Article

Prior History: Sirius International Insurance Corp. v. FAI General Insurance Co. Ltd., 2 All ER (Comm.) 745 (Ch. Comp. Ct. 2002), abstracted at 2003 Annual Survey 271. Sirius International Insurance Corp. v. FAI General Insurance Co. Ltd., 1 All ER (Comm) 865 (Eng. C.A. 2003) abstracted at 2004 Annual Survey 331.

Note: When Agnew, a Syndicate at Lloyds, sought to reinsure its liabilities on an onshore energy policy, FAI General Insurance Co. Ltd., was interested but did not meet the credit requirements. Sirius International Insurance Corp., which was qualified, "fronted" this reinsurance coverage for FAI and then "retroceded" it to FAI. To cover the risk of FAI insolvency, Westpac Banking Corp. issued an LC subject to UCP500 for US$5 million on behalf of FAI in favor of Sirius.

A side agreement between Sirius and FAI, of which Issuer was unaware, provided that a claim by Agnew would not be paid nor would Sirius draw on the LC without FAI's prior written approval unless either FAI "agreed that Sirius should pay a claim but has not put Sirius in funds to do so, notwithstanding the simultaneous settlements clause in our retrocession contract or ... [Agnew] obtains a judgment or binding arbitration award against Sirius which Sirius is obliged to pay." The agreement, which was not included in the letter of credit, also provided that "FAI has already agreed to a simultaneous settlements clause which provides that FAI shall pay their share of any loss under the retrocession simultaneously with Sirius' payment to Agnew."

When Agnew filed a claim against Sirius, a dispute arose as to whether Sirius or FAI would pay the claim. It was agreed that Agnew's brokers, Lambert Fenchurch Ltd., would fund Agnew's obligations and it was given the right to pursue Sirius' rights under the retrocession. As a result of the insolvency of FAI, Sirius and FAI agreed to a court order to the effect that Sirius would draw on the LC and place the money in an escrow account until the disagreement concerning the LC was resolved. The first section of the agreed order stated that "[FAI] is indebted to the applicant Sirius in the sum of US$22,500,000 and the applicant shall be entitled to prove in the liquidation or scheme of arrangement of FAI in the said sum of US$22,500,000."

When proceedings were commenced regarding the escrowed sums, the High Court of Justice Chancery Division Companies Court, Jacob, J., ruled that the agreement of FAI regarding the debt, which was the first condition of the agreed order, was met by the term of the contract in the agreed court order as to the amount due Sirius. FAI appealed and Sirius cross appealed. The UK Court of Appeals, Civil Division, May, Carnwaith, and Wall, JJ., granted FAI's appeal, reversed the decision of the trial court, and dismissed Sirius's cross-appeal, ruling that the first condition was not satisfied by the agreed order and that FAI was entitled to the LC proceeds. Sirius appealed.

The House of Lords, Lords Bingham, Nicholls, Steyn, Walker, and Brown, allowed the appeal, reversed the decision of the appellate court, and reinstated the trial court decision. The House of Lords ruled that the first condition of the agreement between Sirius and FAI was satisfied by the court order and that FAI was indebted to Sirius and, by virtue of the back to back retrocession, to Agnew. Noting that "[t]here has been a shift from literal methods of interpretation towards a more commercial approach." Lord Steyn quoted Lord Diploch in Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 to the effect "if detailed semantic and syntactical analysis of a word in a commercial contract is going to lead to a conclusion that flouts business common sense, it must be made to yield to business common sense." He then stated "[t]he tendency should therefore generally speaking be against literalism." He noted that the commercial interest of the parties was to avoid a long and costly arbitration and "to obtain a draw down of the letter of credit on terms which left open the issue of the entitlement of the proceeds of the draw down." He concluded "it is ... clear that the words of [the court order] necessarily meant that FAI agreed that under the back to back reinsurances and the simultaneous settlements procedure, that Sirius should pay Agnew." Lord Walker, concurring, quoted the trial court in ruling that "[t]he commercial substance is that FAI had agreed that Sirius should pay a claim."

[JEB/lhd]

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