ARB International Ltd v Baillie: Mid-Term Broker Changes – Practice, Commission and Director’s Duties

Hextalls Ltd acted for Mr Robert Baillie, the former Managing Director of ARB International Ltd and the successful defendant in this action, in which the Lloyd’s broker sued him in respect of his conduct when agreeing a mid-term broker change (“MTBC”). The case was heard by Mr Robin Knowles CBE QC sitting as a Deputy High Court judge.

In reaching its decision, the court addressed for the first time:

• a broker’s entitlement to commission under declaration-based contracts for, as opposed to of, insurance; and

• whether there was any relevant standard market practice in relation to MTBCs and, if so, what this was.

The background to the claim was the decision of a major client of ARB’s to transfer a large book of marine cargo business to a new broker. The great majority of the business related to binding authorities, quota share treaties and declaration-based facultative covers.

In relation to a number of these contracts, Mr Baillie as the MD had agreed with the incoming broker that ARB would be entitled to commission on risks declared up to the date that the business was transferred to the new broker. It was alleged (wrongly as the judge found) that he had reached such an agreement in relation to all the transferred business.

ARB’s basic allegations were that Mr Baillie (who had been summarily dismissed on grounds of gross misconduct by reason of exactly the same allegations) was in breach of his duties as a director because, in reaching that agreement, he had deprived ARB of its legal entitlement to commission, and that by agreeing to the terms of the MTBC, Mr Baillie had flouted established market practice.

ARB argued that, as the broker at the time the contracts were placed, it was entitled to commission on all business placed under the contracts until their expiry, irrespective of whether ARB was replaced as broker during their currency. It further argued that the agreement reached by Mr Baillie flew in the face of established market practice as evidenced by guidelines issued by the London & International Insurance Brokers Association (“LIIBA”).

It was common ground between the parties that as regards what the judge called “simple policies of insurance or reinsurance”, commission was generally earned on inception. But, the defendant argued, this was not the case on declaration-based policies where the contract itself does not bind business which would be declared throughout the life of the contract and where the broker is required to administer the business declared throughout and after the period of the contract. Commission was earned when the business was ceded, bound or written, dependent on the particular type of contract.

The judge agreed with the defendant on this crucial point.

The judge further held that there was and is no relevant standard or established market practice as to how MTBCs should be handled, and specifically that the LIIBA guidelines did not establish such a practice. How an MTBC is to be handled will vary from case to case and broker to broker.

ARB also criticised Mr Baillie for agreeing to transfer files to the incoming broker before he had in place written agreements as to commission entitlement, but the judge held that “as part of its duty [a broker] was obliged to carry out its client’s instructions to transfer client files . . . promptly.” Moreover, the broker has no right to delay file transfers as a lever in negotiations about commission. On this, as on all other matters relating to the MTBC, Mr Baillie acted properly and in accordance with his duties as director.

This decision has for the first time addressed the question of when commission is earned on declaration-based business and the court’s decision accords with what the evidence suggested is common if not standard practice in the market when an MTBC occurs. Any broker that wishes to depart from what has been found to be the standard position on commission will need to reach specific agreement with its clients. As is common in the market, the contracts in this case were silent on the subject.

Hextalls Ltd briefed Mr Richard Harrison of Devereux Chambers to represent Mr Baillie in the case.

For further information, please contact David Hadfield or Dominic Lang – tel. 020 7382 0700.

About Dominic Lang