David Gareth Jones v Society of Lloyd’s : Mervyn John Anthony Standen v Same (1999)


Whether provision in the Lloyd's settlement agreement that underwriting members who did not pay their reduced liabilities in full by a certain date would be liable for their full liabilities was in the nature of an unenforceable penalty or constituted a provision for forfeiture.


These were two sets of proceedings which arose out of the scheme by which the Society of Lloyd's sought to settle the mass of litigation between underwriting members ("Names") and agents which arose from the large scale losses suffered by Names for the years up to 1992. The first applicant, J, sought to have a statutory demand by Lloyd's for £342,240 set aside. The second applicant, S opposed a bankruptcy petition against him. As part of the scheme provision was made for a fund to be applied in part satisfaction, and therefore reduction, of Names' liabilities in respect of insurance losses underwritten by them, provided their net liability after such reduction was paid by a specified date, 30 September 1996. If such payment was not made by that date, then the scheme purported to provide that the Name concerned would not enjoy the benefit of reduction of his full liability. J and S, who did not pay by the due date and who therefore received demands from Lloyd's for their full liability, contended that this provision was in the nature of a penalty and therefore unenforceable by Lloyd's. They argued, relying on Jobson v Johnson (1989) 1 WLR 1026, that the difference between the net sums stated in their finality statements and the amounts which they were required to pay because of their failure to pay those net sums on time did not bear any relationship to loss suffered by Lloyd's as a result of that failure. The requirement to pay the larger sums was therefore a penalty which the court would enforce only to the extent of any loss suffered by Lloyd's. Lloyd's argued, inter alia, that the true nature of the settlement agreement was that each accepting Name was offered an option to pay his true liabilities reduced by debt credits by 30 September 1996 or to pay his full underwriting liabilities without such reduction at a later date, and that therefore the disputed provisions were no more than a penalty than was any contractual provision of the option of taking a discount for prompt payment. Alternatively, J and S argued that the provisions constituted a provision for forfeiture against which the court had an equitable jurisdiction to grant relief, as they deprived the Names of an interest in the funds set up as part of the scheme to provide the debt credits in the event of a breach of the obligation to pay the reduced sum by 30 September 1996. J put forward a further submission that it was at least arguable that J in fact complied with all his obligations under the settlement agreement by offering through his bank a guarantee in a sum which would have covered those obligations, leaving Lloyd's to produce the form of guarantee it required, which it never did.


(1) It was essential to the enquiry whether a provision was of the nature of a penalty to establish the nature and origin of the secondary obligation sought to be imposed in the event of the breach of the primary obligation. As in Thompson v Hudson (1869) 4 HL 1, the sum to be paid in the event of failure to comply with a new agreement could not be regarded as a penalty because it was a sum contractually due before the new agreement was entered into, an obligation to pay which was expressly preserved by the new agreement to take effect in the event of the breach of the latter. In this case, the disputed provisions preserved the Name's original underwriting liabilities without deduction in the event of the Name failing to comply with the new settlement provisions for payment of a lesser sum by a specified date. The provisions did not constitute a penalty. Their true effect was that the benefit of the reduction of pre-existing liabilities offered on certain conditions by the settlement agreement was lost if those conditions were not fulfilled. There was nothing objectionable in equity about such a provision.

(2) The intent and effect of the settlement agreement was that a Name had no proprietary interest in the settlement fund (BICC plc v Burndy Corp & Anor (1985) 2 WLR 132). The provisions relating to the application of debt credits to Names' primary liabilities had effect in contract only. The doctrine of relief against forfeiture could have no application to a Name's loss of the benefit of a deduction from his primary underwriting liability in respect of debt credits.

(3) The offer of a guarantee could not have satisfied J's obligations under the terms of the settlement agreement itself. Nor had correspondence between J and Lloyd's varied the terms of the settlement agreement.

(4) There was no substance in any of the submissions made by J to dispute the debt claimed by Lloyd's in its statutory demand and the application to set the demand aside would be dismissed.

(5) Although S's arguments had failed, submissions would be heard as to whether, in the light of the latest evidence of his financial position, a bankruptcy order should be made, having regard to the discretion conferred on the court by s.271(3) Insolvency Act 1986.