Velos Group Ltd. v. Harbour Insurance Services Ltd., [1997] 2 Lloyd's Rep. 461
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CENTRAL LONDON COUNTY COURT (BUSINESS LIST)
[1997] 2 Lloyd's Rep 461
HEARING-DATES: 21 March 1997
21 March 1997
CATCHWORDS:
Insurance (Marine) -- Insurance brokers -- Commission -- Title to sue
-- Brokers placed plaintiffs' insurance with underwriters -- 12-month
policy cancelled after five months -- Brokers retained part of return
premium as balance of commission due in respect of 12-month policy --
Whether privity of contract between brokers and owners -- Whether
brokers had title to sue -- Whether brokers entitled to retain moneys.
HEADNOTE:
The defendants were placing brokers for a hull and machinery slip
policy concluded on June 6, 1995 covering four vessels, respectively
owned by the third to sixth plaintiffs as owners and managed by the
second plaintiffs Cavo D'Oro. The first plaintiffs, Velos, were
generally insurance agents to the other plaintiffs and were in
particular, the producing brokers under the policy.
The policy covered 10 per cent of the owners' respective interests and
was placed as to one third with Independent Insurance Co Ltd and as to
two thirds in different proportions with two Lloyd's syndicates and was
expressed to run for 12 months from May 25, 1995.
The policy on its face referred to "deferred" payment of premium as per
an attached clause providing for payment in four instalments whereby in
particular one quarter of the annual premium was due and payable at
inception with a further quarter due and payable two months thereafter.
The policy was also subject to the Institute Time Clauses Oct 1, 1983,
cl 22.1 of which provided for returns of premium to be made pro rata
monthly net of each month should the insurance be cancelled by
agreement. The first two instalments of premium were paid.
The policy was cancelled by mutual agreement between underwriters and
the owners on Nov 7, 1995 with effect from Oct 25, 1995. In accordance
with cl 22.1 the underwriters returned to the defendants Harbour
premium in the amount of US$10,245.44.
Harbour accounted for US$2308.88 but retained US$7936.56 representing
the balance of commission which they said was due in respect of the
12-month policy which they were instrumental in placing.
The plaintiffs sought recovery of the amount from the defendants.
The issue for decision was whether Harbour were entitled to retain
those moneys.
There was also in issue as to title to sue, because unless Harbour were
able to show that privity of contract existed between themselves and
the owners rather than Velos, Harbour were obliged as fiduciaries to
account to the owners without room for any deduction based on purported
contractual rights arising between themselves and Velos or indeed
between themselves and underwriters.
-- Held, by CLCC (BL) (Judge HALLGARTEN, QC), that (1) as between
Harbour and underwriters Harbour were agents of the owners; the
exchanges between Velos and Harbour indicated that Harbour were
treating Velos as agents for the owners and the appointment of Harbour
could not be categorized as a mere delegation of authority; where
shipowners authorized or caused risks to be placed in the Lloyd's
market they must be taken to know that the producing broker may not be
able to go into the market himself; in those circumstances the right
inference to draw was a direct relationship between the actual or
prospective assured and the sub-agent (see p 462, col 2; p 463, col 1);
(2) the owners may be regarded as being in privity of contract with
Harbour and Harbour could prima facie raise against the owners all
claims and defences arising from their role as placing brokers (see p
463, col 1);
(3) prima facie the broker earned the entirety of his commission when
the risk was successfully placed (see 463, col 1);
(4) the fact that the relationship postulated that the broker might be
called on to undertake certain superadded duties in no way derogated
from the fact that he had perionned his essential task upon the placing
of the insurance; it was this and nothing else which triggered the
right to commission (see p 463, col 2);
(5) the payment of premium clause was merely deferring payment of a
liability which accrued at inception; in these circumstances payment of
commission was likewise being deferred and there was nothing to suggest
that if, by agreement between the underwriters and the assured,
payments of premium ceased by reason of cancellation that should in any
way affect or reduce the broker's rights (see p 463, col 2);
(6) cl 22 had to be construed against the background that, prima facie,
under marine policies premium was indeed earned and payable at
inception; and the reference to underwriters being obliged only to make
a net payment meant that cancellation was intended, prima facie, to be
a matter dealt with on a bilateral basis between underwriters and
assured without affecting or prejudicing the rights of the broker;
Harbour had a vested right to their entire commission over 12 months
and absent a waiver, there was no reason why the cancellation agreed
between the plaintiffs and the underwriters should affect such
entitlement (see p 464, col 1);
(7) insofar as there were moneys legitimately due to Harbour by way of
commission either from underwriters or from the plaintiffs there was no
reason why they should not have been retained or set-off by way of
deduction from what was received from underwriters before being passed
on to the owners; the plaintiffs were not vested with any rights of
recovery; the claim failed and Harbour were entitled to retain the sum
which they had deducted (see p 464, col 2).
CASES-REF-TO:
De Bussche v Alt, (CA) (1878) 8 Ch D 286;
Pryke (John W) and Others v Gibbs Hartley Cooper Ltd, [1991] 1 Lloyd's
Rep 602.
INTRODUCTION:
This was an action by the plaintiff assured Velos Group Ltd and others
seeking recovery of US$7936.56 from the defendants Harbour Insurance
Services Ltd the plaintiffs' placing brokers the moneys being retained
as balance of commission due when the plaintiffs and the insurers
cancelled the policy by mutual agreement.
The further facts are stated in the judgment of His Honour Judge
Hallgarten, QC.
COUNSEL:
Mr S Phillips for the plaintiffs; Miss C Burgin for the defendants.
PANEL: Judge Hallgarten, QC
JUDGMENTBY-1: JUDGE HALLGARTEN QC
JUDGMENT-1:
JUDGE HALLGARTEN QC: In this case, the plaintiffs are seeking recovery
of US$7936.56 from the defendants, Harbour, who were placing brokers
for a hull and machinery slip policy, concluded June 6, 1995, covering
four vessels, respectively owned by the third to sixth plaintiffs, as
owners, and managed by the second plaintiffs, Cavo D'Oro. As to the
first plaintiffs, Velos, they were generally insurance agents to the
other plaintiffs, and were, in particular, the producing brokers under
the policy. The policy covered 10 per cent of the owners' respective
interests and was placed as to one third with Independent Insurance Co
Ltd, and as to two thirds in different proportions with two Lloyd's
syndicates, and was expressed to run for 12 months from May 25, 1995.
The policy was cancelled by mutual agreement between underwriters and
the owners on Nov 7, 1995 with effect from Oct 25, 1995; ie it was in
force for no longer than five of its 12 months. The policy on its face
referred to "deferred" payment of premium, as per an attached clause
providing for payment in four instalments, whereby in particular
one-quarter of the annual premium was due and payable at inception with
a further quarter due and payable two months thereafter. Both of these
instalments were paid, with the consequence that as at termination
underwriters had received premium for six months.
The policy was also subject to the Institute Time Clauses, Oct 1, 1983,
cl 22.1 whereof provided for returns of premium to be made pro rata
monthly, net for each uncommenced month should the insurance be
cancelled by agreement. In consequence, underwriters returned to
Harbour premium in the amount of US$10,245.44. Of that sum Harbour have
accounted for US$2308.88 but have retained US$7936.56, representing the
balance of commission which they say was due in respect of the 12 month
policy which they were instrumental in placing.
The question which I have to determine is whether, as against the
plaintiffs or any of them, Harbour were entitled to retain those
moneys.
Title to sue
The first question that arises relates to title to sue and, while
technical, it represents, so Mr Phillips submits, more than a mere
technicality, because unless Harbour are able to show that privity of
contract existed between themselves and the owners rather than Velos,
Harbour are obliged as fiduciaries to account to the owners, without
room for any deduction based on purported contractual rights arising
between themselves and Velos, or indeed themselves and underwriters.
The determination of this issue is not easy, first because the question
whether privity of contract exists between a principal and a sub-agent
is notoriously difficult; and, secondly, because such principles as can
be discerned have to be applied in the arcane context of the Lloyd's
market, where risks can only be placed by or under the umbrella of a
Lloyd's broker.
I have to say that I am far from convinced (this is no criticism, of
course, of Counsel, who delivered admirably concise arguments) that the
point may not somehow be covered by custom or authority, but, working
from first principles, it seems to me that the following factors are
relevant:
(1) As between Harbour and underwriters, Harbour, who operated under
the umbrella of Ramon International Insurance Brokers Ltd ("Ramon"),
who in turn operated under the umbrella of Lowndes Lambert Marine Ltd,
Lloyd's brokers, were agents of the owners. This basic principle is now
axiomatic (see John W Pryke & Others v Gibbs Hartley Cooper Ltd, [1991]
1 Lloyd's Rep 602, per Mr Justice Waller at p 614, col 1). Moreover, as
to Ramon, such was expressly stated in the payment of premium
provision, to which I have already referred.
(2) Looking at the exchanges between Velos and Harbour in and about the
placing of the risk, I do not believe that Harbour were treating Velos
as sole principals. I think that Harbour were treating Velos as agents
for the owners; although whether as agents only or as agents who might
attract personal liability is not so clear.
(3) I do not believe that the appointment of Harbour can be categorized
as a mere delegation of authority. It seems to me that where shipowners
authorize or cause risks to be place in the Lloyd's market, they must
be taken to know that the producing broker may not be able to go into
the market himself. In those circumstances, since of necessity a
sub-agent has to be appointed (see De Bussche v Alt, (1878) 8 Ch D 286,
per Lord Justice Thesiger giving judgment in the Court of Appeal at p
311), the right inference to draw is that a direct relationship is
established between the actual or prospective assured and the
sub-agent.
Again, in this case that inference is in my view reinforced by the
designation of Ramon as the assured's agents in the policy. It is also,
I believe, reinforced by the circumstances that the cover note
designated Harbour as the assured's agents, although, for reasons which
I explore separately, I consider that Harbour cannot affirmatively rely
upon the cover note, insofar as it differs from the policy. Since the
plaintiffs never sought to challenge that part of the cover note, so
far as the issue or issues of agency are concerned, it seems to me that
it supports the conclusions which I have expressed above.
In those circumstances, as I see it the owners may be regarded as being
in privity of contract with Harbour and Harbour can, prima facie, raise
against the owners all claims and defences arising from their role as
placing brokers.
The commission claim
Turning now to the substantive issue in the case: are Harbour entitled
to retain the US$7936.56? In this regard, it is important to see how
the claim is put. Harbour do not assert that the early cancellation was
wrong vis-a-vis themselves, ie they do not seek to set-off US$7936.56
as damages representing commission lost by reason of some breach on the
part of the plaintiffs or underwriters. What they say is that they are
entitled to retain such sum by reason of express or implied terms of
their agreement for the placing of the risk, and they advance their
contentions in a number of ways, which I will deal with in turn.
1. The basic right to commission
The parties drew attention to certain specific terms, or purported
terms (to which I will refer to below), but it seems to me that a good
starting point is to ask what rights are, prima facie, vested in a
broker who has successfully placed a time policy. In this regard, there
is a minor complication that, technically, commission is due from
underwriters rather than the assured, albeit the practice in the market
is for the broker to deduct commission from the premium received before
remitting it to underwriters. In my view, this does not really affect
matters and, as I see it, prima facie, the broker earns the entirety of
his commission when the risk is successfully placed, just as, prima
facie, the underwriter is entitled to his premium at that point (see
Templeman on Marine Insurance, 6th ed, p 447).
Mr Phillips, for the plaintiffs, submitted that this was the wrong
approach; alternatively that if there was any prima facie position it
was rebutted in the present case. Basically he made, I think, three
points.
(a) He submitted that the right to commission was co-terminous with the
currency of the policy, because part of the consideration was the
broker's obligation to service such policy, by dealing with addenda,
claims, etc, during its lifetime. He therefore submitted that this
entailed commission only being earned in proportion to the life of the
policy.
I do not accept this submission. In my view, the fact that the
relationship postulates that the broker may be called upon to undertake
certain superadded duties in no way derogates from the fact that he has
performed his essential task upon the placing of the insurance. In my
view, it is this and nothing else which triggers the right to
commission.
(b) Next, Mr Phillips relied on the circumstance that under the policy
payment of premium was by instalments, so that, in practical terms,
commission was also payable by instalments, with brokers receiving
remuneration by deductions as and when those instalments were received
from the plaintiffs.
Well, I agree with his analysis, but I do not agree with the conclusion
which he would wish to draw from it. In my view, the payment of premium
clause was merely deferring payment of a liability which accrued at
inception (see, indeed, the expression "Deferred payments of premium"
on the face of the policy).
In those circumstances, payment of commission was in practice likewise
merely being deferred, and I see nothing to suggest that if, by
agreement between underwriters and the assured, payments of premium
cease by reason of cancellation, that should in any way affect or
reduce the broker's rights.
(c) Finally, Mr Phillips relied on cl 22 of the Institute Time Clauses,
which I have referred to above but it is more convenient to deal with
this separately, and it is to that point I now turn.
2. Clause 22.1 of the Institute Time Clauses
Each side sought to rely on this clause. Mr Phillips submitted that the
relevant entitlement was to return of premium net of earned brokerage
accrued to the date of cancellation. Miss Burgin submitted that the
entitlement was to return of premium net of brokerage, whatever the
contractual entitlement to brokerage might be.
In my view, Miss Burgin's construction is to be preferred. Clause 22
has to be construed against the background that, prima facie, under
marine policies premium is indeed earned and payable at inception, and,
as I see it, the reference to underwriters being obliged only to make a
net payment means that cancellation was intended, prima facie, to be a
matter to be dealt with on a bilateral basis between underwriters and
assured, without affecting or prejudicing the rights of the broker (see
O'May on Marine Insurance, p 285). In my view, therefore, cl 22 serves
if anything, to reinforce the position which I have set out under head
(1) above.
It therefore follows that, as I see it, Harbour had a vested right to
their entire commission over 12 months and, absent a waiver (which has
been in no way asserted), there is no reason why the cancellation
agreed between the plaintiffs and underwriters should affect such
entitlement.
3. The broker's cancellation clause in the cover note
In the light of the conclusions above, this point no longer arises,
although until a late stage it represented, I believe, the primary way
in which Harbour put their case. I can, I think, deal with this matter
quite briefly.
(a) The slip policy contained a broker's cancellation clause
representing a variant of a standard provision whereby, in the event of
non-payment of premium, Ramon were entitled to cancel. The reason for
such a term vesting rights in a broker is, of course, because he is
personally liable to underwriters for premium under s 53 of the Marine
Insurance Act, 1906.
(b) The cover note produced by Harbour on June 8, 1995 purported to set
out terms agreed with underwriters, but contained a different purported
broker's cancellation clause. The first paragraph was on the lines set
out under (a) above, save that Harbour rather than Ramon were named. An
additional paragraph, however, read as follows:
It is further agreed that in the event of cancellation under this
agreement or by virtue of curtailment of cover for any other reason
whatever, Harbour Insurance Services Ltd shall be entitled to all
brokerage or commissions under this insurance without regard to the
time the cover was in force. This clause shall not prejudice or affect
Harbour Insurance Services Ltd's lien on this insurance for any amounts
remaining due to it from the assured, whether in connection with this
insurance or otherwise, or any other rights of Harbour Insurance
Services Ltd against the insured.
(c) The evidence showed that this additional paragraph was not a
standard provision, and it was certainly not a standard provision to be
found within any broker's cancellation clause.
(d) The plaintiffs never sought to challenge the provision and indeed
sought various amendments to the insurance on the basis that the cover
note evidenced contractual relations. However, the plaintiffs cannot be
regarded as bound by any course of dealing, because such was based on a
misapprehension that Harbour's version of the broker's cancellation
clause reflected what was contained in the policy, which was not the
case.
For the above reasons, had I been against the plaintiffs on issues (1)
and (2) above, I would not have been in their favour on issue (3). On
the other hand, it does seem to me that Harbour's clause reflects
correctly the position which I have endeavoured to outline on issues
(1) and (2) above, and despite the fact that the plaintiffs' witnesses
gave evidence that they were uneasy about this provision, I believe
that their failure to make any protest is not without significance.
Recovery
Finally, there is an issue whether Harbour are entitled to enforce
their claim for commission by retaining the moneys which they received
from underwriters. Under ss 53 and 82 of the Marine Insurance Act,
1906, despite the fact that brokers are responsible for payment of
premium, underwriters are directly accountable to the assured for any
premium which may have to be returned. In those circumstances, can it
be said that Harbour were merely a conduit for repayment of premium and
thus held such repayment in a fiduciary capacity so as to be unable to
deduct commission which was due as a matter of contract? I do not think
that such refinement applies. As I see it, insofar as there were moneys
legitimately due to Harbour by way of commission, either from
underwriters or from the plaintiffs, there is no reason why they should
not have been retained or set off by way of deduction from what was
received from underwriters before being passed on to the owners.
In those circumstances, I do not believe that the plaintiffs are vested
with any right of recovery. The claim fails, and Harbour are entitled
to retain the sum which has been deducted.
DISPOSITION:
Judgment accordingly.
SOLICITORS:
Lewis Moore & Co; Dorman & Co.
