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Securitisation and Lenders’ Claims. Paul Mitchell and Eva Ferguson . What is securitisation. Take a portfolio of income producing assets (e.g., mortgage loans owned by a bank) – known as “receivables”

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Securitisation and Lenders’ Claims

Paul Mitchell and Eva Ferguson

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What is securitisation

  • Take a portfolio of income producing assets (e.g., mortgage loans owned by a bank) – known as “receivables”

  • Convert the receivables into a capital sum by selling the cash generated by them to a third party

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Types of securitisation

  • Three broad methods of securitising:

    • Sale

    • “Synthetic” method

    • Loan

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Sale method (1)

  • The lender (“the Originator”) sells receivables to a Special Purpose Vehicle (“SPV”).

  • The receivables are a mixed bag of mortgage loans – some to people who are solid risks, others to people who are far more risky

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Sale method (2)

  • The SPV funds the purchase of the receivables by issuing commercial paper (“CP”) – bonds, Notes etc that pay interest to the holder

  • Say it is receiving interest payments from the receivables at varying rates...

  • It offers a range of products to investors, from AAA-rated investments (that are stable and pay a low rate) to BBB or worse (riskier but with higher rates).

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Sale method (3)

  • The theory is that the amount of interest received by the SPV from the receivables is higher than the amount paid out to those who have bought the SPV’s commercial paper (“the spread”)

  • The SPV uses the spread to pay the Originator fees to collect in the money owed by the borrowers

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Sale method (5)

  • The investors buying the CP need the SPV to be “insolvency remote” from the Originator – if the Originator becomes insolvent, the SPV must remain unaffected.

  • Furthermore, the SPV is owned by a charitable trust/ a corporate service provider.

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Sale method (6)

  • Because the SPV is owned by a charitable trust, it has no liability to tax; and

  • It is not an asset owned by the Originator and does not show on the Originator’s balance sheet.

  • Result: Originator has transformed long-term loans into cash; and the risk of default has been transferred to the investors in the SPV’s commercial paper.

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Synthetic method (1)

  • More complex

  • By a series of linked transactions, the risk of the mortgagors defaulting is transferred from the Originator to those who buy the SPV’s commercial paper, but...

  • The mortgage loans themselves stay on the Originator’s balance sheet

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Synthetic method (2)

  • (1) Originator enters credit default swap with the SPV

  • Originator agrees to pay SPV a regular fixed premium, in exchange for...

  • An agreement by the SPV to make payments to the Originator in the event that mortgagors default

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Synthetic method (3)

  • (2) the SPV issues CP...

  • And with the proceeds acquires a portfolio of income producing assets (“the collateral”)

  • (3) the SPV applies (a) income received from the Originator and (b) interest income received from the collateral to pay interest on the CP it has issued

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Synthetic method (4)

  • (4) the SPV applies payments of principal received from the collateral as follows:

    • First, to make payments to the Originator as and when mortgagors default

    • Second, to repay the capital owed to the investors in its CP as such repayments fall due

  • Result: the risk of mortgagors defaulting is transferred from Originator to investors

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Loan method

  • Different structure, with no SPV

  • Owner of receivables issues CP directly against the security of those receivables

  • Receivables are charged to the party lending money to the Originator

  • Result: Originator has obtained liquid assets against the security of illiquid assets

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Benefits of securitisation (1)

  • Allows lender to transform illiquid assets (mortgage loans) into liquid and tradeable financial market instruments; and...

  • Allows lender to transfer credit risk associated with mortgages to third parties; and...

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Benefits of securitisation (2)

  • (For sale and synthetic methods) allows lender to leverage its balance sheet because:

    • Once loans have been transferred to SPV, the risk to the lender of borrower default has gone with them; and so

    • The lender needs to maintain less regulatory capital to support its lending and can thus lend more.

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Disadvantages (1)

  • In the context of lenders’ claims against professionals, the disadvantages are:

    • Lender has transferred title to the loan/ title to the benefit of the loan to a third party

    • Lender has already been repaid in part or in full (either at initial sale to SPV or as the result of payments under the credit default swap contract with the SPV)

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Possible lines of defence for professionals

  • Who has title to sue in respect of loss suffered?

  • Proceeds of Securitisation:

    bring into account vs “res inter alios acta”

  • Contributory negligence

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Who should sue?

The Lender?

The SPV? But query:

a) Duty of Care?

b) Practicality of Funding?

1) Title to Sue

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Banques Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] 2 All ER 769

  • Syndication of loans

    • BBL made insurance backed loans based on D valuations

    • loan agreements in respect of 3 properties entered for £200m

    • BBL then syndicated part of its loan to “Substitute Banks”

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Effect of Syndication

  • BBL’s retention lower than original advance

  • Nonetheless BBL claimed the full amount of loss. Argued no regard should be paid to subsequent syndication on basis it was res inter alios acta

  • BBL had not suffered the loss in respect of which it sued

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As regards the Substitute Banks

“They became parties to the loan transactions by novation and had transferred to them a pro rata share of BBL’s rights under those transactions, including BBL’s interest in the properties securing the transactions. There was thus transferred from BBL to the syndicate banks a share of the risks inherent in the loan transactions. … The principle of res inter alios acta requires the court to disregard an indemnity received by the plaintiff from a third party in respect of the loss caused by the defendant. It does not require or permit the court to assess damages on the basis of a fiction; to treat losses sustained by third parties as if they have been sustained by the plaintiff. The intervention of the syndicate banks did not indemnify BBL in respect of consequences of entering into the loan transactions. It resulted in the syndicate banks suffering those consequences in place of BBL. The loss claimed by BBL is not loss suffered by BBL prior to syndication, but loss suffered by all the syndicate banks after syndication” per Phillips J

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The lessons to be learnt:

  • The syndication of the loans meant that losses were ultimately suffered by parties other than the original lender; thus the original lender could not sue in respect of those losses.

  • But: “Insofar as the other banks were induced by John D Wood’s valuation to join the syndicate they are likely to enjoy an independent cause of action in their own right.”

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Effect of Securitisation

  • What is likely to be transferred are the lender’s rights against the borrower

  • For the SPV to sue one of the professionals involved, the lender would have had to have assigned all of its rights against that professional to the SPV

  • Alternatively, the SPV would have to establish that the professional owed it an independent duty of care

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Cost of Litigation

  • Even assuming SPV can sue one of the professionals...

  • There might not be adequate money within the SPV to fund the litigation: possible security for costs implications

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2) Securitisation and loss

  • Does the fact of securitisation mean no loss in effect


  • Not an act of mitigation; but a collateral benefit which is res inter alios acta

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Interallianz Finanz AG v Independent Insurance Company Ltd [1997] EGCS 91

  • Lender loaned £25m to Borrower

  • L then entered “sub-participation” agreements with other Banks:

    • Back to back loans from the “sub-participants” effectively transferred tranches of the loan from L to the other banks

    • L ultimately had direct exposure to 12.5% of the original loan

  • B defaulted a little while later and L claimed against the surveyor the full amount of the difference between negligent and non-negligent valuation.

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The surveyor’s argument

  • D argued L’s recovery should be limited to maximum extent of its loss, i.e., 12.5% of the original sum loaned

  • L argued that the sub-participation agreements were arrangements made independently of D’s negligence and were thus not to be taken into account.

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The judgment

  • Thomas J agreed with the lender: he found that the agreements were legally unconnected to D’s negligence and excluded them from consideration

  • The facts of that case were unusual, and the nature of securitisation might mean that this case is of little assistance

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Synthetic Securitisation – just and reasonable to allow the L double recovery???

  • What if purpose of the lending is to securitise?

  • Part of a continuous transaction where L’s aim achieved?

  • L getting other benefits from the process?

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3) Contributory Negligence the L double recovery???

  • As yet unknown, but seems possible that availability of securitisation encouraged inappropriately risky lending as a matter of policy

  • Eg sub-prime lending: if the business model is to lend and then securitise, is there less incentive to lend prudently?

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Conclusions result of securitisation) and strong competition to lend, possible that lending targets set by management put pressure on underwriters to nod through bad loans.

  • Securitisation and its ramifications not yet widely understood

  • There are grounds for believing that questions relating to securitisation may play a role in the ensuing round of lenders’ litigation

  • Watch this space...

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Equitable Claims result of securitisation) and strong competition to lend, possible that lending targets set by management put pressure on underwriters to nod through bad loans.

Spike Charlwood

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Background result of securitisation) and strong competition to lend, possible that lending targets set by management put pressure on underwriters to nod through bad loans.

Last time

Recent lending practices

The claims being made

Liability issues

Contributory negligence


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Target v Redferns result of securitisation) and strong competition to lend, possible that lending targets set by management put pressure on underwriters to nod through bad loans.

Bristol & West Building Society v Mothew

Swindle v Harrison

Paragon Finance v Thakerar

Background: last time

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Sub-prime result of securitisation) and strong competition to lend, possible that lending targets set by management put pressure on underwriters to nod through bad loans.

The “NINJA” loan

Buy to let

Lending to securitise


The ever rising(!) property market


Background: recent lending

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Equitable claims more common than expected result of securitisation) and strong competition to lend, possible that lending targets set by management put pressure on underwriters to nod through bad loans.

Two types of claim:

Negligence wrapped up as breach of trust / fiduciary duty

“True” equitable claims

Additional claims

Breach of warranty of authority

Breach of undertaking

Barclays Bank v Weeks Legg & Dean

The claims being made

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Breach of trust: does the allegation go to the solicitor’s power / authority to deal with the advance?

Breach of fiduciary duty: does the lender allege more than mere incompetence?

Liability issues (1)

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Theoretically, yes power / authority to deal with the advance?

In practice, no

Weeks, Legg & Dean (above) at 328D-E:

“Theoretically his liability as a trustee is strict, but in practice it is not, for if he acts honestly and reasonably and ought to be excused from liability, the court will grant him relief under section 61 of the Trustee Act 1925.”

Liability (2): breach of trust strict?

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(1) Negligence a bar to the s.61 defence? power / authority to deal with the advance?

s.727 of the Companies Act 1985

Re D’Jan of London Ltd [1994] 1 BCLC 561 at 564

Barings v Coopers & Lybrand [2003] EWHC 1319 (Ch) at paras.1125-48

(2) An all or nothing issue?

(3) How far are terms of the retainer terms of the trust?

Liability (3): further trust issues

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B, a fraudster, creates a false office of a real firm of solicitors

B applies for a loan, nominating S as his solicitors

The false office purports to be acting for the vendor

S sends the purchase monies, including L’s advance, to the false office and B absconds

L asserts S’s identification obligations are trust obligations and alleges breach of trust, but not negligence

In answer to a s.61 plea, L says that defence is not available because S was negligent

Throughout, L asserts that contributory negligence is not available

Liability (4): an example

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Negligence/breach of contract solicitors


Standard Chartered Bank v Pakistan National Shipping

Breach of warranty of authority

Breach of undertaking

Equitable claims

Contributory negligence: overview

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Equitable nature of breach of trust remedies solicitors

Analogy with the Law Reform (Contributory Negligence) Act 1945, if necessary by reference to Target

S.61 of the Trustee Act 1925

“wholly or partly”

Contrib.: breach of trust

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Nationwide v Balmer Radmore solicitors

Grounds of attack

The decision itself

The Commonwealth position

The analogy with deceit

Intentionality vs dishonesty

Mothew: “Conduct ... need not be dishonest but it must be intentional.”


Contrib.: breach of fid. duty

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What is recklessness? solicitors

Fraser v Furman [1967] 1 WLR 898 (employers’ liability):

“... actual recognition ... that a danger exists, and not caring whether or not it is averted. The purpose of the condition is to ensure that the insured will not, because he is covered against the loss by the policy, refrain from taking precautions which he knows ought to be taken.”

Have lenders been reckless?

If so, what impact will that have?

Contrib.: recklessness?

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Simon Wilton

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Section 1(1): “ solicitorsSubject to the following provisions of this Act, any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise)”

Section 2(1): “...the amount of the contribution recoverable from any person shall be such as may be found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage in question”

Section 6(1): “A person is liable in respect of any damage for the purposes of this Act if the person who suffered it entitled to recover compensation from him in respect of that damage (whatever the legal basis of his liability, whether tort, breach of contract, breach of trust, or otherwise)”

The Civil Liability (Contribution) Act 1978 (“The Act”)<Insert Heading>

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A, B and C. solicitors

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B can only recover from C if he can show that C is liable for the “same damage” as B;

C’s liability with respect to the “same damage” must be a liability to A: it is no good if C’s liability is a liability to someone else;

the amount of contribution recoverable by B depends on what is “just and equitable”;

at that stage you have to have regard to the extent of C’s responsibility for “the damage in question”;

“the damage in question” is the same thing as “the same damage”;

there is an inclusive approach to the kind of liability for that damage concerning which a right to contribution arises.


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B has to show: for the “

that it, B, is liable to A in respect of damage suffered by A;

that C would also be liable to pay compensation to A (whatever the basis of that liability);

that C’s liability to A would be with respect to the same damage;

that justice and equity require a contribution to be paid.

What has to be proved?

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Royal Brompton Hospital NHS Trust v Hammond for the “[2002] 1 WLR 1397 and Co-operative Retail Services Ltd v Taylor Young Partnership Ltd [2002] 1 WLR 1419 :

B and C both have to be liable to A for the same damage: if A’s contract with C precludes liability of C to A, then B will not be able to recover a contribution from C;

“same damage” does not mean “same damages”: just because claims for damages with respect to different or overlapping aspects of A’s loss could be made against B and C it does not follow that the respective liabilities are for the “same damage”;

in asking whether parties are liable for the “same damage” the question is whether they are being sued with respect to damage of the same character.

Liability for the “same damage”

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a matter of legal analysis; for the “

examples: a claim for personal injury against B does not involve the “same damage” as the economic loss flowing from a solicitor’s (C’s) failure to issue the claim in time; a claim against a building contractor for defective work does not involve the same damage as the economic loss flowing from an insurance broker’s failure to procure insurance covering the loss occasioned by that defective work;

Howkins & Harrison v Tyler [2001] Lloyd’s Rep PN 1 probably still good law. In a lender’s claim against solicitors or surveyors there can probably be no contribution claim by the professional against the borrowers. They are not liable for the “same damage”.

When is the damage for which B and C are liable of the same character?

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A problem: what happens when there is clearly some “ for the “same damage” but the extent of B’s liability to pay damages to A is not commensurate with that of C? What then is the “same damage” concerning which contribution is payable?

B and C are negligent but only C’s loss is ‘capped’ by SAAMCO? Can B seek a contribution with respect to the entirety of the damage for which it was liable to A, or only that part concerning which C is also liable to A?

B is fraudulent and liable for all the damage but C was merely negligent and can plead contributory negligence and remoteness to reduce its liability.

C, but not B, has an effective limitation of liability clause.

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A has sustained a loss of £10 million. B is liable for the whole £10 million. C is liable only for £5 million. On an apportionment it is, prima facie, a 50/50 case.

If contribution is available with respect to £10 million then B can recover £5 million from C; conversely, C, if it had paid off A as to £5 million, could then recover nothing from B.

If contribution is available only with respect to £5 million then B can only recover £2.5 million from C and, if C was bringing the claim, C can recover £2.5 million from B.

An illustration

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B is liable for the whole of A’s loss but C’s liability would be capped by SAAMCO.

Ball v Banner [2000] Lloyd’s Rep PN 569: Solicitors liable to investors for misrepresenting tax-saving scheme. Solicitors seek contribution from valuers whose liability is ‘capped’ by SAAMCO. Held: the total loss the investors could recover from the solicitors represented the “same damage” concerning which there was a right to contribution from the valuers. SAAMCO did not limit the scope of a contribution claim.

Possibly not the last word: see Nationwide Building Society v (1) Dunlop Haywards Ltd; (2) Cobbetts [2009] EWHC 254 at para 64. But also bear in mind that even if there is a right to contribution beyond the SAAMCO cap it is likely a court would not consider it “just and equitable” to order C to pay more than that cap.


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All tackled in would be capped by SAAMCO.Nationwide Building Society v (1) Dunlop Haywards (DHL) Limited; (2) Cobbetts

Nationwide lose £££mmm because of the surveyors, DHL’s, deceit, and Cobbetts’ negligence. DHL liable for the entirety of Nationwide’s loss whether or not foreseeable and irrespective of contributory negligence. Cobbetts not liable for remote losses, and have partial defence of contributory negligence, and limitation of liability clause.

Cobbetts settle with Nationwide and seek a contribution from DHL.

What is the “same damage” concerning which a right to contribution arises?

Fraud/Contributory negligence/Limitation of liability clauses

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Christopher Clarke J: would be capped by SAAMCO.

the “same damage” for which both DHL and Cobbetts were liable excluded the unforeseeable losses for which DHL alone was liable in deceit: that was a distinct category of economic loss concerning which there was no common liability;

the “same damage” included, and both DHL and Cobbetts were prima facie liable to contribute towards, the entire non-remote damage - notwithstanding availability to Cobbetts alone of contributory negligence and the limitation of liability.

THE JUDGE HELD...of liability clauses

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Section 2(3) of the Act: the liability of C to would be capped by a contribution is capped where his liability to A would have been limited because of a limitation of liability clause or because of a partial defence of contributory negligence.

The court still has to consider what amount it is just and equitable to award by way of contribution under section 2(1) of the Act.

IT IS DARKEST JUST BEFORE DAWN...of liability clauses

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Section 2(1): would be capped by SAAMCO.

“...the amount of the contribution recoverable from any person shall be such as may be found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage in question”

Causative potency, moral blameworthiness, and the need to disgorge benefits.

Conventionally a % division.

Nothing in the Act to preclude something more sophisticated.


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Christopher Clarke J: would be capped by SAAMCO.

if wrong to regard the unforeseeable losses suffered by Nationwide as not part of the “same damage” they should be excluded at the apportionment stage. That was a loss which Nationwide was only able to recover from DHL because DHL was fraudulent: not fair to require Cobbetts to share in that loss;

for the same reason just and equitable to reduce the sum available for contribution to reflect the fact Cobbetts’ liability was reduced by its defence of contributory negligence;

Nationwide 50% at fault so the amount available for contribution reduced by 50%;

the limitation of liability clause was different: that might cap any contribution payable by Cobbetts but it could not reduce the amount in issue for the purposes of contribution;

next the conventional % apportionment: a split of 80%/20% in Cobbetts’ favour.


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Amount Cobbetts paid in settlement: £5,585.001. would be capped by SAAMCO.

Nationwide’s entire loss for which DHL was liable as a result of its fraud: £21,049.107.

First identify “same damage” for which Cobbetts was prima facie also liable for contribution purposes(stripping out remote losses but ignoring the limitation of liability clause and contributory negligence available to Cobbetts alone): £13,200,179.

Second, apportion as just and equitable...

In doing so exclude losses Nationwide could have recovered from deceitful DHL but not from Cobbetts because of availability of contributory negligence to Cobbetts: reduces amount available for contribution by 50%: £6,600,090.

No further reduction for the limitation clause capping Cobbets’ liability at £5 million.

Next distribute £6,600,090 80%/20% to reflect culpability/causative potency.

Amount of sharable liability apportioned to Cobbetts is 20% x £6,600,090 = £1,320,018.

Cobbetts paid Nationwide £5,585,001. It had to bear £1,320,018. Therefore entitled to recover £5,585,001 - £1,320,018 = £4,264,893 from DHL.

Simple, isn’t it.


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B can recover from C a contribution for costs paid to A: would be capped by SAAMCO.BICC v Cumbrian Industrial Ltd [2002] Lloyd’s Rep PN 526.

B can also recover such a contribution where A has already established an entitlement to costs against both B and C: see Nationwide

Christopher Clarke J:

ordinary case involving two defendants liable to a claimant - apportion the aggregate costs payable to the claimant in accordance with the % apportionment under the Act;

in Nationwide situation different because DHL alone defending case in fraud: amount of costs available for contribution therefore reduced after stripping out such costs;

result: Cobbets also entitled to hefty contribution from DHL for costs paid to Nationwide.