International Round Up

Markel International Insurance Co Ltd v Surety Guarantee

Consultants Ltd and others [2008] EWHC 1135 (Com)

Markel International Insurance Co Ltd, QBE Insurance (Europe)

Limited and Amalfi Underwriting Limited (collectively the

Claimants), brought proceedings in England's High Court against

Surety Guarantee Consultants Ltd (SGC) and its former directors and

employees. The claims related to surety bonds written by SGC that

exceeded limits set out in a binding authority and management

agreement (the Agreements) held by the Claimants with SGC. The

Claimants alleged they were exposed to greater liabilities than

agreed to, resulting in SCG obtaining excess premium payments.

Fraud and dishonesty by the employees was also alleged.

In handing down its judgment on 3 June 2008, the Court held the

Agreements on the surety bonds written by SGC had clear limits that

SGC had breached, enabling secret profits to be made at the expense

of the Claimants. The Court also found that there was an

inescapable inference that the bonds were overwritten in order to

defraud the Claimants by making secret profits, and that SGC had

misstated the amount of the Claimant's exposure.

The Court further ruled that SGC violated its fiduciary duty

through writing the unauthorised bonds and, in addition, the

employees were found to have breached their fiduciary duty by

conspiring to obtain secret profits which gave rise to a liability

in tort. Consequently, all defendants had to account for the secret

profits to the extent of loss incurred by the Claimants.

In respect of a defendant director of SGC, the Court held it

probable the director had suspicions regarding the legitimacy of

SGC's business but failed to pursue any investigations into the

matter. The Court ruled the director could not have honestly

believed that signing the bonds in excess of daily limits was

justified, and that the director's failure to ask questions of

other directors amounted to deliberately 'closing his eyes'

to the danger of signing the bonds. Such conduct exposed the

Claimants to a greater liability than was agreed. The recklessness

of the director as to the Claimant's interests amounted to a

breach of the director's fiduciary duty, as the director had

dishonestly assisted and enabled SCG to breach its fiduciary duty

in making secret profits.

In assessing the effect of the Agreements, the Court found that

a relationship of trust and confidence was established based on the

existence of personal names listed in the schedules of the

Agreements. Thus, the directors had duties as fiduciary to the

companies because of the trust and confidence placed upon them.

Consequently, the directors who procured a breach of the Agreements

were found liable in tort.

Implications

Where company directors and employees are involved in making

secret profits in circumstances where such practice is found to

constitute a breach of their fiduciary duty, each director will be

held liable to account for the full extent of those profits.

Directors and employees must be wary of deliberately 'closing

their eyes' to the practice of overwriting bonds as this may

constitute a breach of their fiduciary duty. Further, it is clear

that a mere...