In Equitas v. Walsham Bros the Commercial Court ruled on a number of important legal issues concerning the duties owed by Lloyd’s brokers to pass on monies to reinsurers and reinsureds. The Court was also asked to consider and construe, for the first time, the complex agreements entered into across the Lloyd’s market as part of the process of “Reconstruction and Renewal”, which drew a line under the catastrophic losses suffered in the 1980s and 1990s and brought an end to the market turmoil.

Males J. held that a reinsurance broker owed a duty of care in the tort of negligence to remit funds reasonably promptly. That duty was owed by the broker not merely to its client reinsureds but also to the reinsurers with whom it had placed cover. The broker argued that there was no duty of care because the duties to remit were absolute obligations owed only in contract and/or restitution. Rejecting this argument, the judge held that there was no inconsistency between those absolute duties and a duty of care in the tort of negligence.

In a ruling that is significant for the law of limitation, Males J. held (distinguishing a number of well-known authorities such as Bell v. Peter Browne & Co. and Nouri v. Marvi) that the broker’s duty to remit funds is a continuing obligation breached afresh every day. Accordingly, a claim to recover unremitted funds from the broker can never become time-barred.

Males J. considered in detail the effect of the Sempra Metals principle concerning the recovery of damages in respect of compound interest losses. He formulated a general rule that, at least in the commercial context, a claimant can recover such losses by reference to a conventional commercial borrowing rate without having to adduce specific evidence of its own financial circumstances.

In the final part of his judgment, Males J. examined the proper construction and effect of the Lloyd’s “Reconstruction and Renewal” settlement agreements and held that they precluded the broker from asserting cross-claims against the Lloyd’s syndicates and Equitas (their assignee). He also rejected the broker’s argument that its cross-claims gave rise to an equitable set-off and so operated to extinguish the syndicates’ claims automatically, before the settlement agreements had taken effect. The judge considered the nature of the defence of equitable set-off and held that it requires the cross-claim to have been asserted, but that even after assertion the cross-claim does not have the effect of extinguishing or reducing the claimant’s claim.

Christopher Butcher QC and Benjamin Parker were counsel for Equitas.

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