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)

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    60. Mr Sumption said that although the words used in phrases 7 and 8 are wide enough to cover negligence (and indeed fraud), the principal insured was also liable to avoidance of the contract for entirely innocent misrepresentation or nondisclosure on the part of his agent. The rule of construction therefore required the phrases to be construed as limited to avoidance on these grounds and not as protecting the insured in the case of his agent's negligence or fraud.

    61. Lord Morton's tests were applied by the House of Lords in Smith v South Wales Switchgear Co Ltd [1978] 1 WLR 165, but accompanied by words of caution about avoiding mechanistic construction. Lord Keith of Kinkel described the tests, at p 177, as "guidelines" but emphasised that:

    "the matter is essentially one of the ascertaining the intention of the contracting parties from the language they have used, considered in the light of surrounding circumstances which must be taken to have been within their knowledge."

    62. Viscount Dilhorne, at p 168, likewise quoted with approval a remark of Salmon LJ (in Hollier v Rambler Motors (AMC) Ltd [1972] 2 QB 71, 80) that

    "in the end you are driven back to construing the clause in question to see what it means"

    and a passage in the judgment of Buckley LJ in Gillespie Brothers & Co Ltd v Roy Bowles Transport Ltd [1973] QB 400, 419 in which he explained the basis of the guidelines as being an assumption that it was

    "inherently improbable that one party to the contract should intend to absolve the other party from the consequences of the latter's own negligence. The intention to do so must therefore be made perfectly clear..."

    63. Likewise in Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR 964, 970 Lord Fraser of Tullybelton said that the Canada Steamship guidelines were based upon the "inherent improbability that the other party to a contract including such a clause intended to release the proferens from a liability that would otherwise fall upon him." For this reason, Lord Fraser said that the guidelines were not "applicable in their full rigour" to clauses which limited rather than excluded liability. I doubt, however, whether Lord Fraser intended to introduce one mechanistic rule (a distinction between limiting and excluding liability) to mitigate the rigour of another. The question, as it seems to me, is whether the language used by the parties, construed in the context of the whole instrument and against the admissible background, leads to the conclusion that they must have thought it went without saying that the words, although literally wide enough to cover negligence, did not do so. This in turn depends upon the precise language they have used and how inherently improbable it is in all the circumstances that they would have intended to exclude such liability. In applying the Canada Steamship guidelines, it must also be borne in mind that, as Lord Denning MR pointed out in George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] QB 284, 297-298 (a perception which was adopted on appeal by the House of Lords: [1983] 2 AC 803, 812-813), they date from a time before the Unfair Contract Terms Act 1977, when the courts had no remedy but construction to relieve consumers from the burden of unreasonable exclusion clauses.

    64. In the present case, Aikens J held that the Canada Steamship guidelines did not have direct application to a clause excluding avoidance for misrepresentation or nondisclosure because negligence did not constitute a separate cause of action which could be expressly excluded. Misrepresentation or nondisclosure in an insurance context was a "unitary and absolute" duty to which negligence or fraud was irrelevant. If the clause excluded the duty at all, it excluded it altogether. Nevertheless, the judge went on to hold that the language was not clear enough to exclude a right to avoid when the nondisclosure or misrepresentation was the result of negligence or a deliberate intention to conceal or misrepresent material facts.

    65. In the Court of Appeal, Rix LJ found this reasoning self-contradictory. Following what he had said earlier in HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co [2001] 2 Lloyd's Rep 161, 187, he agreed that the "unitary and absolute" nature of the duty of good faith meant that the Canada Steamship guidelines did not apply. They only made sense if there was a distinct liability for negligence which the parties could have decided not to exclude. Lord Morton's third test spoke of a "possible head of damage other than that of negligence". But, for reasons similar to those given by Clarke LJ in National Westminster Bank v Utrecht-America Finance Company [2001] 3 All ER 733, 750, para 51, the very concept of negligent nondisclosure as a separate head of liability was incoherent. If there was no duty of good faith which required disclosure, a failure to disclose could not be negligent. Having gone so far with the judge (and in disagreement with the judgment of Colman J in Toomey v Eagle Star Insurance Co Ltd (No 2) [1995] 2 Lloyd's Rep 88) Rix LJ said, at p 512, that this reasoning should have led the judge to conclude that the parties had not intended to distinguish between negligent and non-negligent breaches of the duty of good faith.

    66. For my part, I would agree with the conclusion of Rix LJ, although I do not think that I would have placed the same emphasis upon the "unitary and absolute" nature of the duty of good faith as excluding any intention to distinguish between negligent and non-negligent breach. I thought that there was force in Mr Sumption's criticism that the most striking illustrations of the Canada Steamship approach are cases in which the law imposes a single "unitary and absolute" duty of strict liability, such as that imposed upon a common carrier, who is significantly referred to as an "insurer" of the goods which he carries. Nevertheless, in such cases, clauses excluding liability have been construed as limited to losses caused otherwise than by negligence. There is no logical reason why the parties should not have intended to distinguish between different ways in which the duty might be broken, even though the rule imposing the duty treats those differences as irrelevant.

    67. Mr Sumption did however frankly concede that while negligence could conceptually exist as a head of liability separately from that of a common carrier, there were difficulties about the concept of negligent nondisclosure. But I would prefer to put my decision upon the wider basis adopted by Rix LJ in paragraph 156 of his judgment, namely that there is nothing in the language or context of phrases 7 and 8 to suggest that the parties did not intend them to cover negligence. There is no inherent improbability in such an intention. As Rix LJ said, in a case like this the question of negligence can never be all that far from the contemplation of the parties. It would be quite unrealistic to hold that when they said that Chase was have no liability for "any information provided by any other parties" or that such information or nondisclosure by any other parties should not be a ground for avoidance of the policy, it went without saying that they did not contemplate negligence. Negligence is a risk which the parties could reasonably have been expected to allocate to one party or the other, so as best to achieve the commercial objectives of the contract. And it seems to me that the commercial objective of the Truth of Statement clause would be substantially undermined if Chase's right to the policy monies depended upon an inquiry into whether Heaths had or had not taken reasonable care in checking the truth of representations or deciding which facts should be disclosed.

    Does the clause cover fraud?

    68. The next question is whether the words relieve Chase from liability to avoidance of the contract or damages in cases in which the misrepresentation by its agent has been fraudulent or avoidance in cases in which the nondisclosure has been dishonest. Here again I agree with Rix LJ that fraud is quite different from negligence: "Parties contract with one another in the expectation of honest dealing", particularly in an insurance context. I think that in the absence of words which expressly refer to dishonesty, it goes without saying that underlying the contractual arrangements of the parties there will be a common assumption that the persons involved will behave honestly. As Lord Loreburn LC said of the exempting clauses in S Pearson & Son Ltd v Dublin Corporation [1907] AC 351, 354, "They contemplate honesty on both sides and protect only against honest mistakes."

    69. Lord Grabiner said allowing the insurers to rescind or claim damages for fraud would undermine the purpose of the Truth of Statement clause just as much as allowing them to rescind or claim damages for negligent misrepresentation. What Chase wanted was to insulate its rights under the policies from any misconduct on the part of Heaths or anyone else. It wanted to be able to treat them as autonomous claims like documentary credits. No doubt, ideally, that is what Chase would have wanted. It does not follow that it is what the parties as reasonable people would have understood the clause to mean. Your Lordships were not referred to any case in which the language of the contract has been held to bar a remedy for inducing fraud, whether by the contracting party or his agent. I do not think that this contract does so either.

    Fraudulent nondisclosure

    70. Rix LJ went on to say that although, for the reasons just given, the Truth of Statement Clause did not exclude a remedy for rescission or damages for fraudulent misrepresentation by Heaths, it did exclude any remedy for fraudulent nondisclosure. The reason was that whereas innocent, negligent and fraudulent misrepresentation were recognised causes of action, each with its own remedies, there were no such gradations of nondisclosure. There was either an obligation of disclosure or there was not. If there was, it did not matter whether it had been negligent or fraudulent and the only remedy was avoidance of the contract. If there was not, failure to disclose could not be described as fraudulent. Disclosure was a "unitary and absolute" duty and, if excluded, was excluded altogether. Rix LJ also confessed to some difficulty in saying exactly what fraudulent nondisclosure meant.

    71. In saying that the Truth of Statement clause excluded liability for nondisclosure, I do not think that Rix LJ was intending to include that form of nondisclosure which makes a positive statement misleading - the half truth which, without disclosure of the other half, is, as Lord Macnaghten said in Gluckstein v Barnes [1900] AC 240, 251 "no better than a downright falsehood". (See also Blackburn J in Lee v Jones (1864) 17 CBNS 482, 503-504.) The declaration made by the Court of Appeal allowing the insurers to rescind or claim damages on the basis of facts which would found a good claim in deceit shows that such half truths would be actionable. But this considerably reduces the scope of the ruling that liability for nondisclosure as such is excluded, because it cannot be easy to conceal material facts in the course of negotiating insurance contracts such as these without falsifying something which has been expressly or impliedly stated.

    72. Even in respect of what may be called "pure nondisclosure", I must respectfully disagree. I would first observe that the carefully chosen language of phrases 7 and 8 does not say that the agent shall not be under a duty of disclosure. It says that the insurers shall not be entitled to avoid the contract on account of his breach of that duty. And if one asks whether the parties could have contemplated that this protection should extend to a dishonest breach of that duty, I would have no difficulty of saying what dishonesty meant. As Lord Blackburn said in Brownlie v Campbell (1880) 5 App Cas 925, 950:

    "where there is a duty or an obligation to speak, and a man in breach of that duty or obligation holds his tongue and does not speak, and does not say the thing he was bound to say, if that was done with the intention of inducing the other party to act upon the belief that the reason why he did not speak was because he had nothing to say, I should be inclined myself to hold that that was fraud also."

    73. The 1906 Act itself contemplates that one can distinguish between dishonest and innocent nondisclosure. Section 84(3)(a) lays down a general rule that when the policy is avoided (for example, for nondisclosure) the premium is returnable. But there is an exception when there has been "fraud or illegality on the part of the assured". In Rivaz v Gerussi Brothers & Co (1880) 6 QBD 222 the underwriters were held entitled to avoid the policies on account of concealment of the undervalue of the insured shipments. Brett LJ said (at p 229-230):

    "Here it was not only a concealment, but a fraudulent concealment, for the matter concealed was kept back from the knowledge of the underwriters in order that the assured might thereby derive an advantage. Being therefore fraudulent, it seems to me there should be no return of premium..."

    74. Even if phrases 7 and 8 are construed as removing the duty of disclosure, I do not think there is a conceptual difficulty about treating them as confined to cases in which noncompliance with such a duty, if it existed, would not be dishonest. As I have said earlier, the fact that the rule imposing the duty treats it as "unitary and absolute" and makes no distinction between the ways in which it may be broken is no reason why the parties should not make such distinctions in a contractual provision which limits its scope.

    75. I would therefore hold that phrases 7 and 8 do not bar the right to rescind for a nondisclosure which is dishonest in the sense described by Lord Blackburn and Brett LJ. On the other hand, nondisclosure (whether dishonest or otherwise) does not as such give rise to a claim in damages: see Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1990] 1 QB 665, 777-781 and 788 ("without a misrepresentation there can be no fraud in the sense of giving rise to a claim for damages in tort") and [1991] 2 AC 249, 280 (per Lord Templeman) and 281 (per Lord Jauncey of Tullichettle).

    A rule of law?

    76. My view that the Truth of Statement clause, upon its true construction, does not exclude a remedy for fraudulent misrepresentation or nondisclosure by Heaths makes it unnecessary for me to decide whether there is a rule of law, based on public policy, which in any event would prevent it from doing so. There is no doubt that a party cannot contract that he shall not be liable for his own fraud. But whether he can contract that he should not be liable for his agent's fraud is less clear. Mr Sumption submitted that although he might be able to exclude liability for the fraud of an agent in the performance of a contract, he could not exclude the right of the other party to rescind for the fraud of an agent in inducing the conclusion of the contract. It would be contrary to public policy to allow him to enforce a contractual advantage which had been obtained for him by the fraud of his agent.

    77. My Lords, I see the force of this submission and it has the support of remarks by some of the members of the House who took part in the decision in S Pearson & Son Ltd v Dublin Corporation [1907] AC 351. The question in that case was whether a clause in a building contract which provided that the contractor should satisfy himself as to the dimensions, levels and nature of all existing works excluded an action based on alleged fraudulent misrepresentations by the council's engineers as to the position of an existing wall. Lord Halsbury said roundly, at p 356:

    "The action is based on the allegation of fraud, and no subtilty of language, no craft or machinery in the form of contract, can estop a person who complains that he has been defrauded from having that question of fact submitted to a jury."

    78. This passage was cited and adopted by Innes CJ in the leading South African case of Wells v South African Alumenite Co 1927 AD 69, 72-73. On the other hand, Lord Loreburn LC in Pearson's case expressed himself cautiously, at p 354:

    "I will not say that a man himself innocent may not under any circumstances, however peculiar, guard himself by apt and express clauses from liability for the fraud of his own agents."

    79. He went on, however, in a passage I have already cited, to hold that the clause as a matter of construction did not cover cases of fraudulent misrepresentation.

    80. The opinions of the other Law Lords who sat in Pearson's case (there were eight altogether) are less clear and some time was devoted by counsel on both sides in the course of argument to trying to enlist them on one side or the other, including the interpretation of judgments such as Lord Macnaghten's "My Lords, I entirely agree in the motion proposed", Lord Robertson's "My Lords, I concur in the judgment proposed" and Lord Collins's "My Lords, I agree." These exercises have more in common with reading tea leaves than with legal reasoning. I would suggest to your Lordships that the question remains undecided and that it is open to your Lordships to declare the law in the sense favoured by Lord Halsbury. The question is whether you think it right to do so.

    81. I think it is significant that in the period of nearly a century which has elapsed since Pearson's case, although there have been further dicta, no court has found it necessary to decide the question one way or the other. Nor have your Lordships been referred to any Commonwealth authority which has done so. Even the statement by Innes CJ in Wells's case was an obiter dictum, since no fraud was alleged. This suggests that it is extraordinarily unlikely that parties to a contract will agree a term which excludes liability for fraud with sufficient clarity to raise squarely the question of whether it should be lawful to do so.

    82. In this state of affairs, I do not think that your Lordships should try to foresee what Lord Loreburn LC called the peculiar circumstances in which the question may one day be raised. It is dangerous to try to legislate for the unforeseeable. In this case, it is sufficient to say that the question has not arisen for decision.

    Conclusion

    83. The Court of Appeal answered the preliminary issues by declaring, first, that the insurers were entitled to avoid and/or rescind the contracts of or for insurance against Chase "provided that they prove a positive case of fraud such as would entitle them to rescind the relevant contract at common law for fraudulent misrepresentation and/or to recover damages in deceit" and, secondly, that they were entitled to damages from Chase only on the basis of a good claim in deceit. The insurers have appealed against (i) the holding that they were not entitled to avoid the contracts and claim damages for negligent misrepresentation (ii) the holding that they were not entitled to rescind for negligent nondisclosure and (iii) the holding that the clause excluded the right to avoid the contracts for dishonest nondisclosure. Chase have cross-appealed against the holding that the insurers are entitled to avoid the contracts and claim damages for fraudulent misrepresentation.

    84. I would dismiss the appeal on grounds (i) and (ii) but allow the appeal on ground (iii). I would dismiss the cross-appeal.

    LORD HOBHOUSE OF WOODBOROUGH

    My Lords,

    85. The English law of insurance has, since the 18th century, put insurance contracts into a special category. They are contracts of the utmost good faith. What this involves is spelled out in sections 17 to 20 of the codifying Marine Insurance Act 1906. In brief, it means that if an assured or his agent has failed to make full disclosure to the underwriter of all facts, which he knows or ought in the ordinary course of business to know, material to the risk, the underwriter can avoid the policy. In other words the policy becomes valueless to the assured. This negates the purpose of insurance which is to provide a secure and certain financial safeguard against losses caused by the insured risks. It makes the safeguard insecure.

    86. The practical circumstance which has since been said to justify this special treatment of insurance contracts is a disparity between the knowledge of the proposer (and his agent) and the underwriter. This may well be realistic in certain classes of business and certain types of insurance. But it is not in others. In some sectors, insurance contracts are devised and marketed by brokers as a 'product'. The 'product' is designed to be marketable to potential assureds and will usually have been negotiated by the broker with chosen leading insurers beforehand both as to terms and as to rates. The broker may have obtained a binder or open covers from the insurers. Such brokers may have a far greater expertise and ability to judge the extent of the risks and what circumstances are material to them than is possessed by most of those whom they invite to enter into the insurance contracts. The brokers will thus quite often have a relationship with the leading insurers which precedes the brokers' involvement with a given assured.

    87. In such situations it becomes questionable whether it is appropriate to place on the assured the full burden of disclosure with its attendant risk of the avoidance of the policy. Clauses protective of the assured's position become appropriate. This need not affect the position of the broker. The broker has a separate and independent duty of disclosure to the insurer. Section 19 of the Act conveniently states what this is. It applies to the agent who places the insurance for the insured. The duty of the broker has two limbs. First, he must disclose every material circumstance actually known to him or which in the ordinary course of business ought to be known by, or to have been communicated to, him. Secondly, he must additionally disclose every material circumstance which the assured is bound to disclose (unless it comes to the knowledge of the assured too late). The duty of disclosure, whether by the assured or the broker, does not apply to any circumstance as to which information is waived by the insurer: s.18(3)(c) and s.19.

    88. As regards representations, whether they are made by the assured or the broker, they must be true. If a material representation is untrue even though made in good faith, the insurer may avoid the contract: s.20. This duty is, like the disclosure duty, strict. It does not depend on dishonesty, negligence or fraud though it may arise from such a fault. Fault will only become relevant if some other remedy than avoidance is being sought by the insurers such as damages or denial of the restitutionary obligation to repay the premium: s.84.

    89. This still leaves two problems for the assured. The first is that the insurer's only remedy for non-disclosure and the insurer's primary remedy for misrepresentation is the avoidance of the policy. The breach of duty on the part of the broker thus directly damages the position of the assured and, because it may lead to a claim over by the assured against the broker, only indirectly damages the position of the broker. The second is that, if the broker's breach of duty is accompanied by some fault amounting to a common law or statutory tort, the insurer may seek to make the assured vicariously liable for the tort of his agent, the broker, even though, as in the present case, no allegation of actual fault or breach of duty by the assured is alleged.

    90. Accordingly, if a special clause is to be inserted into the insurance contract to protect the interests of the assured and curtail what would otherwise be the insurer's rights, consideration needs to be given, and agreement reached, as to how far the clause is to go - whether it is to cover all these matters or only some of them and, if so, in what terms. Such a clause, although it is protective of one party at the expense of the other, serves a genuine commercial purpose and enables insurance business to be done to the benefit of both parties (and of the broker). Whilst still applying the normal canons of construction, there is no reason to give an unduly restrictive construction to such clauses or to fail to respect the commercial mutually beneficial purpose they are intended to serve.

    91. Turning to the present case, the facts, both those not in dispute and those which have to be assumed for the purposes of the present appeal, have been sufficiently summarised in the Opinion of my noble and learned friend Lord Hoffmann. They illustrate some of the points to which I have already referred, including the far from passive role of the brokers and their particular interest in procuring this insurance. The preliminary issues which have to be decided likewise raise questions of the construction of a special clause of the type which I have been referring to and to more fundamental questions of the result of fraud on the part of the agent who has effected the contract. I agree with the orders proposed by my noble and learned friend Lord Bingham of Cornhill and the formal answers he would give to the preliminary issues.

    92. The insurance with which this appeal is concerned was a specialised class of insurance, 'time variable contingency insurance', an insurance 'product' for the purpose of supporting loans for the financing of film productions. The proposer was a bank which had agreed to provide finance to a company of no significant substance that the group making a film had set up as a vehicle for the money needed to make the film, the money to be repaid to the vehicle by assigning revenues from the exploitation of the film. This assigned revenue was then further assigned by the vehicle to the bank as security for the repayment of its loan. The bank had no particular expertise enabling it to assess the likely profitability of a film nor had it any knowledge of its own as to the basis for or the reliability of the figures put forward by the film company, nor, it seems, of how the relevant revenue would be calculated and what deductions would have been made from it. The commercial purpose of the insurance was to protect the bank against the risk that the assigned revenue would be insufficient to secure the repayment of the loan. This risk the bank (unlike the brokers) was itself no better placed to assess than the underwriters; any facts which the bank provided would have to be obtained from others. The only people who really knew were the persons who devised and were responsible for setting up the complex overall scheme of corporate structures and interrelated contracts of which the bank loan and the insurance policy formed a subsidiary part and those who were responsible for the making and marketing of the film. The bank's lack of knowledge of the material facts lay at the heart of the need for the insurance contract and is a primary source of the risk which it was seeking to insure. An essential part of the certainty of the security thus provided is that the insurance contract should contain an appropriate clause negativing the bank's duty to ascertain and disclose all material facts. By definition the bank is going to be unable to do this and without such a clause, the bank's security will probably be valueless. The courts must recognise this and give effect to the clause the parties have agreed upon in accordance with its terms, properly construed.

 
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