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Session 2002 - 03
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Judgments - HIH Casualty and General Insurance Limited and others (Respondents) v Chase Manhattan Bank (Appellants) and others HIH Casualty and General Insurance Limited and others (Appellants) v Chase Manhattan Bank (Respondents) and others (First Appeal) HIH Casualty and General Insurance Limited and others (Appellants) v Chase Manhattan Bank (Respondents) and others (Second Appeal) (Conjoined appeals)

HOUSE OF LORDS

SESSION 2002-03
[2003] UKHL 6
on appeal from: [2002] EWCA Civ 1250

OPINIONS

OF THE LORDS OF APPEAL

FOR JUDGMENT IN THE CAUSE

HIH Casualty and General Insurance Limited and others (Respondents) v. Chase Manhattan Bank (Appellants) and others

HIH Casualty and General Insurance Limited and others (Appellants) v. Chase Manhattan Bank (Respondents) and others (First Appeal)

HIH Casualty and General Insurance Limited and others (Appellants) v. Chase Manhattan Bank (Respondents) and others (Second Appeal) (Conjoined appeals)

ON

THURSDAY 20 FEBRUARY 2003

The Appellate Committee comprised:

  Lord Bingham of Cornhill

  Lord Steyn

  Lord Hoffmann

  Lord Hobhouse of Woodborough

Lord Scott of Foscote


HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

HIH Casualty and General Insurance Limited and others (Respondents) v. Chase Manhattan Bank (Appellants) and others

HIH Casualty and General Insurance Limited and others (Appellants) v. Chase Manhattan Bank (Respondents) and others (First Appeal)

HIH Casualty and General Insurance Limited and others (Appellants) v. Chase Manhattan Bank (Respondents) and others (Second Appeal)

(Conjoined appeals)

[2003] UKHL 6

LORD BINGHAM OF CORNHILL

My Lords,

    1. The appeal and cross-appeal before the House arise from answers given first by Aikens J ([2001] 1 Lloyd's Rep 30) and then the Court of Appeal (Aldous and Rix LJJ and Lloyd J: [2001] 2 Lloyd's Rep 483) to preliminary issues ordered to be tried in the Commercial Court. The issues (so far as they remain contentious) are:

    "On the true construction of the contracts of or for insurance pleaded in the Particulars of Claim in Claim No 1999 Folio 1413 [the Insurers' action] and on the assumption that the facts and matters pleaded in those Particulars of Claim are true, are the Insurers entitled

      (a) to avoid and/or rescind the contracts of or for insurance, and/or

      (b) to damages from Chase for misrepresentation or non-disclosure . . . ?"

The Court of Appeal (in the judgment of Rix LJ, paragraph 180) answered these issues in this way:

    "(a)  the insurers are entitled to avoid and/or to rescind the contracts of or for insurance against Chase provided that they prove a positive case of fraud as stated above;

    (b)  the insurers are entitled to damages from Chase only on the basis of a good claim in deceit, and for these purposes it has not been suggested that such a claim can be premised on the pleaded non-disclosures alone."

These answers differed from those given by Aikens J: [2001] 1 Lloyd's Rep 30 at page 59, paragraph 117.

    2. The issues between the parties concern the correct interpretation of a "Truth of Statement" clause contained in policies of insurance made between Chase (as representative of a syndicate of lending banks) as the insured and HIH which, although now in liquidation and not an appellant, has been treated as the lead company among a group of underwriting companies. The full terms of the truth of statement clause, conveniently broken down into its constituent phrases and numbered for ease of reference, are cited in the opinion of my noble and learned friend Lord Hoffmann (see paragraph 44 below), and need not be repeated in full. It is enough to cite here the phrases on which argument before the House has focused:

    "[6] the Insured will not have any duty or obligation to make any representation, warranty or disclosure of any nature, express or implied (such duty and obligation being expressly waived by the insurers) and

    [7] shall have no liability of any nature to the insurers for any information provided by any other parties and

    [8] any such information provided by or nondisclosure by other parties including, but not limited to, Heath North America & Special Risks Ltd (other than Section I of the Questionnaire) shall not be a ground or grounds for avoidance of the insurers' obligations under the Policy or the cancellation thereof".

I gratefully adopt Lord Hoffmann's account of the relationship between the parties and the commercial background to the transactions giving rise to these proceedings.

    3. In paragraph 2 of his judgment ([2001] 2 Lloyd's Rep 483 at 487) Rix LJ drew attention, in terms which are not contentious, to the role of the lender in such transactions:

    "Because the assured is a lender rather than a film producer, it is distanced from an intimate knowledge of the proposed film-making and its marketing, and it is the producer and the entrepreneurial investors in the film who need to procure the insurance policy for the benefit of the assured, as a condition precedent of the lending transaction."

Chase was advancing substantial sums to finance the making of future films. If the films, when made, proved successful and generated substantial revenue, Chase would expect or hope to recoup its outlay from the revenue stream assigned to it. But the films might not prove successful and might either produce no revenue stream or a revenue stream insufficient, after deductions, to repay the loan. To the extent that the revenue stream fell short of the sum advanced, Chase would look to the insurance policies. These provided the security without which, it seems safe to infer, Chase would not have lent at all.

    4. The policies under consideration provided for English jurisdiction and the application of English law. They formed part of a complex web of interlocking contracts involving substantial sums of money and made between sophisticated commercial parties. They were plainly the product of careful legal draftsmanship. It seems to me safe to attribute to the draftsman of the truth of statement clause a sound knowledge of English law so far as applicable to insurance contracts. In assessing the extent to which the draftsman of that clause intended to modify the respective rights and obligations of the parties it is helpful to recall what, in the absence of such a clause, the rights and obligations of the parties would have been, a matter the draftsman must have had in mind.

    5. "A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party": section 17 of the Marine Insurance Act 1906, which is accepted as expressing generally applicable insurance principles. The legal and practical implications of this familiar but far-reaching rule are spelled out in the succeeding sections of the Act. Thus subject to some limited and obvious exceptions the insurer may avoid the contract of insurance if the assured fails, before the contract is concluded, to disclose to the insurer every material circumstance known to the assured, who is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him; and every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk: section 18(1), (2). Where, as in the ordinary case and as in the present case, insurance is effected for the assured by an agent, the agent is subject to a very similar and independent duty of disclosure: section 19. The insurer may also avoid the contract of insurance if any material representation made by the assured or his agent to the insurer during the negotiations for the contract is untrue, the test of materiality being the same as that already noted: section 20(1), (2). A representation may be as to fact, in which case it must be substantially correct, or as to a matter of expectation or belief, in which case it must be made in good faith, but a representation may be withdrawn or corrected before the contract is concluded: section 20(3), (4), (5), (6). Thus, put simply and applied to the present situation (in the absence of the truth of statement clause), the insurers might avoid the policy and deprive Chase of its intended security if either Chase, or its agent Heaths, however innocently, were to fail to disclose any circumstance found as a fact to be material (section 18(4)) or were to make any representation found as a fact to be material (section 20(7)) and to be untrue. For the assured (and not least an assured in the position of Chase) avoidance of the policy would be serious enough. But if the non-disclosure or misrepresentation were other than innocent, the insurer might have rights additional to that of avoidance: the right to damages given by section 2(1) of the Misrepresentation Act 1967 to the victim of a negligent misrepresentation; and the right to recover damages for deceit given by the common law to the victim of a fraudulent misrepresentation.

    6. When the phrases numbered [6], [7] and [8] in the truth of statement clause are read against the backcloth of the general law very briefly summarised in the last paragraph of this opinion, three points are immediately striking. First, Chase as the insured, although expressly relieved of any obligation to make any representation at all (phrase [6]), is not relieved of liability for any misrepresentation which it may voluntarily choose to make. Secondly, Chase is expressly relieved of any duty or obligation to make any disclosure of any nature (phrase [6]). Thirdly, no attempt has been made (whether by joining Heaths as a party to the contract or in any other way) to relieve Heaths of any liability to which it might be liable as an agent. The parties have left Heaths to look after itself. In the present case, no allegations of misrepresentation or non-disclosure have been made against Chase at all, so the crucial question is: in what circumstances and to what extent, on a proper interpretation of the truth of statement clause, is Chase to be liable for misrepresentation or non-disclosure by Heaths? While the clause must of course be read as a whole, it can only be conveniently analysed by considering in a little detail the three phrases on which the argument turns.

Phrase [6]

    7. This phrase reflects the obvious intention of the draftsman to distance Chase from the underlying transaction. It need make no representation and no disclosure, such duties being expressly waived. It was argued for Chase that this waiver relieved Heaths also of its disclosure duty, since section 18(3)(c) of the 1906 Act provides that

    "In the absence of inquiry the following circumstances need not be disclosed, namely . . .

      (c) Any circumstance as to which information is waived by the insurer . . ."

Since the disclosure obligation of the agent under section 19 is expressly subject to the provisions of section 18 as to circumstances which need not be disclosed, it was argued, the insurers' waiver of Chase's duty relieved Heaths also and thus operated to relieve Chase of any liability as principal.

    8. This is not in my opinion a tenable argument. For reasons which are readily understandable in the commercial context, the insurers relieved Chase of its usual obligation to disclose. It could not be supposed that the insurers did not require any disclosure of information of material circumstances, only that they were not looking to Chase to get it. Phrase [6] makes plain that the insurers were not waiving disclosure of information of any material circumstances but were relieving Chase of its disclosure obligation altogether. Chase relied in argument on the rhetorical question posed by Saville LJ in Société Anonyme d'Intermediaries Luxembourgeois v Farex Gie [1995] LRLR 116 at 157:

    "Why should it be a breach of good faith sufficient to deprive the assured of his contract if the agent fails to disclose something which, had the assured known of it, would not have had to have been disclosed by the latter?"

But on the present assumed facts the answer is clear: it is a breach because the insurers have chosen to rely not on disclosure by Chase, distanced from the detail of the transaction, but on disclosure by the agent, actively involved.

Phrase [7]

    9. It was common ground, and rightly so, that phrase [7], read with phrase [8], precludes avoidance of the policy by the insurers on the ground of innocent misrepresentation by Heaths: if the phrase does not have that effect, it has no effect at all. But the parties were divided as to how much further protection the phrase gives to Chase and in particular whether its effect is to deny Heaths' authority to speak for Chase and whether it denies the insurers their usual remedies if Heaths were guilty of negligent or fraudulent misrepresentation.

    10. Chase contended that the effect of phrase [7] is to deny the authority of Heaths to speak for Chase. The judge and the Court of Appeal both rejected this argument: [2001] 1 Lloyd's Rep 30, paragraphs 47, 70; [2001] 2 Lloyd's Rep 483, paragraph 144. These decisions were plainly correct. There is nothing in the clause which could reasonably be understood as denying or restricting the implied and apparent authority of Heaths as Chase's agent.

    11. In submitting that phrase [6] does not deny the insurers their usual legal remedies for negligent misrepresentation by Heaths, the insurers drew sustenance from the well-known principles propounded by Lord Morton of Henryton giving the judgment of the Board in Canada Steamship Lines Ltd v The King [1952] AC 192 at 208. There can be no doubting the general authority of these principles, which have been applied in many cases, and the approach indicated is sound. The courts should not ordinarily infer that a contracting party has given up rights which the law confers upon him to an extent greater than the contract terms indicate he has chosen to do; and if the contract terms can take legal and practical effect without denying him the rights he would ordinarily enjoy if the other party is negligent, they will be read as not denying him those rights unless they are so expressed as to make clear that they do. But, as the insurers in argument fully recognised, Lord Morton was giving helpful guidance on the proper approach to interpretation and not laying down a code. The passage does not provide a litmus test which, applied to the terms of the contract, yields a certain and predictable result. The courts' task of ascertaining what the particular parties intended, in their particular commercial context, remains.

    12. In relation to negligent misrepresentation, the key to the understanding of phrase [7] in my view lies in the provision that Chase shall have "no liability of any nature . . .". This is comprehensive language, clearly chosen to give Chase an extended immunity. It cannot refer simply to the liability of Chase to suffer the avoidance of the contract, since that is the subject of express provision in clause [8]. So the language must be intended to preclude the liability of Chase for damages under section 2(1) of the 1967 Act for any negligent misrepresentation by Heaths and also any right of the insurers to avoid the policy on that ground.

    13. I find nothing commercially surprising in this interpretation, from the viewpoint of Chase or the insurers. In a complex transaction of this kind, the possibility that Heaths as agent might make and fail to correct a representation which was later held to be both untrue and negligent would be very real. Chase, distanced from the transaction, would have little knowledge of what was represented and little opportunity to correct it. It could reasonably seek protection against loss or diminution of its security on such a ground. The insurers for their part might reasonably accept this chink in their armour, recognising that their rights against Heaths in such an eventuality would remain unimpaired.

    14. Does phrase [7] then operate to protect Chase against any liability for damages or any risk of avoidance if the insurers should be induced to enter into the contract by any fraudulent misrepresentation of Heaths acting as the agents of Chase? In submitting that such is the effect of the phrase, Lord Grabiner QC for Chase emphasised the comprehensive language already noted, "no liability of any nature". Read literally, those words would cover liability for fraudulent misrepresentation, or deceit. If Chase's security for its loan is to be cast-iron, the policy must stand even if induced by the deceit of Heaths.

    15. This is not a negligible argument. But neither the judge nor the Court of Appeal accepted it and I am satisfied that they were right not to do so. For, as Rix LJ observed more than once in his judgment (paragraphs 160, 169), fraud is a thing apart. This is not a mere slogan. It reflects an old legal rule that fraud unravels all: fraus omnia corrumpit. It also reflects the practical basis of commercial intercourse. Once fraud is proved, "it vitiates judgments, contracts and all transactions whatsoever": Lazarus Estates Ltd v Beasley [1956] 1 QB 702 at 712, per Denning LJ. Parties entering into a commercial contract will no doubt recognise and accept the risk of errors and omissions in the preceding negotiations, even negligent errors and omissions. But each party will assume the honesty and good faith of the other; absent such an assumption they would not deal. What is true of the principal is true of the agent, not least in a situation where, as here, the agent, if not the sire of the transaction, plays the role of a very active midwife. As Bramwell LJ observed in Weir v Bell (1878) 3 Exch D 238 at 245,

    "I think that every person who authorizes another to act for him in the making of any contract, undertakes for the absence of fraud in that person in the execution of the authority given, as much as he undertakes for its absence in himself when he makes the contract".

    16. It is clear that the law, on public policy grounds, does not permit a contracting party to exclude liability for his own fraud in inducing the making of the contract. The insurers have throughout contended for a similar rule in relation to the fraud of agents acting as such. After a very detailed examination of such authority as there is, both the judge ([2001] 1 Lloyd's Rep 30 at 45, paragraph 35) and the Court of Appeal ([2001] 2 Lloyd's Rep 483 at 504, paragraph 109) decided against the existence of such a rule. It is true that the ratio of the leading authority on the point, S Pearson & Son Ltd v Dublin Corporation [1907] AC 351, despite the distinction and numerical strength of the House which decided it, is not easy to discern. I do not however think that the question need be finally resolved in this case. For it is in my opinion plain beyond argument that if a party to a written contract seeks to exclude the ordinary consequences of fraudulent or dishonest misrepresentation or deceit by his agent, acting as such, inducing the making of the contract, such intention must be expressed in clear and unmistakable terms on the face of the contract. The decision of the House in Pearson v Dublin Corporation does at least make plain that general language will not be construed to relieve a principal of liability for the fraud of an agent: see in particular the speeches of Lord Loreburn LC at page 354, Lord Ashbourne at page 360 and Lord Atkinson at page 365. General words, however comprehensive the legal analyst might find them to be, will not serve: the language used must be such as will alert a commercial party to the extraordinary bargain he is invited to make. It is no doubt unattractive for a contracting party to propose a term clearly having such effect, because of its predictable effect on the mind of the other contracting party, and this may explain why the point of principle left open in Pearson v Dublin Corporation has remained unresolved for so long. But I think it clear that, judged by this exacting standard, the language of phrase [7] falls well short of what is required to meet Chase's objective, as both the judge (paragraph 81(3)) and the Court of Appeal (paragraphs 159, 160) held.

    17. It appears, from authority to which we were referred by Chase, that a different approach would be taken in New York. In The Chase Manhattan Bank v AXA Reinsurance UK plc (unreported, index number 603080/00, 26 July 2001) Gammerman J considered the effect of a truth of statement clause in a film-finance insurance contract and observed (at page 7):

    "Under well-established New York law, such express, detailed disclaimers preclude a claim of fraud based on misrepresentations within the scope of the disclaimers . . ."

The judge's decision was upheld by the Appellate Division of the Supreme Court on 23 May 2002. In a judgment also of that date in The Chase Manhattan Bank v New Hampshire Insurance Company and AXA Reassurance SA (unreported, index number 602759/01) the same judge, construing (it would appear) similar clauses, in a similar context, said (at page 38):

    "The clauses are drafted with great precision. Each sentence and word within each clause serves a separate function. Some portions of the clauses are limited to representations/omissions about the risk, while others are not. Given the sophistication of the parties, I decline to read into the contractual language limitations that are not stated in the plain text of the parties' agreements."

As these citations make plain, the law in our respective jurisdictions has a different point of departure. English law knows no rule comparable with that described as well-established in New York. Instead, it requires a party seeking to exonerate himself from the consequences of his agent's fraud (assuming that is legally possible) to do so expressly and openly. I can see no persuasive argument for varying or relaxing our domestic rule which, as it seems to me, serves to encourage an open and cards-on-the-table (face upwards) approach to the making of contracts.

Phrase [8]

    18. In relation to misrepresentation, phase [8] adds nothing to phrase [7]: there may be no avoidance for innocent or negligent misrepresentation, but the phrase does not, for reasons already given, apply to fraudulent misrepresentation. In relation to non-disclosure, there was some difference of opinion between the judge and the Court of Appeal.

    19. I think it plain, giving fair effect to the language of this phrase, that innocent or negligent non-disclosure by Heaths is to give the insurers no right to avoid the policy. The phrase refers to "any . . . nondisclosure by other parties . . ."; the English law on non-disclosure is widely recognised to be very strict; and any other reading would weaken Chase's security to a point which would, it may be inferred, have been unacceptable to it. But fraudulent non-disclosure raises a more difficult problem.

    20. The judge held that phrase [8] did not exclude the insurers' right to avoid the contract of insurance in circumstances where the breach of the independent duty of disclosure by Heaths was the result of deliberate concealment of material facts: [2001] 1 Lloyd's Rep 30, paragraphs 76-77. In the Court of Appeal, doubt was cast on the meaning of "fraudulent non-disclosure" ([2001] 2 Lloyd's Rep 483, paragraph 165) and it was questioned whether the law had distinguished between innocent, negligent and fraudulent non-disclosure (paragraphs 163, 168). In paragraph 168, Rix LJ said:

    "In sum, I do not think that, in the absence of express language, any line is to be drawn between the various possible causes of or motives for non-disclosure. It is not in this way that the distinction is to be drawn. The question to my mind is whether a non-disclosure can support a claim in fraud, with its remedies in damages and/or rescission: either because [on] analysis it amounts or gives rise to a fraudulent misrepresentation or perchance for any other reason."

    21. In the passage quoted, Rix LJ makes an important but uncontentious point: that silence, where there is a duty to speak, may amount to misrepresentation: see Brownlie v Campbell (1880) 5 App Cas 925 at 950, per Lord Blackburn; Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1990] 1 QB 665 at 773-774, 782-783, per Slade LJ; Spencer Bower, Turner & Sutton, Actionable Non-Disclosure (2nd ed 1990) at 249-250. Since an agent to insure is subject to an independent duty of disclosure, the deliberate withholding from the insurer of information which the agent knows or believes to be material to the risk, if done dishonestly or recklessly, may well amount to a fraudulent misrepresentation. If, in the present case, the insurers establish non-disclosure by Heaths of this kind, nothing in the truth of statement clause deprives them of their ordinary right to avoid the policy and recover damages against Chase and Heaths.

    22. Whether, on the facts of this case, the insurers can establish any deliberate and dishonest or reckless non-disclosure by Heaths which does not amount to a misrepresentation, must be doubtful. In Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501 at 549, Lord Mustill pointed out that "in practice the line between misrepresentation and non-disclosure is often imperceptible." But section 84 of the 1906 Act appears to accept the possibility of fraudulent non-disclosure and I do not think such possibility need be rejected on conceptual grounds. If it were to be established, I would agree with the judge that phrase [8] does not exclude the insurers' ordinary right to avoid.

    23. I would for my part answer the preliminary issues in this way:

    "On the true construction of the contracts of or for insurance pleaded in the [Amended] Particulars of Claim No. 1999 Folio 1413 [the Insurers' action] and on the assumption that the facts and matters pleaded in those Particulars of Claim are true, the Insurers are entitled in law

      (a) to avoid and/or rescind the contracts of or for insurance against Chase on the grounds, but only on the grounds, of fraudulent misrepresentation or as regards the contracts of insurance fraudulent non-disclosure by Heaths as agent of Chase;

      (b) to damages from Chase for, but only for, fraudulent misrepresentation by Heaths as agent of Chase and fraudulent non-disclosure by Heaths as agent of Chase if, but only if, such fraudulent non-disclosure by Heaths amounts to fraudulent misrepresentation."

On the Court of Appeal's narrow point relating to fraudulent non-disclosure not amounting to misrepresentation, the insurers' appeal succeeds, and should be allowed to that extent. The cross-appeal by Chase fails and must be dismissed.

LORD STEYN

My Lords,

 
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