Sirius International Insurance Company (Publ) (Appellants) v. FAI General Insurance Limited and others (Respondents)
32. When parties are under severe time pressure, and one or both of them have inadequate information, such a limited agreement may be all that the parties can achieve. But in such difficult circumstances they may have to accept that the immediate action on which they do agree inevitably alters the context of the issues which remain unresolved. For instance, a consent order for sale of equipment subject to a finance lease may raise the question whether relief from forfeiture, which the lessee was seeking from the court, is still available (see the decision of this House in On Demand Information Plc v Michael Gerson (Finance) Plc  1AC 368, especially in the speech of Lord Millett, at p 381, paras 36-39).
33. So in this case the two important points on which the parties did agree inevitably had an effect on the issues which were not resolved. Paragraphs 1 and 5 of the schedule had the effect of putting a final end to the arbitration. It was no longer possible for Sirius to obtain declaratory relief (sought, in addition to a money award, in the arbitration) to the effect that Sirius was bound to pay Agnew and FAI was bound to pay Sirius. Moreover, paragraphs 2 and 3 of the schedule had the effect that Westpac, the issuer of the letter of credit, dropped out of the picture. The escrow account was a sort of substitute for the letter of credit but it was of a different kind, as the element of "the great and fundamentally important separation" (the expression used by Sir John Donaldson MR in Bolivinter Oil SA v Chase Manhattan Bank  1 Lloyd's Rep 251, 256) between banker and re-insurers was no longer there. The deceptively simple language of para 4 of the schedule must in my view be approached with these points in mind.
34. The terms in the schedule, and paragraph 4 in particular, must also be viewed, like any other contractual document, in their commercial context. In this House there was not much common ground between counsel as to how the commercial context of the Tomlin order should be characterised. The courts below saw much more of the extensive documentary evidence than has been placed before your Lordships. But the limited evidence before the House discloses some uncontroversial facts which may be material.
(a) The order of Mr Registrar Baister made on 27 May 2002 (that is, more than a year after the Tomlin order) shows that there was still no agreement as to what the basic contractual documents were. Between August 1999 and January 2000 there had been a lengthy exchange of correspondence (identified in the affidavit dated 18 September 2001 of Mr Timothy Brown of Reynolds Porter Chamberlain and the witness statement dated 2 November 2001 of Ms Kathryn Carr of Ince & Co) from which the effective contractual terms had to be identified and extracted.
(b) In an affidavit made on 5 April 2001 (that is, the day before the Tomlin order) Mr Timothy Bull of Reynolds Porter Chamberlain deposed (in relation to the letter of 3 September 1999) to his belief that:
Whether or not this was admissible or cogent on the issue of construction of the letter, it appears to have been the only clear instance of an argument about the letter of credit put forward openly before the making of the Tomlin order.
(c) There is mention (in a letter dated 31 July 2001 from Reynolds Porter Chamberlain to Freshfields Bruckhaus Deringer, and also in an affidavit of Mr Timothy Brown of Reynolds Porter Chamberlain sworn on 18 September 2001) of a suggestion put forward on behalf of the provisional liquidators that (in the words of the letter) "the security given by the LOC must be 'downgraded' as a result of FAI's insolvency to security for any distribution in the estate of FAI." This suggestion was evidently put forward after the appointment of the provisional liquidators but before the Tomlin order.
(d) However, it does not seem to have been a considered view, since on 7 August 2001 Freshfields (for the provisional liquidators) stated that their clients had still not had an opportunity to acquaint themselves with the facts and take a view as to the merits of Sirius's claim. In order to do so they would need (among other things) to contact Ince & Co (who had acted for FAI at the time). Freshfields' state of knowledge on 6 April 2001 must have been even more deficient.
(e) In her witness statement of 2 November 2001 Ms Carr put forward further arguments (based on allegations of champerty and misrepresentation) on behalf of the provisional liquidators but there is no suggestion that these arguments were live at the date of the Tomlin order.
35. Against that background I turn to paragraph 4 of the schedule to the Tomlin order:
Meticulous verbal analysis of this paragraph is not appropriate, at any rate not to the exclusion of common sense, or its commercial context. Nevertheless I make three short verbal points. First, the words "For the avoidance of doubt," although sometimes loosely used, suggest that the paragraph is going to spell out what is fairly obvious (or at any rate unsurprising) rather than subverting the other provisions of the Schedule. Second, the reference to arguments being "preserved" cannot in the circumstances sensibly restrict the parties to arguments which had already been articulated and advanced (compare the mirror-image issue of the release of unknown claims considered by this House in Bank of Credit and Commerce International SA v Ali  UKHL 18;  1 AC 251); at the time when the Tomlin order was made there seems to have been doubt even as to the identity of the relevant contractual documents. Any arguments, whether or not already canvassed, could be put forward (the parenthesis " (if any)" in paragraph 3 is consistent with that). Third, the repetition of "in respect of" ("the arguments . . . in respect of the LOC are preserved in respect of the proceeds") is not careless drafting but serves to emphasise the intended parallel between the letter of credit before draw-down and the proceeds after draw-down.
36. Then there are the most controversial words in paragraph 4, "notwithstanding the terms of this Schedule." Plainly they are intended to have some sort of overriding effect: in particular, since the issues left unresolved centre on the letter of credit, to require entitlement to the letter of credit to be determined as if there had been no draw-down. That hypothetical approach may give rise to more difficulties than the parties had fully thought through, but it is consistent with their commercial objectives.
37. Does the Schedule intend the hypothesis to be stretched further, so as to require the apparently unqualified acknowledgement in paragraph 1 of FAI's liability to be disregarded in determining entitlement to the proceeds of the letter of credit? The judge thought that that would be an extraordinary result. He said, at p 93, paras 21-22:
38. In the Court of Appeal May LJ took the same view. He said, at p 2222, para 19:
Carnwath LJ agreed with May LJ; and Wall J expressed similar views.
39. The ground on which the Court of Appeal disagreed with the judge was not as to a far-reaching counterfactual hypothesis introduced by paragraph 4, but as to the proper meaning of paragraph 1, construed in its commercial context. On that point, for all the reasons given by Lord Steyn, I respectfully prefer the reasoning of the judge to that of the Court of Appeal. As the judge said, at p 94, para 26:
For these reasons I would allow the appeal.
LORD BROWN OF EATON-UNDER-HEYWOOD
40. I find myself in precisely the same position as my noble and learned friend, Lord Bingham of Cornhill. I too was inclined to the construction of the Tomlin order contended for by the respondents. For the reasons given by Lord Bingham, however, I too am content to agree that the appeal should be allowed.
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