary duty by the making of secret profits.

iv) Thus each of these four defendants is liable to the Claimants in respect of those secret profits.

Annex 1

Excess of £1m/€1.5m/$2m individual bond limit

Vol.	No.	Date	Contractor	Beneficiary	Amount
G7	007/05	21/02/05	Byrne Bros	Bovis Lend Lease	£1.623m
G10	013/05	11/02/05	PC Harrington	OHN Construction	£2m
G11	015/05	30/03/05	Cape Industrial*	CTSD Ltd	£2.45m
G12	016/05	30/03/05	Cape Industrial*	Chiyotec Ltd	£4.6m
G15	020/05	01/04/05	Curzon	Intercontinental	£2.4m
G20	026/05	05/04/05	Ocon	Leeds One Ltd	£2.6m
G23	029/05	31/03/05	Zakhem*	Bulk Oil	$4.7m
G24	030/05	01/03/05	Zakhem*	Bulk Oil	$2.38m
G25-6	031/05	13/04/05	Interhealth	SS Health	£10m
G40	054/05	22/06/05	PC Harrington	Multiplex	£3m
G41	055/05	22/06/05	PC Harrington	Multiplex	£5m
G46	064/05	23/06/05	Really Great Hols	Avion Group	£4m
G51	074/05	16/06/05	Really Great Hols	Avion Group	£4m
G56	080/05	25/08/05	O'Sheas	Cork City Council	€2.4m
G64	095/05	09/08/05	William Verry	ING	£1.05m
G67	099/05	24/08/05	Caledonian	Berkeley First Ltd	£1.2m
G70	104/05	14/09/05	WWA Holdings	Van Wijerden Zaden	€2.28m
G102	141/05	14/11/05	SunOpta	Abener Energia SA	€4.7m

Excess of £2.5m/$5m per principal limit

Vol.	No.	Date	Contractor	Beneficiary	Amount
G2	002/05	08/02/05	Zakhem*	Bulk Oil	$360,000
G3	003/05	08/02/05	Zakhem*	Bulk Oil	$720,000
G8	008/05	03/03/05	Byrne Bros	Bovis Lend Lease	£880,231
G49	069/05	28/06/05	Hargreaves	RBS	$1.28m
G50	070/05	28/06/05	Hargreaves	RBS	$1.04m
G55	078/05	28/06/05	Hargreaves	RBS	$1.36m
G61	089/05	01/08/05	Hargreaves	RBS	$1.2m
G62	090/05	04/08/05	Hargreaves	RBS	$1.7m
G79	118/05	28/06/05	Hargreaves	RBS	$623,611
G81	119/05	28/06/05	Hargreaves	RBS	$564,780
G52	075/05	02/09/05	William Verry	Lewisham PCT	£830,038
G65	097/05	02/09/05	William Verry	Mercer's Company	£465,688
G69	103/05	02/09/05	William Verry	Portsmouth CC	£315,275
G85-9	121/05 -126/05	10/10/05	William Verry	Kent Education	Unknown
G66	098/05	16/08/05	Ocon	OSB Ltd	£760,000

On demand (examples only)

G21	027/05	11/05/05	GSL International	Bug-Alu Technic	£77,574
G96	132/05	19/10/05	RTT Engineering	MJ Gleeson	£144,000

* Also outside territorial limits

Annex 2

Bond Number	Principal	Beneficiary	Date of Bond/Issue Date	100% QBE participation on bond returned from bond holder
AUL01/007/05	Gala Group (Isle of Man) Limited	Co-Op	01/10/2005	£300,000
AUL01/010/05	Energybuild	Neath Port Talbot	27/02/2006	£3,100,000.00
AUL01/012/05	Gala	Co-Op	01/10/2005	£4,242,000.00
AUL/01/12/06	Gala	Co-Op	01/10/2006	£4,242,000.00
AUL/01/17/05	Canadian Shipping	Carisbrooke	25/04/2006	€ 5,176,470.50
AUL/01/19/05	Canadian Shipping	Carisbrooke	25/04/2006	€ 5,176,470.50
AUL01/026/06	Ocon	Opal South	11/04/2005	£1,549,769.00
AUL01/027/06	City Wharf	City Wharf Developments	07/02/2006	£1,357,014.60
AUL/01/028/06	PC Harrington	Bovis	25/04/2006	£975,000.00
AUL/01/034/06	David Mclean	Brabco	03/02/2006	£1,375,460.00
AUL01/052/06	Admiral Harding Marine Limited	HM Customs & Excise	17/02/2006	£120,000.00
AUL/01/064/06	Ardmore	Redrow	21/03/2006	£2,733,885.30
AUL/01/065/06	Ocon	Opal Property	13/06/2005	£1,041,385.39
AUL/01/066/06	Ocon	Birmingham One	11/07/2005	£2,096,173.80
AUL01/068/06	Cape	Goro Nickel	30/03/2006	$302,042.10
AUL/01/077/06	Ocon	University of Manchester	25/04/2006	£950,000.00
AUL/01/078/06	Byrne Brothers	Bovis	14/04/2006	£1,535,000.00
AUL/01/085/06	Ocon	Opal Developments	21/04/2006	£4,758,972.20
AUL/01/091/06	Ardmore	St George	12/05/2006	£2,461,300.00
AUL/01/093/06	David Mclean	Mayfair	01/06/2006	£1,896,871.40
AUL/01/094/06	Cape	Goro Nickel	31/05/2006	$2,615,117.60
AUL/01/100/06	David Mclean	Primark	09/06/2006	£524,552.44
AUL/01/101/06	Ashgrove	Barclays Mercantile	08/05/2006	£1,320,847.00
AUL/01/103/06	Travelzest	Montpellier collection	09/06/2006	£2,000,000.00
AUL/01/118/06	David Mclean	Primark	12/07/2006	£205,405.46
AUL/01/126/06	PC Harrington	Skanska	14/08/2006	£1,000,000.00
AUL/01/127/06	PC Harrington	Skanska	14/08/2006	£4,078,123.00
AUL/01/132/06	Winder Power	Whessoe	11/08/2006	£79,820.00
?	ESR	Kiln	Unknown	£800,000.00
?	IWA	Various	11/07/2006	n/a