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
		20/02/2009

Mr Justice Field :

Introduction

1. The first claimant ("Hamishmar") is an insurance agent, and is the wholly owned subsidiary of the second claimant ("Harel"), an insurance company incorporated in Israel.
2. In the 1990s, Harel became the coverholder under a number of binding authority agreements it entered into with various underwriters, including Lloyd's underwriters. The defendant ("FCP") is the Lloyd's broker that acted on behalf of Harel in the operation of the aforesaid binders.
3. It was the role of FCP to pay the premium to underwriters due on business written under the binders and to collect from underwriters monies due for claims. All monies handled by FCP in respect of the binders, whether as receipts or as payments, were received into and paid out of FCP's Insurance Broker Account.
4. Under all of the binders, save for two, 60% of the net premium due for each quarter was paid to underwriters for that quarter, but 40% of the gross premium was retained as a float to pay claims. The result was that quarter by quarter, FCP paid the premium due to underwriters in two tranches: (i) 60% of the net premium for that quarter; and (ii) 40% of the net premium paid for the previous quarter.
5. Hamishmar produced quarterly consolidated bordereaux showing, inter alia, gross premium; commission; net premium; claims paid; claims float; and claims float released (payment of the previous quarter's 40% claims float retention). Following receipt of these bordereaux, the normal practice was for payments made by FCP to Hamishmar to include the necessary adjustment for the movement in the claims float (the difference in the claims float retained and the claims float released).
6. In 2003, the leading underwriters under the binders exercised their right to audit Hamishmar's records and subsequently brought a claim against Hamishmar for breach of contract. In 2005, this claim was settled on terms that the binders would be commuted with underwriters accepting 100% of claims that had been paid by Hamishmar and 70% of all outstanding claims. In 2006, Hamishmar brought a claim against FCP alleging that it was FCP's mishandling of the business written under the binders that had led to the audit and claim by the underwriters: the damages sought were in respect of the expense to which Hamishmar had been put dealing with the audit and the claim. FCP filed a Defence to the Claim and a Counterclaim. The relevant parts of the Counterclaim are

22. Further, the gross written premium paid by the Defendant on behalf of Hamishmar to Lloyd's Underwriters in respect of all binding authorities arranged by the Defendant on behalf of Hamishmar from the fourth quarter of 2001 to the fourth quarter of 2002 exceeds the gross written premium collected from Hamishmar by the sum of US$419,459.31. Accordingly, the Defendant has funded premium payments to Lloyd's Underwriters on behalf of Hamishmar in the sum of US$419,459.31.

23. The Defendant has asked Hamishmar to acknowledge that this sum is due from Hamishmar (and/or, if relevant, Harel) and that this sum should be set off against payments of claims monies collected from Lloyd's Underwriters by the Defendant on behalf of Hamishmar (and/or, if relevant, Harel). Hamishmar (and if relevant, Harel) has not provided such acknowledgement.

24. In the premises, the Defendant is entitled to and Counterclaims the sum of US$419,459.31 plus interest thereon pursuant to Section 35A of the Supreme Court Act 1981 on the sum found to be due to it at a commercial rate or alternatively at such rate and for such period as the Court thinks fit.

25. Alternatively, the Defendant is entitled to and Counterclaims a declaration that a sum of US$ 419,459.31 plus interest as aforesaid is due from Hamishmar (and/or, if relevant, Harel) to the Defendant.

7. In their Defence to Counterclaim, the claimants put FCP to proof that it paid $419,459 to underwriters in respect of premiums payable by Hamishmar and contend that even if the sum was paid in this manner, FCP set it off against sums collected for claims settlements paid to FCP on 3 December 2003 in the net sum of $585,808.27.
8. On 18 March 2008, the parties' solicitors sent a jointly agreed letter of instruction to an expert accountant, Mr James Stanbury, instructing him to determine the amount in issue in the Counterclaim and the amount due as between Hamishmar and FCP in respect of certain agricultural facilities and open market facultative placements.
9. The letter described the issue to be determined in respect of the Counterclaim as "a discrete accounting issue" which was "a technical accounting matter". Under the heading "Scope of the Determination" the letter states:

9. Briefly, FCP's position is that its accounts and records show that it funded the amount of the Counterclaim in premium payments on behalf of [the claimants]. [The claimants] however, dispute the accounting records provided and say that any such sums were recouped by FCP by means of a set off against claims settlements. The amount claimed by FCP relates to claims floats advanced to [the claimants] in 2001^[1]. It is FCP's case that effectively, this was an advance funding of claims that otherwise would have been processed through the quarterly accounts procedure outside normal reconciliation and payment process.

10. [The claimants] deny that any such sums are owing and state that the amount FCP are claiming for has already been taken into account by means of an earlier set off. [The claimants] have recently made some further additional claims totalling US$1,670,179.37 in respect of funds they claim are owing from FCP to [the claimants] in relation to various accounts.

10. The parties sent written submissions to Mr Stanbury, with copies to each other. These submissions were written by non-lawyers. In Hamishmar's case, they were drafted by Mr Alan Koor of Miyana Consulting Services Ltd.
11. In their submissions, FCP explained that normally it adjusted for claims float movement within its payments, so that this adjustment was reflected in the payments made to Hamishmar representing claims. However, from September 2003, FCP ceased to make any such adjustment. Thus no adjustment was made when payments of varying amounts were made to Hamishmar on 25 September 2003, 2 December 2003, 13 February 2004, 13 October 2004, 2 May 2005, 9 August 2005 and 18 August 2005. Hamishmar and FCP were in agreement over claims float movements between Q3 01 and Q1 03. It was in respect of the five quarters Q4 01 to Q4 02 where there was disagreement. FCP's figure for outstanding claims float movement Q4 01 – Q4 02 was ($419,459.31) and the agreed figure for movement in claims float for Q1 03 – Q1 06 was ($67,643.60), giving a total movement in claims float between Q4 01 – Q1 06 of ($487,102.91). Hamishmar were wrong to contend that any part of the sum of $419,459.31 had been the subject of a set-off when FCP paid US$585,808.27 to Hamishmar on 3 December 2003. The supporting statement that accompanied that payment made no mention of the outstanding claims float movement.
12. In its submissions, Hamishmar acknowledged that FCP's statement that their case on the Counterclaim was effectively an "advance funding of claims" was entirely accurate, but noted this did not equate to the Counterclaim that states "the Defendant has funded premium payments to Lloyd's Underwriters on behalf of Hamishmar in the sum of US$419,459.31". Referring to a document provided by FCP to the court, Hamishmar also noted that FCP represented the Counterclaim as "Claims Float Journal".
13. Next, having observed that the Counterclaim had been variously described in the correspondence by FCP as funded premium; retained "claims float journal"; and funded claims, Hamishmar submitted that FCP had not funded premiums or claims out of its own resources. As for retained claims float, Hamishmar accepted that there was a rolling claims float based on the relevant provisions in the binders and attached a schedule showing: (a) the retained and released amounts beginning Q3 01 at the point at which the retained float was $487,102.91; and (b) that by Q2 06 there was no further retained amount, the "rolling" claims float as described by FCP showing a nil balance. All amounts had been processed in the accounts therefore there can be nothing further due as a "rolling claims float".
14. In conclusion, Hamishmar submitted that the Counterclaim was a voluntarily funded balance with consequences accordingly and that the amount of the claim had been withheld by FCP against payments due to Hamishmar.
15. In its reply submissions, FCP contended that none of the various descriptions that had been given to the counterclaimed sum was incorrect: they all referred to the effect of FCP being deficient in the Counterclaim funds but still paying premium amounts to underwriters or making payments to Hamishmar without adjusting for the claims float. There was no "actual" funded element in the payment but there was a form of financing because, by not adjusting the payment for outstanding claims float movements, FCP was settling a higher sum than should have been paid.
16. For its part, Hamishmar in its reply submissions acknowledged that it could now see that FCP funded the amount of the Counterclaim but maintained that in the previous two years it had been misled by contradictory and misleading presentations. Even so, it was unlikely that FCP had ever been actually out of pocket: the so–called funding was merely payment of amounts already on FCP's books waiting to be paid to Hamishmar. Further, the payment made in December 2003 had been made on the basis that all outstanding sums were being settled.
17. With the parties' consent, on 8 August 2008 Mr Stanbury issued a draft determination of balances due under the binders and the agricultural facilities. In this document he finds that, in regard to the Counterclaim, Hamishmar must give credit to FCP in the sum of $487,103 and that the sum due by FCP to Hamishmar under the binders is $175, 232. In order to determine the balances due under the binders, Mr Stanbury identified the last agreed position between the parties (the outstanding claims as at 15 December 2003) and then reviewed the subsequent transactions up to and including Quarter 4 2007 (Q4 2007). His reasoning is contained in the following paragraphs of the draft determination:

3.04 The terms and conditions of the individual Binding Authorities stipulate that Harel are entitled to retain 40% of total premium from each quarter, with this amount to be released to underwriters in the following quarter. The wording contained within each binder refers to this retention as a "Claims Float".

3.05 I consider that to call this retention a "claims float" is misleading, as premium is not withheld by Harel for a period of time that is long enough to pay claims as they fall due. The substance of this claims float is that, in effect, Harel withhold 40% of the premium for each quarter from FCP (and ultimately underwriters) and repay it in the subsequent quarter.

3.06 My analysis below is based on the conclusion that the "claims float", at any quarter end, is essentially premium withheld by Harel. Notwithstanding this, I continue to refer to this balance as the "claims float" for both parties' ease of understanding.

3.07 FCP's submission states at page 16 that the quarterly retention and release of the claims float was included in all payments between the parties that were used to settle bordereaux up to and including Q3 2001. The last such payment made by FCP to Harel where this adjustment occurred was dated 12 June 2003 for $193,799.

3.08 FCP's submission further states that for bordereaux subsequent to Q3 2001, the adjustment that would have accounted for the quarterly movement in the claims float was not made in calculating the payments due from FCP to Harel. This was due to an agreement between the parties, the effect of which was to ensure that funds continued to be paid to Harel from FCP to settle paid claims.

3.09 Harel, at page 9 of their Submission, state that "the retained claims float is now zero [as at Q2 2006] and that all amounts have been processed in the accounts therefore there can be nothing further due as a 'rolling claims float'".

3.10 In this respect, I note that this is shown by Harel's bordereaux, as shown on Schedule 4. However, Harel's assertion that there is no balance owed by Harel to FCP, as a consequence of this zero balance at Q2 2006, can only be supported if it can be shown that the balance that was withheld by Harel at the end of Q3 2001 was subsequently paid by Harel. In this respect I note the following:

a. the bordereaux at Q3 2001 shows the retained claims float that was to be payable by Harel in Q4 2001, totalled $487,103. This is analysed on Schedule 2.

b. The subsequent bordereaux, for Q4 2001, shows that – per that bordereaux – the claims float was released, however.

c. It is critical to evaluate what payments were actually made – to see if Harel actually repaid the claims float. I have reviewed the FCP statements that were provided to Harel for all payments subsequent to 12 June 2003 until 13 February 2008. I note that in calculating the amount payable by FCP to Harel for these payments, no deduction was made for the claims float as at Q3 2001.

d. I have seen payment reports from Lloyds that show that FCP have paid premium to underwriters in relation to the retained float as at the end of Q3 2001 totalling $487,103. These payments were therefore made to underwriters by FCP on behalf of Harel. Therefore, FCP are due the same value of $487,103 from Harel.

3.11 I therefore conclude that Harel have withheld from FCP the premium that was included in the retained claims float as at the end of Q3 2001. Therefore, I further conclude that this withheld premium should be deducted from the balance owing by FCP to Harel.

3.12 In summary, FCP have settled premium balances on behalf of Harel with underwriters, totalling $487,103. I therefore show this as an amount owing from Harel to FCP in my Determination, as shown on Schedule 1.

18. On receipt of Mr Stanbury's draft determination, FCP served a further submission dated 5 September 2008 in which, inter alia, it invited Mr Stanbury to award compound interest on the sum of $487,103 for the period 31 March 2002 to 13 February 2008, when FCP set off that sum in arriving at the figure of $192,277.69 which it paid to Hamishmar by cheque.
19. In Hamishmar's follow-up submissions, Hamishmar argued that it had been incumbent on Mr Stanbury to determine whether the $419,459.31 referred to in the Counterclaim had been "funded" by FCP ie paid by FCP to underwriters in advance of receiving the sum from Hamishmar or paid by FCP as a settlement of a creditor sum prior to receiving the associated debtor funds into FCP's bank account.
20. Thereafter, Lawrence Graham for Hamishmar and Holman Fenwick Willan for FCP argued in correspondence, with copies to Mr Stanbury, whether the letter of instruction to Mr Stanbury did indeed require him to determine whether the sum claimed in the Counterclaim had been "funded". By letter dated 3 September 2008 to both sets of solicitors, Mr Stanbury stated that he considered the issue of funding to be outside the scope of his instructions. He therefore intended to issue his final award on that basis and without reference to funding. If the parties required matters relating to funding to be included in the determination, they must agree between themselves as to the scope of this extension of his instructions.

The claimants' applications

21. First, the claimants apply for:

(i) a declaration that on the true construction of the terms of the agreement entered into between the parties to refer the Counterclaim to expert determination that expert determination includes determination of the following issues:

(a) Whether the FCP paid underwriters the sum of $419,459.31 on behalf of Hamishmar by way of premium in respect of the binders for the period Q4 01 to Q4 02.

(b) If so, whether FCP made those payments of premium to underwriters out of its own resources i.e. whether FCP funded the payment of premium to underwriters; and

(c) If so, whether any such payments were recouped by FCP out of claims collected by it from underwriters on behalf of Hamishmar.

(ii) Alternatively, a declaration or direction that the said issues remain to be determined by the court in the Counterclaim.

(iii) Permission to amend the Defence to Counterclaim.

22. Secondly, the claimants apply to strike out the Counterclaim on grounds that it is an abuse of process or for summary judgement dismissing the Counterclaim.

The submissions of the parties

Hamishmar's submissions

23. Miss Buehrlen for Hamishmar submitted that the Counterclaim was a claim for a sum paid as premium to underwriters out of FCP's own resources. If FCP had not paid premium out of its own resources, the Counterclaim must fail.
24. Miss Buehrlen relied on: (a) the wording of paragraph 22 of the Counterclaim, particularly "the Defendant has funded premium payments to Lloyd's Underwriters on behalf of Hamishmar in the sum of US$419,459.31"; and (b) the claim in paragraph 24 of the Counterclaim that a specific sum is due as at the date of the Counterclaim on which interest is claimed. Miss Buehrlen cited paragraph 16.3.1 of Barlow Lyde and Gilbert's Reinsurance Practice and the Law:

Funding involves one party (usually the broker) paying over a sum of money to another in advance of receipt of the money from the person from whom it is owed. The funding is usually of premium or claims. An example of funding would be where a reinsured makes a claim upon its reinsurer and, pending receipt of the claims money from the reinsurer, the broker pays the amount of the claim to the reinsured.

25. In Miss Buehrlen's submission, on the true construction of the agreement to refer issues for expert determination, the expert was instructed to determine each of issues (a), (b) and (c) set out in paragraph 21 above. That agreement, argued Miss Buehrlen, was to be found in the letters exchanged between the parties' solicitors that led to the joint letter of instruction to Mr Stanbury dated 18 March 2008. Mr Stanbury had partly decided issue (a) but had failed to decide issues (b) and (c) and was refusing to do so without the express agreement of the parties. Hamishmar was accordingly entitled to the declaration sought. As to the undecided issues that Mr Stanbury should have decided, it was agreed between the parties that these should be decided by the court and the court should get on and strike out the claim because FCP admitted that it had neither funded premium, nor claims, nor claims float out of its own resources.

FCP's submissions

26. Mr Blackwood for FCP referred the court to a report at tab 3 of the claimants' submissions to Mr Stanbury that clearly shows that well prior to the expert reference, they knew that FCP was claiming US$487,102.91 as Claims Float not recovered and that the claimants considered the true figure to be US$417,080. It is also clear that the claimants knew that US$67,643 represented Claims Float that Hamishmar was entitled to retain, which when deducted from US$487,102.91 gives the figure pleaded in the Counterclaim – US$ 419,459.31.
27. Mr Blackwood submitted that the scope of the reference to Mr Stanbury was to be found only in the letter of instruction: that alone constituted admissible evidence of the agreement of the parties. Under that letter, Mr Stanbury was asked, inter alia, to determine the amount properly owing, and to whom, in relation to the Counterclaim. As the letter said, this was a matter that related "solely to technical accounting issues". The Counterclaim was not to be construed as being limited to a claim for money paid out of FCP's own resources to fund premium. Both sides well understood at the time of the reference that the sum claimed related to claims floats advanced to Hamishmar. It was understood that the detail of the Counterclaim would be fleshed out in the parties' submissions. The claims float related to the 40% premium retained by Hamishmar and accordingly the reference to "premium" in the Counterclaim should be read as a reference to retained premium and the expression "funded premium payments" covered a situation where premium had been paid without the deductions that took account of claims float movements. The situation fell within the following statement in the Barlow Lyde and Gilbert work cited by Miss Buehrlen:

Funding occurs either when money is paid over or an appropriate credit entry is made in the broker's books of account. [Italics supplied]

28. Mr Blackwood also told me that in order to avoid the suggestion that FCP was relying on a claim based on having used its own monies for Hamishmar's benefit, FCP would relinquish its claim to interest made in its post draft determination submissions.

Discussion

29. In my judgement, Mr Blackwood's submission that the scope of the reference to Mr Stanbury is to be found only in the letter of instruction is correct. The letters between the parties leading up to that letter were the parties' negotiating positions and it is well known that evidence of negotiations leading up to an agreement is inadmissible as an aid to the construction of the resulting agreement.
30. I am further of the opinion that the Counterclaim referred to Mr Stanbury for determination is not to be treated as a narrow claim founded exclusively on the use by FCP of its own monies to pay premium but instead is to be read as encompassing a claim that FCP was entitled to bring into the account with Hamishmar US$419,459.31 in respect of claims float movements (US$487,102, less US$67,643 which Hamishmar was entitled to retain). I say this: (a) because Hamishmar knew before the reference that this was the substance of what FCP was claiming; and (b) because of the description of FCP's claim in the letter of instruction: "The amount claimed by FCP relates to claims floats advanced to [the claimants] in 200[3]". Further, whilst I think the sentence in Barlow Lyde and Gilbert's Reinsurance Practice and the Law cited by Mr Blackwood is referring to a credit in the books of a broker in respect of an underwriter or insured, I am nonetheless of the view that the failure to adjust for claims float movements can be described as funding in a broad sense, as Hamishmar accepted in its reply submissions to Mr Stanbury.
31. I therefore find that Mr Stanbury was not obliged to decide the three issues set out in paragraph 21 above and that he would not be in breach of his instructions if, as he intends, he were to make a final award on the Counterclaim along the lines set out in his draft determination.
32. Even if I were of the opinion that in determining the Counterclaim Mr Stanbury was obliged to decide whether FCP had advanced monies out of its own resources to underwriters as premium, in the exercise of my discretion I would still not make the declaration sought. I say this because I consider the following to be powerful reasons for not interfering in Mr Stanbury's determination:

(1) The claimants now accept that even if they were to be granted the declaration they seek and the Counterclaim were struck out, following Mr Stanbury's determination they must give credit to FCP for US$487,103.

(2) Thus, FCP having abandoned its claim to interest, Hamishmar's only concern in having the declaration it seeks is to avoid an award of costs that Mr Stanbury might make in his final award against it.

(3) Yet, when deciding the question of costs, Mr Stanbury will be well able to take into account, should he choose to do so, the way in which the Counterclaim was drafted and the length to which Hamishmar went to demonstrate that FCP had not funded from its own resources either premiums or claims.

Conclusion

33. It follows from my conclusion that Mr Stanbury's proposed determination of the Counterclaim is within his instructions that not only does the claimants' application for a declaration fail, but so also do their applications for permission to amend their Defence to Counterclaim and for an order that the Counterclaim be struck out.

Note 1   It is common ground that the correct year was 2003, not 2001.    [Back]