|
The
settlement contained in a Tomlin Order had to be construed in its commercial
context and not literally, and on that basis the condition for drawdown
under a letter of credit had been satisfied and the beneficiary was
entitled to the proceeds accordingly.
Sirius
International, the Appellant in these proceedings, had provided reinsurance
to a Lloyd's syndicate in respect of certain liabilities which it had
"fronted" for the Respondent, Fai General, on "back to
back" terms. As part of the fronting arrangements Sirius had obtained
a letter of credit from Fai General as security. Sirius agreed in a
side letter not to draw down under the letter of credit unless, inter
alia, Fai General had agreed that Sirius should pay a claim to the Lloyd's
syndicate and had not put Sirius in funds to do so, notwithstanding
the simultaneous settlements clause in the retrocession contract.
The Lloyd's
syndicate had claimed against Sirius under the reinsurances and Sirius
had commenced an arbitration against Fai General. Fai General had subsequently
gone into provisional liquidation and the arbitration was automatically
stayed. Sirius applied to court to remove the stay and this was compromised
by a Tomlin Order.
In paragraph
1 of that Order, Fai General acknowledged that it was indebted to Sirius
in the sum of $22.5 million and that Sirius was entitled to prove in
Fai General's liquidation for that amount. The paragraph did not indicate
any agreement, though, on the part of Fai General that Sirius should
pay the claim to the syndicate, as required under the terms of the side
letter. Paragraph 4 of the Tomlin Order stated that all arguments of
Sirius and Fai General were preserved in respect of the proceeds.
The letter
of credit had been drawn down and the proceeds placed in escrow. Sirius
had then demanded payment of the proceeds on the basis that the conditions
on which Sirius could draw on the letter of credit had been satisfied.
Fai General refused and Sirius then commenced proceedings, which were
eventually appealed to the House of Lords.
Fai General
argued before the House of Lords that the conditions on which Sirius
could drawn on in the letter of credit had not been satisfied, since
paragraph 1 of the Order did not contain any agreement by Fai General
that Sirius should pay a claim to the syndicate. They argued that paragraph
1 of the Tomlin Order had to be read as subordinate to paragraph 4,
which preserved all arguments of Sirius and Fai General in respect of
the proceeds notwithstanding the terms of the Tomlin Order.
The House
of Lords unanimously disagreed and granted the appeal. The logic of
Fai General's position (that the parties' rights were reserved against
the other under paragraph 4 of the Order) was that Sirius had abandoned
the chance of ever fulfilling the conditions in the side letter. That
outcome was so extraordinary as to be commercially implausible. Paragraph
4 could not be read as leaving open the issues which paragraph 1 compromised.
Furthermore, although the literal words of paragraph 1 did not express
an agreement by Fai General that Sirius should pay the syndicate's claim
(as required under the side letter), the words of paragraph 1 meant
that there was such an agreement. The commercial substance was that
Fai General had agreed that Sirius should pay the claim. Therefore,
on a correct interpretation of paragraph 1 of the Tomlin Order, the
condition in the side letter was satisfied.
The case
demonstrates the reluctance of the courts to determine contracts too
literally where this would give rise to an uncommercial result. The
court emphasised that the settlement contained in the Tomlin Order had
to be construed as a commercial instrument. The aim of the enquiry was
not to probe the real intentions of the parties but to ascertain the
contextual meaning of the relevant contractual language. The enquiry
was objective and literalism should if possible be resisted in the interpretative
process.
The case
also underlines the importance of drafting Tomlin Orders with the utmost
care. It is regrettable that the drafting of a Tomlin Order should give
rise to satellite litigation which has to be taken to the House of Lords.
This could easily have been avoided with clearer drafting.
|