American Patriot Insurance Agency Inc. v Mutual Holdings (Bermuda) Ltd

• Jurisdiction: Bermuda
• Judgment Date: 09 July 2010
• Date: 09 July 2010
• Docket Number: Civil Jurisdiction 2003 No. 26,Civil Jurisdiction 2003 No. 26 And Civil Jurisdiction 2004 No. 196
• Court: Supreme Court (Bermuda)

In The Supreme Court of Bermuda

Storr AJ

Civil Jurisdiction 2003 No. 26

BETWEEN:

Mutual Holdings (Bermuda) Limited

Plaintiff

and

American Patriot Insurance Agency Inc and others

Defendants

Mr. P Smith for the Plaintiff

Mr. J Woloniecki for the Defendants

The following cases were referred to in the judgment:

Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co LtdELR [1915] AC 847

Jackson v Horizon HolidaysWLR [1975] 1 WLR 1468

Woodar Investments Development Ltd v Wimpey Construction UK LtdUNK [1980] 1 All ER871

Lenesta Gardens Trust Ltd v Lenesta Sludge Disposals LtdELR [1994] 1 AC 85

Darlington BC v Wilshier Norther LtdWLR [1995] 1 WLR 68

Alfred McAlpine Construction Ltd v Panatown LtdELR [2001] 1 AC 518

Knauf UK GmbH v British Gypsum LtdUNK [2002] 1 Lloyds Rep 199

Siporex Trade SA v Condel CommoditiesUNK [1986] 2 Lloyds Rep 428

Claim for monies payable — Specific performance — Insurance agreement — Rent a captive — Forum non conveniens — Leave to serve writ out of the jurisdiction — Preliminary issue — Application to set aside service — Disclosure of relevant matters

JUDGMENT of Storr, AJ

American Patriot Insurance Agency Ltd (“American Patriot”) is a licensed Insurance Brokerage Agency incorporated in Wisconsin which is now effectively owned by Defendants Kenneth and Diane Hendricks. Diane Hendricks was President of the Company until May 1998 when she was superseded by a Ms. Lysa Saran.

American Patriot set up an insurance programme to provide workers compensation and/or employers' liability to roofing contractors. This programme was designed to provide roofing contractors with specialist cover in respect of their particular risks.

In March 1997 an entity called Commonwealth Risk which described itself as an “MRM Company” offered to insure the American Patriot roofers programme in respect of workers' compensation, employment liability and other risks under a general management agreement. In short, this was to be a ‘rent a captive programme.’ Under this programme Legion Insurance Company was to issue the policies and Legion was, in turn, reinsured by Mutual Indemnity for all losses between Legion's retention and a predetermined percentage of the programme premium which limited Mutual Indemnity's liability to a certain sum. American Patriot was to be responsible for amounts between Mutual Indemnity's fixed liability and what was described as the ‘aggregated attachment point’. This was a fixed amount set out in the programme documents. American Patriot was to have no liability for amounts in excess of the aggregate attachment point.

In support of this programme, a Shareholder Agreement was executed said to be with effect from 23^rd March 1997 between American Patriot and Mutual Holdings which set out the manner in which the mechanics of the roofers' programme would operate. This agreement was subsequently amended on 17^th July 1998 with the object of substituting Kenneth Hendricks and Diane Hendricks for American Patriot in respect of all American Patriot's obligations under that Shareholder Agreement.

It is by virtue of this agreement that the Plaintiff seeks to recover either monies due or alternatively an accounting for monies payable and damages for breach of contract by the Defendants. Additionally the Plaintiff seeks specific performance of the obligations under the Shareholder Agreement. Mutual Holdings is described as the parent company of Mutual Indemnity. It is to be noted that it is Mutual Indemnity which reinsures Legion.

The purport of the Shareholder Agreement appears to be to allow American Patriot to participate in profits of the programme. On the other hand it contains provisions whereby American Patriot is to indemnify Mutual Holdings against losses which might occur under the Programme. In order to ‘back up’ this indemnity provision, American Patriot was required to provide security in the form of a clean irrevocable letter of credit in the sum of US$311,010.00 which was to be adjusted from time to time.

The Shareholder Agreement contains a choice of law clause in the following terms:-

‘This agreement is being made and executed in Bermuda shall be exclusively governed by and construed in accordance with the laws of Bermuda and any dispute concerning this agreement shall be resolved exclusively by the Courts of Bermuda.’

The present action was commence by Writ of Summons dated 31^st January 2002 whereby Mutual Holdings claims an indemnity in the sum of US$2,871,347.23 said to be due under the Shareholder Agreement, an account of any additional collateral of security deposit payable under the agreement, damages in respect of the freezing, in United States Courts, of letters of credit provided under the Shareholder Agreement and for specific performance of a further clause of that agreement.

Leave to issue the Writ for service out of the jurisdiction and for service of notice thereof was granted on 30^th January 2003. The Defendants now apply, by summons dated 19^th March 2003, for an Order that notice of service of that Writ and the service of the Writ be set aside pursuant to Order 12 Rule 8 of the Rules of the Supreme Court. The grounds of the application are:-

‘1. That a proper case by the Plaintiff has not made out, under Order 11 Rules 2 and 4 of the Rules of the Supreme Court for service of the Notice of Writ out of the jurisdiction upon any of the Defendants.

2. Further and/or alternatively that, the Plaintiffs failed to disclose all material facts to the court at the time leave was given for service of the Notice of Writ outside the jurisdiction.’

There is an alternative application that the proceedings in this action be stayed on the grounds of forum non conveniens.

Both the Plaintiff and Defendant accept that, in order to obtain leave to serve notice of the Writ outside the jurisdiction the Plaintiff must satisfy the court that the Plaintiff has a good arguable case and that there is a serious issue to be tried upon the merits.

The gist of the Defendant's claim is that as Mutual Indemnity is not a party to the Shareholder Agreement and as Mutual Holdings is not a party to any contract of reinsurance, Mutual Holdings cannot be entitled to an indemnity or to held harmless against anything under the contract of insurance or to claim an account in respect of monies payable to Mutual Indemnity which as a third party to the Shareholder Agreement.

In support of this proposition Mr Woloniecki quoted Viscount Haldane LC, in the case of Dunlop Pneumatic Tyre Co. Ltd. v Selfridge & Co LtdELR[1915] AC 847 at page 853 as follows:

‘My Lords, in the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus quaesitum terti arising by way of contract. Such a right may be conferred by way of property, as, for example, under a trust, but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam.’

Mr Woloniecki argued that the obligation to provide a letter of credit is owed, if ti si owed at all, by American Patriot to Mutual Indemnity and not to Mutual Holdings. Mutual Holdings cannot therefore claim an account in respect of an obligation owed to Mutual Indemnity which is not a party to the contract. Accordingly, Mr Woloniecki urges that Mutual Holdings cannot possibly have suffered any loss or damage as this is effectively a matter between American Patriot and Mutual Indemnity not Mutual Holding. In support of this proposition Mr Woloniecki cites Jackson v Horizon HoldingsWLR[1975] 1 WLR 1468.

Mr Woloniecki further argues that whatever the position under the Shareholder Agreement American Patriot cannot properly be a party to this present action. He asserts that Mr and Mrs Hendricks have now assumed all liabilities under the Shareholder Agreement by virtue of the Amendment of 17^th July 1998. The amendment includes the following provision:

‘New Shareholders shall assume all the rights duties and obligations of American Patriot Insurance Company under the Shareholder Agreement jointly or severally.’

However, the amendment is badly drafted and it is for the trial judge to decide whether or not it validly passes Patriots' responsibilities to Mr and Mrs Hendricks. For example, whilst the amendment recites the wish of Patriot to transfer its ownership of its own preferred share in Mutual Holdings to Mr and Mrs Hendricks, there is no express transfer of the share in the amendment. It may perhaps be implied. Further, the document purports to cancel the preferred shares but then goes on to say that Mr and Mrs Hendricks agree to buy the cancelled share for US$1000.00. It does not contain an express release of Patriot's liabilities. I am, therefore, not prepared to decide, at this stage, whether or not Patriot is properly a Defendant to this action.

The third limb of the Defendants' argument is that the disputes which have now arisen are not genuinely disputes under the Shareholder Agreement but are disputes under the contracts of insurance and reinsurance involving other parties. There are proceedings pending in various United States Federal Courts between the Defendants in these proceedings and various entities and individuals which are not party to the proceedings before this court. Those proceedings arise out of the operation of the insurance programme in the United States arising from the various policies of insurance which have been issued. The Defendants say that these are the true disputes in the case and that the choice of jurisdiction clause in the Shareholder Agreement is, therefore, not effective. It asserts that the real dispute is between the Defendants and other bodies and entities in the United States which allege fraud, negligence and breach of contracts to which Mutual Holdings is not a party. The nature of these disputes is such that they would not be amenable to applications under Order 11...