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	England and Wales High Court (Administrative Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Administrative Court) Decisions >> Ludgate Insurance Company Ltd v Citibank NA [1998] EWHC 1144 (Comm) (26 January 1998) URL: http://www.bailii.org/ew/cases/EWHC/Admin/1998/1144.html Cite as: [1998] EWHC 1144 (Comm), [1998] Lloyd's Rep IR 221

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IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION
(COMMERCIAL) FINAL LIST
(MR JUSTICE WALLER)

		Royal Courts of Justice Strand London W2A 2LL
		26th January 1998

LORD JUSTICE BROOKE:

1. This is an appeal by the Plaintiffs, Ludgate Insurance Company Ltd ("Ludgate"), against a judgment by Mr Justice Waller on 25th April 1996 in which he dismissed all their claims against the Defendants, Citibank (SA) ("Citibank").
2. The Plaintiffs' claims arise out of a dispute between the parties which followed the collapse of certain companies trading in the London insurance market in the early 1990s. Ludgate, in short, contends that Citibank is wrongly retaining too much by way of collateral deposits in support of Letters of Credit it has issued and that it has also wrongly debited interest charges to its account.
3. The background history to this dispute relates to the underwriting activities of H S Weavers (Underwriting) Agencies Ltd ("Weavers", sometimes called "HSW"), which traded as underwriting agents between 1963 and March 1990 when it ceased writing any further insurance business. It went into liquidation in August 1992. At all material times Weavers provided an underwriting service for UK and overseas insurance companies which wished to participate in the London insurance market. The companies for whom it acted as an underwriting agent entered into agency agreements with it. These companies were often called "stamp companies", although not all such companies appeared on the Weavers stamp. These agreements gave Weavers authority to accept business on their behalf, settle claims and arrange reinsurance programmes either collectively or individually. These companies became known in the context of this case as Weavers' Principals.
4. Weavers' business steadily expanded, particularly after its take-over by London United Investments plc ("LUI") in 1971. Following this take-over, Weavers became the underwriting agent for the insurance companies in the LUI group, the most notable of these being companies called Walbrook, Kings Croft, El Paso, Lane Street and Mutual Reinsurance (later called the KELM or KWELM companies, depending on whether Walbrook was included). It also continued to perform underwriting services for non-LUI group companies, but from the time it joined the LUI group, its prominence in the field of North American Casualty and Professional Indemnity insurance increased rapidly, to such an extent that by the mid-1970s it had become one of the acknowledged leaders in these fields.
5. At all material times, therefore, until March 1990, Weavers was engaged in underwriting casualty, liability and property insurance and reinsurance emanating mainly but not exclusively from the United States. The underwriting was evidenced by an underwriting stamp which showed the different insurers' respective 'gross' participation in the risks being underwritten. Behind the companies which appeared on the stamp were a number of other insurance companies who were participating by way of quota share reinsurance of the companies on the stamp. Some of the latter companies had appointed Weavers as their underwriting agent. Others had not. In general Weavers treated these quota share reinsurers as part of the stamp.
6. The composition of the stamp and the extent of the participation of each stamp company (including those participating by way of quota share reinsurance) varied from time to time. Changes would occur when a stamp company departed or a new company arrived, or when an existing stamp company wished to increase or reduce its participation. There were separate 'stamps' for casualty and liability business and for property business. This form of trading continued until 26th March 1990 when the Secretary of State directed that LUI and its subsidiary insurance companies should take on no new insurance business. Two months later an administration order was made in respect of LUI, and several of the LUI group insurance companies, including the last four of the five mentioned above, went into provisional liquidation in due course. They were followed in August 1992 by Walbrook, which had been Weavers' principal stamp company.
7. This appeal is concerned with the operation of the London Market Letter of Credit scheme. This scheme was operated by Citibank from 1964 onwards, and it enabled reinsurers in the London market (and, later, other European reinsurers) to conduct reinsurance business in the United States. In that country insurance companies are regulated at state level, and state regulators make certain requirements of a US direct writing company or reinsurer who has reinsured any part of its risk portfolio with a non-domestic reinsurer, both in relation to outstanding claims and to unearned premium. If a claim is made, the non-domestic reinsurer must be promptly told of its share of the claim and required to put up security for that amount. As to unearned premium, although US insurance companies offer to pay reinsurance premiums annually in advance, they require Letters of Credit to be opened in their favour to cover the portion of the premium still to be earned by the reinsurer in order that their balance sheets will not be negatively affected. The London Market scheme enabled participants to substitute Letters of Credit for cash advances for both these purposes.
8. Weavers were from time to time required to establish irrevocable Letters of Credit for these two purposes on business emanating from the United States which it accepted on behalf of its Principals. Until 1989 the standard form of request to Citibank was in the following terms, so far as is material:

"2. To meet payments under the Credit, the undersigned applicants have transferred and delivered to you at your London, England branch a Reinsurance Deposit of an amount in United States [or Canadian] currency at least equal to the face value of the Credit requested, such amount to be applied by you on the terms of the agreement hereinafter set forth.

3.. You are to utilise the Reinsurance Deposit for the payment of any and all sums which may be drawn upon you under the Credit by the beneficiary, plus your commissions and any and all charges and expenses which you may pay or incur relative to the Credit, and no part of such amounts shall be repaid, and no interest thereon shall be paid to us unless and until all such sums have been paid to you in full.

4.. Also in the premises, the undersigned applicants agree to pay to you on demand at your London branch office any sum or sums as required by the foregoing paragraphs remaining unsettled in your favour after the said Reinsurance Deposit may have been exhausted."

9. That the Principals' liability in relation to the Letters of Credit was a joint liability was later put beyond doubt by Clauses 1, 3(b) and 9 of a Master Agreement dated May 1989, by which Ludgate was bound, which was expressed to apply also to all Credits already established by Citibank at Weavers' request.
10. The Letters of Credit which Citibank issued at Weavers' request showed no breakdown of the liability as between the various stamp companies and other companies which underwrote through the Weavers underwriting pool. Sometimes the stamp companies were the only reinsurers participating on a Letter of Credit, and on other occasions non-Weavers reinsurers also took part.
11. In order to ensure it was properly secured when it issued a Letter of Credit, Citibank required Weavers to maintain deposit accounts with the bank in London. If a Letter of Credit was drawn down in the United States, the London office of Citibank, on receiving notice from the New York office, would draw down on the Weavers accounts to meet Weavers' share of the drawing under the Letter of Credit. Weavers would ensure that the accounts had sufficient money in them to meet any liability which arose on such a draw down. The system worked well until the events which followed the Secretary of State's direction in March 1990.
12. The Plaintiff company, Ludgate Insurance Company Limited, was incorporated in 1981 as a wholly owned subsidiary of MMI Companies Inc. It entered into an agency agreement with Weavers in November 1981, and from its inception it underwrote all its insurance business through the Weavers underwriting pool. Its share of the Weavers stamp between 1982 and 1987 varied between 4% and 6%. It terminated its membership of the pool on 31st December 1987, and participated in 1988 only by way of two quota share reinsurance agreements, one being made with Walbrook and the other with another company. After 31st December 1988 it took no further part in the pool. On 3rd August 1992 Ludgate was bought by new owners, and five weeks later it removed any remaining authority from Weavers.
13. Until 1986 Ludgate's liabilities in respect of any Letters of Credit issued by Citibank on Weavers' instructions (and on the instructions of all the other Principals in the Weavers pool) were secured by cash deposits deposited by Weavers in accounts in its name. These accounts were sometimes described as the Weavers pool account. Weavers had direct control over its Principals' collateral and it ensured that the pool account stayed in credit to the extent that it could meet any drawings under the Letters of Credit.
14. In 1986, however, there was a change in these arrangements, so far as Ludgate and certain of the other Weavers Principals were concerned. They followed some of the other leading Principals in taking steps then to establish segregated collateral accounts in their own names, even though Weavers retained its authority to give instructions to Citibank in relation to the money in those accounts. The dispute in this case turns on the interpretation of the letter of agreement between Ludgate and Citibank dated 9th December 1986 whereby Ludgate's segregated accounts were opened for the first time that month, and the way in which Citibank has purported to exercise its discretionary powers under that agreement in the events that have occurred.
15. Clause 1(i), (ii) and (iii) and Clause 2(i) and (ii) of the agreement are in the following terms:

"1. We [Ludgate] refer to:-

(i) the sundry letters of agreement ("the Agreement(s)") now or hereafter entered into by you [Citibank] with H.S.Weavers (Underwriting) Agencies Limited ("HSW") in respect inter alia of any letters of credits ("Credit(s)") now or hereafter issued by any

branch of Citibank NA ("the Bank") on behalf of and for the account of HSW;

(ii) the accounts with the Bank in our name now or hereafter established by us with the Bank for the purposes hereof ("the Account(s)"); and

(iii) the proposal that the Bank agrees to waive in part its requirement that HSW maintains certain deposits with the Bank in connection with the Agreement(s) on condition inter alia that we maintain certain deposits with the Bank which, taken together with the deposits which HSW continues to maintain with the Bank, at least equal the amount required to be deposited by the terms of the Agreement(s).

2. We hereby offer to agree with you as follows:-

(i) we shall maintain in the Account(s) a deposit or deposits equal in aggregate amount to that portion of the Bank's actual or contingent liability under the Credits as is notified to the Bank by HSW from time to time as attributable to our interest in the Credit(s) and

(a) we shall be deemed to have requested the Bank to assume such liability under the Credit(s) for our sole account on the same terms and conditions mutatis mutandis as the Agreement(s) and (b) we shall not be entitled to withdraw any monies from the Account(s) that would result in a breach of the foregoing requirement, Provided Always that if HSW fails to so notify the Bank or the Bank is in receipt of conflicting or ambiguous instructions from HSW or otherwise it would appear to the Bank that the monies in the Account(s) and in the account(s) of HSW held or established pursuant to the terms of the Agreement(s) would not together equal 100% of the Bank's actual and contingent liabilities (as aforesaid) then the Bank shall be entitled to retain in the account(s) such additional margin as it considers appropriate in all circumstances until a solution satisfactory to it is effected in respect thereof;

(ii) we irrevocably authorise the Bank (without prior notice to us) to debit the Account(s) from time to time for the payment of any and all sums which may be drawn under any of the Credit(s) by any beneficiary thereof in such manner as may be notified to the Bank by HSW Provided Always that if HSW fails to so notify the Bank or the Bank is in receipt of conflicting or ambiguous instruction(s) from HSW the Bank shall

(a) advise us in writing of such circumstances and (b) in the absence of a solution satisfactory to it being effected within such period as the Bank considers reasonable in all the circumstances, the Bank may allocate the drawing(s) under the Credit(s) between us and HSW in such manner as the Bank considers appropriate in its sole discretion."

16. The agreement therefore limited Ludgate's obligation to maintain sums on deposit to sums equal to that part of Citibank's actual or contingent liability under the Letters of Credit as was notified to Citibank by Weavers from time to time as attributable to Ludgate's interest in the credits unless one or other of what the judge described as the "trigger events" occurred. If such an event occurred, then Citibank would be entitled to retain such additional margin as it considered appropriate in all [the] circumstances until a solution satisfactory to Citibank was effected. The judge held that the first of the trigger events had indeed occurred, since Weavers had failed to notify the bank in the manner provided for by the agreement. Ludgate now accepts that he was correct in so holding. There was a continuing dispute before us as to whether the judge was correct in holding that the third trigger event had not occurred.
17. Before considering the issues on this appeal, it is necessary to say a little more about the history after December 1986. During 1989 Citibank and many of Weavers' Principals became concerned about the solvency of both Weavers and the insurance companies in the LUI group which formed the backbone of the Weavers 'stamp'. As a result, Citibank completely restructured its relationship with Weavers in relation to the issuing of Letters of Credit. Weavers and a number of its Principals who had significant liabilities under Letters of Credit were now obliged to enter into new agreements. These related to the establishment of new types of reinsurance deposits to secure the Letters of Credit, and the charging of those deposits to secure Weavers' liabilities and the liabilities of all its Principals whose funds were so charged. Ludgate's agreement in the event remained unchanged, a matter on which Ludgate relies in these proceedings, although it was, as I have said, bound by the terms of the new Master Agreement for Insurance Letters of Credit which Weavers executed for itself and its Principals at the same time.
18. The concerns I have mentioned were justified in the end. When the principal LUI companies and Weavers all stopped underwriting in March 1990, the orderly administration of the run-off of the Weavers underwriting pool became a matter of major concern to Citibank. Weavers no longer provided information on the agreed monthly basis about the liabilities of its Principals for Letters of Credit issued by Citibank. Instead, this information flowed through to Citibank irregularly in the manner I will now describe.
19. In September 1990 Weavers transferred a large part (but not all) of its business to a new company called Southwark Run-off Services Ltd ("SROS"), which was a wholly owned subsidiary of Walbrook. Weavers did not formally assign its agency agreements to SROS. Instead, it secured the future servicing of business it had underwritten in the past by making an agreement with SROS. It was apparently intended by both Weavers and SROS that SROS should provide the information Citibank required under the agreement, but Citibank acquired no contractual rights to obtain information from SROS, and there was evidence before the judge to the effect that Citibank had doubts about the quality of the information which would be coming from SROS because several key members of Weavers' staff did not move to SROS but went to work for another company. Between September 1990 and June 1992 SROS supplied relevant notifications to Weavers, and Weavers sporadically transmitted information so notified to Citibank. Shortly after SROS's appearance on the scene the idea of definitively segregating the liability of Weavers' Principals for their respective shares in the Letters of Credit was first mooted.
20. The emergence of these difficulties in 1990 does not appear to have caused any significant problems, either from the point of view of drawing down on the Letters of Credit or of Citibank's ability to reimburse itself following such drawdown. At all material times until the present day the total collateral held by Citibank has exceeded by a substantial margin all the liabilities assumed by Citibank under all the Letters of Credit issued at Weavers' request. The difficulty confronting both Citibank and Weavers in 1990 was how to allocate the liabilities between the different categories of Principals who were participating in the Weavers' underwriting pool. Citibank understandably wanted to receive regular information identifying each Principal's share of liability under the outstanding Letters of Credit. From the information provided during 1990 Citibank was able to determine that although the total collateral it held comfortably exceeded all its liabilities under the Letters of Credit there were a small number of Principals with a shortfall in collateral, if assessed individually. Citibank was therefore concerned that although the segregation exercise being contemplated would show that many Principals had surplus collateral, others would not have enough to cover their individual liabilities. For this reason the bank was only willing to proceed with a segregation exercise if the latter made good their collateral shortfall or if the former funded the deficiencies. Citibank has always favoured segregation provided that an agreed solution on one or other of these lines could be found.
21. The judge described some of the technical difficulties they encountered in these terms:

"A great deal of time and effort was expended on the segregation exercise. If it had been achieved, this dispute would not have come this far. One complicating factor has been the fact that not all of HSW's Principals actually appeared on the "stamp" when HSW's underwriters subscribed to a risk. Even for those who did appear on the stamp the ultimate net share of that risk may have been different from the gross share indicated on the "stamp". The web of inter-Principal reinsurances, outside quota share reinsurances and facultative excess of loss reinsurances produced a sharing of ultimate liabilities between many more insurers. The description "gross stamp" was applied to the HSW stamp companies proper and reflected each companies' agreed percentage participation. The description "net stamp" was applied to HSW stamp companies proper together with their whole account quota share reinsurers. HSW treated these reinsurers as if they were stamp companies. This led to HSW keeping their accounts on a net stamp basis rather than a gross stamp basis. However, Citibank wished to have the segregation exercise carried out on a gross stamp basis. The collateral position of Principals differs depending upon whether net or gross accounting is adopted."

22. Eventually Citibank formally wrote to all the Weavers Principals on 22nd May 1992. In this letter the bank announced that no new Letters of Credit would be issued at Weavers' request and that the amount of existing Letters of Credit would not be increased. It also indicated that it would be prepared to consider requests for the release of collateral on certain conditions. In this letter the bank provided information about the proposed segregation exercise and enclosed a Questionnaire inviting Principals to indicate whether they supported this exercise. Ludgate, like some of the other Principals, did not respond to this letter at all.
23. The conditions for the release of collateral became known as the "acid test". This test made the following requirements:

"1) written confirmation from HSW (supported by financial data) that the principal requesting the release of surplus collateral does have a specified amount of surplus collateral over its share of letter of credit obligations (calculated on both gross and net bases of accounting);

2) a written statement from HSW (based on its data) of all principals which have collateral (or shares of collateral) smaller than their respective shares of letter of credit obligations (on both bases of accounting), and a written computation to determine whether the sum of such shortfalls is greater on a gross or a net basis of accounting;

3) the amount to be released to the relevant principal will be the amount remaining after the deduction of (a) the larger figure computed under (2) above from (b) the smaller figure computed under (1) above."

24. There is another aspect of the history which should be mentioned. When the court appointed administrators to the KELM companies, orders were obtained which were believed to have the effect of preventing Weavers from transferring sums from their deposits to meet this liability for sums drawn down under the Letters of Credit. For a while Walbrook's deposit account funded the KELM companies' share of the drawings, but Citibank perceived that the continuation of this practice might drive Walbrook closer to insolvency. Citibank therefore sought advice as to how it could resume enforcing its security so far as the KELM companies were concerned, and it was advised that provided that debts were due to Citibank on an overdraft once Letters of Credit were drawn down, it would be able to enforce its collateral from those companies. As a result steps were taken to ensure that the Pool Account at Citibank went into overdraft. In 1992 this overdraft became larger than it might otherwise have done due to the absence of instructions from Weavers. On 16th June 1992 Weavers purported to give instructions to Citibank, after having omitted to do so for many months, but Citibank felt unable to accept these instructions for technical reasons, so that the overdraft continued to rise, thereby occasioning substantial interest charges on the overdrawn Pool Account.
25. In early August 1992, the month when Walbrook was placed in provisional liquidation and Weavers went into liquidation (thereby terminating all the Agency Agreements with its Principals), the new owners of Ludgate, which was put into run off but has always remained solvent, immediately adopted a more aggressive approach towards the company's efforts to have funds released by Citibank. At the same time, with Weavers now in liquidation and a mounting deficit on the Weavers Pool Account, the bank became concerned to see whether it was possible to achieve some apportioning as between the different Principals, so that the overdraft could be paid off by drawing on their accounts. To this end it wrote to Weavers on 18th September 1992, referring to the deficit on the Pool Account and requesting it to notify it of Pool members' liabilities in order to open the way for apportionment of this debit balance between the different segregated accounts. No such information was forthcoming, and indeed Weavers supplied no information of any kind to Citibank after it went into liquidation. In October 1992 Citibank approached SROS direct and received information from it direct for the first time. The judge found that this information was furnished on terms and understandings different from those which had prevailed while Weavers were supplying the information. In particular, SROS would not verify the figures for companies other than the KWELM companies and one other company whom it represented, and no agreement has ever been forthcoming from all the former Weavers Principals that the figures furnished by SROS and its successor are 100% accurate.
26. On 12th October 1992 Ludgate told Citibank that it saw no reason why it should provide collateral beyond the amount of its liability. It also made certain other requests, but following correspondence and meetings on these topics, Citibank wrote to Ludgate on 6th November 1992 to the effect that it did not accept that Ludgate's maximum exposure related purely to its own liabilities. Instead, it maintained that it had the right to retain Ludgate's segregated collateral pursuant to the terms of the letter dated 9th December 1986; that in the absence of a solution it found satisfactory, it had the right to allocate drawings in such manner as it considered appropriate in its sole discretion; that unless and until a segregation exercise was agreed between all Principals, the release of collateral could only be obtained on the basis of the acid test; and that it hoped that a solution which lay in the hands of the Principals, as opposed to Citibank, could be achieved.
27. A week later Citibank told all the Principals that in the absence of advice from Weavers, it would use its power to apportion drawings between Principals unless some other arrangement it found satisfactory was devised. It added that it considered it appropriate to use figures for this purpose which SROS was then furnishing to it directly. It referred to the possibility of releases of collateral pursuant to the "acid test" (which was modified slightly) and added that it believed that this was a conservative basis for collateral release and that it intended to adhere to it for the immediate future. It would be pleased to consider a less conservative basis in due course, provided that none of the Principals objected to it. It believed that its action was equitable to Principals and that it was the best solution open to all parties until such time as Principals were able to conclude full segregation on a mutually agreed basis.
28. None of the Principals suggested in reply that Citibank did not have the power to apportion drawings, and in particular there was no suggestion at that time from Ludgate that Citibank was actually receiving notifications which counted as notifications from Weavers. On the contrary, Ludgate wrote to Citibank on 26th November 1992 accepting that it had the power to apportion and telling it that they broadly supported the approach it was taking in that regard.
29. On 18th December 1992 SROS sold its assets and transferred its business to a company called KWELM Management Services Ltd ("KMS"). A month later Citibank told the Principals that it intended to use the information supplied by KMS in place of that previously supplied by SROS.
30. Citibank went on trying to achieve an equitable result as between Principals but it was unable to achieve agreement across the board. Ludgate continued to insist that its surplus collateral should be released, and eventually the writ in this action was issued on 14th January 1994.
31. There were originally three main issues arising for our decision on this appeal. In the event Mr Rowland accepted that the first of the trigger events mentioned in the 1986 agreement had indeed occurred when Weavers stopped notifying the bank of the information required from it under the agreement and the bank never agreed to accept an alternative supplier of information. He argued, however, that the manner in which the bank was entitled to exercise its discretion under the agreement depended critically on the nature and identity of the trigger event that had occurred. In the circumstances he said that since SROS and KMS were simply following in Weavers' tradition and the information these companies provided was in every respect comparable to that provided by Weavers, this was an important factor to take into account when assessing Citibank's conduct when exercising its discretionary powers. The other two issues on the appeal go to the manner in which Citibank in fact exercised its powers under the proviso to clause 2(i) and the question whether it was entitled to debit Ludgate's account for interest debited to it by SROS and KMS when it allocated the drawings under the credits pursuant to the authority given to it under the proviso in clause 2(ii).
32. In my judgment the first issue which arises for decision on this appeal is quite simple. Mr Rowland resolutely maintained that the only purpose of the December 1986 agreement was to ensure that Ludgate maintained collateral sufficient to secure its own liabilities under the Letters of Credit. I have no doubt that if everything had continued to go well, Citibank would never have dreamed of looking to Ludgate to secure the liability of other Weavers Principals. But that it reserved the right to do so under the proviso to Clause 2(i) of the agreement I have not got the slightest doubt. The three trigger events all presuppose a situation in which things are not going well. Either Weavers will not be notifying Citibank at all or the bank will be in receipt of conflicting instructions from Weavers, or for some other reason it will appear to the bank that the monies in the new Ludgate account or accounts and in the accounts of Weavers do not together equal 100% of the bank's actual or contingent liabilities. In such a situation, where almost by definition Citibank would be legitimately worried that it might not have sufficient collateral to secure its liabilities under all the Weavers Letters of Credit, the agreement gave the bank the additional discretionary powers whose exercise is at the heart of the dispute.
33. Mr Rowland was quite unable to explain the reference in the proviso to clause 2(i) to all the bank's actual and contingent liabilities (as opposed to that portion of them attributable to Ludgate's interest in the Credits) if the agreement was to be interpreted as restrictively as he maintained, and I do not accept that on the proper construction of the Agreement the bank's discretionary powers were to be exercised for different purposes depending on the particular trigger which operated to bring them into effect.. Whether it was completely clear in 1986 that Ludgate was potentially liable for the full amounts drawn down under the Letters of Credit, subject of course to recourse to all the other solvent Principals in respect of sums in excess of those for which it had expressly accepted the risk, this question was put beyond doubt by the terms of the 1989 Master Agreement by which it was bound.
34. For the sake of completeness I would add that I accept Mr Butcher's submission that the judge was wrong to hold that the third trigger event mentioned in the proviso to Clause 2(i) had not also occurred. The expression "The account(s) of HSW held or established pursuant to the terms of the Agreement(s)" can only, on any ordinary interpretation of the agreement, mean the accounts held in Weavers' own name. The expression "The Agreement(s)" is specifically defined in Clause 1(i), and cannot extend to agreements made by the bank with other Weavers Principals, and "the account(s) of HSW" or "account(s) in the name of HSW" are mentioned in Clause 2(iv) and (v) in contexts in which they could not possibly be taken to include the segregated accounts of other Weavers Principals. Mr Rowland objected that on this interpretation this trigger event occurred as soon as the December 1986 agreement was executed since so much money had by then been diverted from the Weavers pool account to the segregated accounts of other Weavers Principals, but I do not see how this consideration can deflect the court from giving the words the meaning they naturally bear.

Indeed, any other approach to construction would involve substantially rewriting the agreement.

35. It is very well established that the circumstances in which a court will interfere with the exercise by a party to a contract of a contractual discretion given to it by another party are extremely limited. We were referred to Weinberger v Inglis [1919] AC 606; Dundee General Hospitals Board of Management v Walker [1952] 1 All ER 896; Docker v Hyams [1969] 1 Ll R 487; and Abu Dhabi National Tanker Company v Product Star Shipping Company Limited [1993] 1 Ll R 397 ("The Product Star"). These cases show that provided that the discretion is exercised honestly and in good faith for the purposes for which it was conferred, and provided also that it was a true exercise of discretion in the sense that it was not capricious or arbitrary or so outrageous in its defiance of reason that it can properly be categorised as perverse, the courts will not intervene.
36. Mr Rowland sought to derive comfort from some of the language used by Leggatt LJ, with whom the other members of this court agreed, in The Product Star at p 404 in support of a contention that the courts are more ready today to apply a standard of objective reasonableness when assessing whether a discretionary decision can stand. That Leggatt LJ had not the slightest intention of watering down the well-established test is manifest from the passages of his judgment (at pp 405 RHC; 406 RHC; and 407 RHC) in which he applied the law to the facts, where it is clear that he is using the epithet "unreasonable" to characterise a view which no reasonable decision- maker could reasonably have formed on the material before him.
37. Given, therefore, that the bank was entitled to retain in the segregated Ludgate account such additional margin as it considered appropriate in all the circumstances, in the absence of a satisfactory solution being found, there appears to be no ground on which Citibank can properly be faulted in a court of law for exercising its discretionary power in the way it has. The judge described Citibank's dilemma in these terms:

"The difficulty for Citibank is that they are dealing with Principals in relation to whom, by reference to their own liabilities, Citibank are amply secured, and in relation to others, where they are not. What is more, the Principals cannot agree as between themselves who and in what proportions the shortfall, in relation to those Principals where there is a shortage, should be borne. If one Principal like Ludgate were to obtain the whole of its surplus, the effect as I see it would be that there would then have to be a recalculation of surplus or shortfall so far as all other Principals were concerned. If other Principals came along who had a surplus and demanded payment, that would again lead to a further recalculation. That would ultimately lead to a situation in which those with surplus who were last in making a demand for their collateral would have to bear all the shortfall of those who were in debit.

What accordingly Citibank have done is to apply as they concede a very conservative attitude i.e. "the acid test" in the hope that the Principals will get together to provide a solution equitable as between themselves and a solution which will by virtue of the agreement not be attackable by any other Principal.

Ludgate has not itself found it possible to agree to release of surplus to other Principals without a solution being found in relation to its own surplus. That may well have been a perfectly reasonable attitude from Ludgate but it demonstrates the difficulties which Citibank are in.

It does not seem unreasonable to me for Citibank to maintain a conservative attitude in relation to security. The monies that they hold are earning interest and what Citibank are entitled to do is to insist on Principals working out a method whereby Citibank remain adequately secured and are relieved of any fear that they may be attacked by other Principals for having released collateral in circumstances which would impose higher liabilities on other Principals."

38. I agree and I would dismiss the appeal in this regard.
39. I turn next to the dispute which relates to the charging of interest. Until things started going wrong in the early 1990s, no issue about interest had ever arisen. Drawdowns were made on the Letters of Credit in New York, Citibank (New York) notified Citibank (London), and Citibank (London) drew the appropriate sum from the Weavers Pool Account. Even if there was a short time-lag before this was done, it was treated for all material purposes as if it was done on the same day. In so far as the holders of any of the segregated accounts had incurred any of the relevant liability, Weavers would transfer the necessary funds into the Pool Account. They would not necessarily draw on the relevant Principal's account immediately if this might involve incurring charges for breaking a time deposit: instead they might draw on the account of another Principal where money was immediately ready for transfer. Weavers kept a ledger for accounting purposes, which it called its Pool Account, in which it noted the true position as between itself and the different Principals and made appropriate adjustments to the funds in the different Citibank deposit accounts when it was convenient to do so. The broad brush view seems to have been taken that since each Principal was likely to be treated in the same way over a period of time, the position should not be further complicated by Weavers making notional interest charges as between the different Principals and itself in its pool account ledger. At one stage during argument the epithet "chaotic" was applied by counsel to the manner in which Weavers latterly maintained its books, but since all the Principals were trading profitably no very searching questions seem to have been asked about Weavers' accounting methods.
40. From 1990 onwards this position changed in two ways. First, when Citibank decided that it was expedient to create an overdraft on the Weavers Pool Account in order to enable it to draw n the KELM deposits, it rewrote a large number of the past entries so as to make an interest charge for the period between the time Citibank (New York) permitted a drawdown on a Letter of Credit and the time Citibank (London) reimbursed itself from the Weavers Pool Account. We were told that this change did not itself give rise to any real dispute so far as Ludgate was concerned. The position was quite different, however, when SROS decided unilaterally to charge and credit interest as between the different Principals in respect of any period when one Principal's deposit account was being drawn upon for the benefit of another.
41. For much of the time between 1990 and 1992 Ludgate was in debit on the Weavers pool account ledger, which was of course being maintained by SROS from September 1990 onwards, although the Citibank deposit account in its name remained in credit. This reflected the fact that money belonging to other Principals was being drawn down to meet what were in due course shown to be Ludgate's share of the liabilities under the Letters of Credit, and SROS then made what it considered to be appropriate charges for interest against Ludgate's name in its ledger. This process worked to Ludgate's disadvantage, since it was being charged interest at the overdraft rate in SROS's pool ledger account while it was only being credited with interest at the lower deposit account rate on its own credit balance in the Citibank deposit account.
42. Against this background, Ludgate complains about the way in which Citibank exercised its power to allocate the drawings under the Credits between it and Weavers under Clause 2(ii) of the December 1986 agreement once Weavers had stopped notifying the bank of the way in which it ought to be debiting Ludgate's account.
43. Mr Rowland has founded his argument on a submission that Clause 2(ii) gave Citibank no authority to draw on Ludgate's deposit account for interest at all: he maintains that the provisions of that sub-clause restricted it to making debits for the payments of sums drawn down under any of the credits. It was never envisaged that any of these accounts would be in overdraft, and there was therefore not surprisingly no authority provided in the agreement for authorising the debiting of interest charges.
44. In my judgment the judge was correct to reject this argument. If Weavers had maintained the arrangements SROS initiated for allocating interest liabilities as between Principals when it was using one Principal's money to satisfy the liability of another for sums drawn down under one of the Credits, there could have been no question but that Weavers would have been entitled to give a notification to Citibank to debit Ludgate's account at an appropriate moment in an amount which incorporated these interest charges. Once Weavers disappeared from the scene and Citibank obtained its discretionary powers under Clause 2(ii) of the 1986 agreement it was entitled to allocate the drawings under the credits as between the Ludgate and Weavers accounts in such manner as it considered appropriate in its sole discretion. In my judgment there was nothing capricious or arbitrary about the bank's decision to adopt the SROS approach, and indeed it appeared to be no part of Mr Rowland's argument that SROS was not adopting a reasonable approach. He confined his challenge to his submission that Citibank was simply not entitled, on the proper construction of Clause 2(ii) to adopt this method of allocation, and in my judgment this challenge fails for the reasons I have given.

LORD JUSTICE MUMMERY: I agree.

SIR PATRICK RUSSELL: I also agree.

LORD JUSTICE BROOKE: The appeal will therefore be dismissed with costs. By agreement with counsel, whose attendance today we have excused, this order is not to be drawn up for seven days.

ORDER: Appeal dismissed with costs; order not to be drawn up for seven days.