Markel International Insurance Co Ltd v Surety Guarantee Consultants Ltd and others  EWHC 1135 (Com)
Markel International Insurance Co Ltd, QBE Insurance (Europe) Limited and Amalfi Underwriting Limited (collectively the Claimants), brought proceedings in England's High Court against Surety Guarantee Consultants Ltd (SGC) and its former directors and employees. The claims related to surety bonds written by SGC that exceeded limits set out in a binding authority and management agreement (the Agreements) held by the Claimants with SGC. The Claimants alleged they were exposed to greater liabilities than agreed to, resulting in SCG obtaining excess premium payments. Fraud and dishonesty by the employees was also alleged.
In handing down its judgment on 3 June 2008, the Court held the Agreements on the surety bonds written by SGC had clear limits that SGC had breached, enabling secret profits to be made at the expense of the Claimants. The Court also found that there was an inescapable inference that the bonds were overwritten in order to defraud the Claimants by making secret profits, and that SGC had misstated the amount of the Claimant's exposure.
The Court further ruled that SGC violated its fiduciary duty through writing the unauthorised bonds and, in addition, the employees were found to have breached their fiduciary duty by conspiring to obtain secret profits which gave rise to a liability in tort. Consequently, all defendants had to account for the secret profits to the extent of loss incurred by the Claimants.
In respect of a defendant director of SGC, the Court held it probable the director had suspicions regarding the legitimacy of SGC's business but failed to pursue any investigations into the matter. The Court ruled the director could not have honestly believed that signing the bonds in excess of daily limits was justified, and that the director's failure to ask questions of other directors amounted to deliberately 'closing his eyes' to the danger of signing the bonds. Such conduct exposed the Claimants to a greater liability than was agreed. The recklessness of the director as to the Claimant's interests amounted to a breach of the director's fiduciary duty, as the director had dishonestly assisted and enabled SCG to breach its fiduciary duty in making secret profits.
In assessing the effect of the Agreements, the Court found that a relationship of trust and confidence was established based on the existence of personal names listed in the schedules of the Agreements. Thus, the directors had duties as fiduciary to the companies because of the trust and confidence placed upon them. Consequently, the directors who procured a breach of the Agreements were found liable in tort.
Where company directors and employees are involved in making secret profits in circumstances where such practice is found to constitute a breach of their fiduciary duty, each director will be held liable to account for the full extent of those profits. Directors and employees must be wary of deliberately 'closing their eyes' to the practice of overwriting bonds as this may constitute a breach of their fiduciary duty. Further, it is clear that a mere inference as to the overwriting of surety bonds may be sufficient in satisfying a court that a company had violated its fiduciary duty. In these circumstances directors and employees are at risk of being found liable for knowingly assisting their employer company in breaching fiduciary duty.
Ramco Ltd and Resource Industries v Weller Rusels & Laws Insurance Brokers Ltd LTL  (unreported)
Ramco Ltd (Ramco) and Resource Industries Ltd (RIL) (collectively, the Claimants) traded in surplus army stock under agreements with the Ministry of Defence (the MoD Agreement) and a South African businessman, Mr Murray (the Murray Agreement). The Claimants brought proceedings in England's High Court against International Insurance Company of Hanover (the Underwriters) for losses incurred in 2001 due to fire damage to the stock. The Claimants sought their legal costs in the action against the Underwriters. RIL made a separate claim for the value of the stock that would have been recoverable against the Underwriters had it obtained effective insurance cover. Judgment was handed down in June 2008.
Ramco succeeded against the Underwriters, however, RIL failed. Ramco and RIL subsequently pursued a claim against Weller Russels & Laws Insurance Brokers Ltd (the Broker) alleging the Broker obtained a policy that was inappropriate for the purposes for which it was obtained. The Claimants asserted the Broker breached its contractual and tortious duty to exercise reasonable skill and care by procuring an inappropriate policy. In addition it was claimed the Broker failed to investigate the nature of the Claimant's business, thus, undermining the advice given as to appropriate cover. Specifically, it was alleged the procurement of one particular policy over the wording of another gave rise to inadequate cover, causing loss to the Claimants.
The Court held the events leading up to the Broker's decision on the cover, adequately informed the Broker of the need to undertake further investigations regarding the nature of the MoD and Murray Agreements. The particular words 'held by the Insured in trust for which the Insured is responsible' in the policy effectively restricted the Claimants' recovery in instances where the Claimants had no legal liability for loss. It was also held that the Broker was under an obligation to investigate the terms on which the goods were held by the Claimant before recommending any particular policy. Had such investigations been undertaken, it would have been clear that adequate provision for cover had not been obtained. Consequently, a breach of duty on the part of the Broker was found for adopting the wording of one policy in place of the wording of another policy, and the proceedings against the Broker were upheld.
It is clear that breaches of agreed limits regarding a company's exposure set out in surety bond agreements by overwriting bonds to obtain secret profits, may amount to a breach of fiduciary duty. Further, where employees conspire to obtain secret profits, this may similarly amount to a breach of fiduciary duty in circumstances where a relationship of personal trust and confidence on the part of the employees has been established. Potentially, where employees fail to investigate any suspicions they hold as to the legitimacy of their employers' business dealings, the Court may find that the employee assisted in their employer's breach of fiduciary duty. Accordingly, employees may be required to account for any profit gained.
Clearly, a broker may be held liable in contract and or tort for failing to exercise reasonable skill and care in circumstances where a policy is inappropriate for the purposes for which it is obtained. It is therefore necessary for brokers to investigate the nature of the insured's business thereby maximising the scope of advice given to the insured prior to the provision of a policy. It is also necessary for brokers to be aware of the events leading up to the provision of a policy which may indicate a need to undertake further investigations on the insured's business in general and, in particular, the terms of related agreements.
JP Morgan Chase Bank v Springwell Navigation Corporate  EWHC 1186
Springwell Navigation Corporation (Springwell) was an investment company run by a large Greek shipping fleet family. Throughout the 1990s, Springwell invested heavily in emerging market bonds exceeding US$700 million and during this time, JP Morgan Chase Bank (JP Morgan) acquired Springwell's portfolio of emerging market investments.
In an action extending over many years, Springwell brought a counter-claim against JP Morgan in England's High Court for an alleged failure to provide proper advice regarding emerging market investments. The counterclaim also alleged that JP Morgan dishonestly sold certain investments to Springwell that it knew to be unsuitable.
Springwell asserted JP Morgan had assumed the role of an adviser and, consequently, had a duty to advise Springwell on the appropriateness of its investments and provide ongoing advice on the overall balance of Springwell's portfolio. JP Morgan denied the existence of an advisory relationship based on numerous disclaimers and limitations of liability contained in contractual documentation relating to the transactions.
The key issues facing the Court were whether JP Morgan owed a contractual and/or tortious duty of care to Springwell to provide advice on appropriate investments and the extent of any such duty.
In handing down its judgment on 27 May 2008, the Court found that the duty of JP Morgan did not extend to providing investment advice, nor did it entail a responsibility to select investments or monitor Springwell's portfolio. Springwell was held to be ultimately responsible for its own investment decisions as Springwell was a sophisticated investor that previously dealt successfully in emerging markets. Further, the Court ruled that Springwell was also aware of the risks involved in such transactions. Other considerations held to be relevant included the lack of discussion between the parties regarding investment objectives and the fact that JP Morgan had not issued an advisory agreement or any portfolio statements to Springwell despite being contrary to standard practice. Further, the contractual terms governing the relationship between the parties precluded a duty to advise. In addition, it was evident that Springwell understood the risks involved and did not rely on the advice of JP Morgan in making its decisions.
An allegation of misrepresentation on the part of JP Morgan was on the basis that the effectiveness of the contractual disclaimers meant JP Morgan had not made any actual representations. Therefore, the claim for breach of fiduciary duty was rejected as no advisory relationship existed and, as a result, no fiduciary duty was owed.
This case highlights the factors Courts may take into account in determining the advisory duties that are owed by banks. Such factors may include the sophistication of the bank's customers, the relevant contractual framework, the active role played by the bank and the associated regulatory background. This case indicates that Claimants may face difficulties in asserting the existence of an advisory duty or responsibility for investment decisions in circumstances where it is inconsistent with the relevant contractual disclaimers and terms.
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