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)
93. The relevant insurance contract contained a clause entitled the 'truth of statement' clause which has already been set out in the Opinion of my noble and learned friend Lord Hoffmann. This clause specifically limited the assured's duty to disclose as is illustrated most clearly by section 6 of the clause (using the same sub-divisions as the judge and the Court of Appeal) - "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)". This provision is to be given full effect to. The duty which would otherwise rest upon the assured to disclose fully all material circumstances is negatived. But the duty of the broker is unaffected. The respondent bank has argued that the waiver of the assured's duty must imply the waiver of the brokers' duty as well. This does not follow. First, their roles are different, markedly so in the present transaction. Secondly, waiver by the insurer of information as to certain circumstances will enure for the benefit of both the assured and the broker (eg the opening words of s19 of the 1906 Act) but that is not what the clause provides; it is directed alone to the personal position of the assured not to any material circumstances.
94. The next two sections of the clause say: "the insured shall have no liability of any nature to the insurers for any information provided by any other parties ... including, but not limited to, [the Heath broking company through whom the risk was placed] ... and any such information provided by or non-disclosure by other parties including, but not limited to [the Heath company] ... shall not be a ground or grounds for avoidance of the insurers' obligations under the policy or the cancellation thereof." These sections go further than section 6. They exclude liability of the assured and limit the insurers' right to avoid the policy. What is their scope? They expressly include information provided by and non-disclosure by the brokers and they are stated to apply to others as well. They make no reference to any class of fault or absence of fault; thus the non-disclosure may be by a person who is innocent of any fault, or by a person who has been negligent or by a person who is acting fraudulently.
95. The appellant insurers have argued that these provisions are capable of referring to innocent non-disclosure and innocent misrepresentation and should therefore not be construed as applying to negligent or fraudulent conduct. As regards negligent conduct, they support their argument by reference to such authorities as the Canada Steamship case,  AC 192. However, like your Lordships, I would reject that argument as giving too restricted an interpretation to this clause in its context. I have already referred to the general purpose of the clause, which is the protection of the assured. The liability for the consequences of the non-disclosure or misrepresentation of circumstances material to the acceptance of the risk is in law strict and to make distinctions between misrepresentations with and without negligence, whilst not academic under the Misrepresentation Act 1967, is not part of the purpose of this clause and would disproportionally depreciate the security which the policy is designed to provide to the assured. To make any such distinction for the purposes of bare non-disclosure would likewise be irrational. It is only when the failure to disclose amounts to an implicit misrepresentation that some additional factor may have relevance not to the right to avoid the policy but to some other remedy arising independently of the law of insurance.
96. But negligence is not the only, or even the primary matter relied upon by the insurers in the present case. For present purposes the pleaded allegations made by the insurers are to be assumed to be correct. My noble and learned friend Lord Hoffmann has summarised the relevant allegations and explained their context and relevance to the transactions which led to this litigation. They involve serious allegations of fraud against the brokers, being one or more of the Heath companies acting in conjunction and the individual broker in their employ to whom they delegated the placing of this insurance with the insurers. It is accepted that what is alleged consists of actual fraudulent misrepresentations by Heaths as placing brokers to the insurers on matters of fact material to the risk being placed and its acceptance. This raises a number of questions.
97. The first is the question of construction: whether, as a matter of the correct interpretation of the 'truth of statement' clause, such fraudulent misrepresentations come within the terms of sections 7 and 8. Sections 7 and 8 are expressed in terms wide enough read literally to include any misrepresentation by Heaths: "any ... information provided by [Heaths] ... shall not be a ground or grounds for avoidance of the insurers' obligations under the policy or the cancellation thereof". Should one treat this clause as intended to cover material fraud on the part of the assured's brokers in placing the risk? Like the majority of your Lordships I would answer this question in the negative. Fraud and negligence are different from each other in kind. Commercial men recognise the risk of want of care or skill; they do not contemplate fraud in the making of the contract. Heaths were the insured's brokers. No question of authority arises. They were employed by the insured to place the risk. The fraudulent representations were made in the course of that placement and to enable it to be achieved. Sections 7 and 8 can sensibly be construed as covering honest errors and honest misrepresentations whether negligent or not. But there is no justification to construe them as covering fraudulent misrepresentations and they should not receive that construction without express words which necessitate giving that meaning to them or clearly disclose such an intention. Despite the commercial importance of the 'truth of statement' clause in this transaction which I have earlier emphasised and the need to give it a construction which recognises that importance, it is quite another matter to use it as a means of holding insurers liable on an insurance contract even though that contract has only been procured by means of a fraud practised on them by the proposer's agent. The same conclusion follows for both the remedy of avoidance and the remedy of damages if there should be any. The clause does not make any such distinction.
98. The same conclusion results from the application of more general principles. Where a contract has been procured by the material fraud of one party (or of the agent he has employed to make the contract), the party deceived has not given a true consent to be bound by the contract. He is entitled at common law to avoid the contract when he discovers the deceit. If he elects at that stage not to avoid the contract, he will have chosen to affirm it and consent to it with knowledge of the fact that he had earlier been deceived. He is then bound by the contract. But on the assumed facts of the present case, no such consent was ever given and the assured cannot rely upon a term of a contract to which he has never validly obtained the insurers' agreement. It is true that in some circumstances there may be a collateral agreement, such as a jurisdiction clause or an arbitration clause, which may be capable of taking effect even though the validity of the primary contract is in dispute: eg Heyman v Darwins  AC 356 and Mackender v Feldia AG  2 QB 590. But this is not such a case nor is the 'truth of statement' clause such a collateral agreement. Public policy considerations would also apply to the question whether a principal should be permitted to take advantage of his agent's fraud. Ex hypothesi, the principal would be liable at common law for his agent's fraud committed in the course of carrying out the agency and the principal is only protected if he can set up a valid contractual exemption. But that involves the principal relying upon and seeking to take advantage of the very fraud for which he is liable. If a party wishes to insure against his agent's fraud, he should, independently of that agent and of the contract entered into through that agent, take out cover which specifically insures that risk. Such fidelity type policies exist but the policy in the present case is in no way such a policy. I would add, for the sake of completeness that the present case is not concerned with a situation of the dishonest conduct of a servant or agent in the course of the performance of a wholly valid contract, say, a contract of carriage, and an exemption of, say, the theft of the goods in transit. There questions of construction may well arise but, absent other factors, not the questions discussed in this paragraph - material fraud by the contracting agent which has induced the other party's assent to the contract.
99. It follows that I agree with the orders and answers proposed by Lord Bingham.LORD SCOTT OF FOSCOTE
100. The appeal before the House arises out of the answers given first by Aikens J and then by the Court of Appeal (Aldous and Rix LJJ and Lloyd J) to the preliminary issue that had been directed to be tried by Longmore J. The preliminary issue was formulated as follows:
101. Nothing for present purposes turns on (c). The 2nd and 3rd defendants (Heaths) have taken no part in this appeal. The issues are those arising under (a) and (b). But these issues must be decided on a hypothesis. The hypothesis is that the facts and matters pleaded in the particulars of claim, as amended, are true. Nothing in the conclusions reached by the House on those issues can prevent Chase from undermining them by successfully disputing the pleaded facts on which they are based.
102. I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Hoffmann and gratefully adopt his description of the facts and circumstances that have given rise to this litigation. It is apparent that the issues raised by the preliminary issue turn upon the construction of and the effect to be given to the Truth of Statement clause referred to in paragraph 43 and set out in paragraph 44 of my noble and learned friend's opinion.
103. Issues of construction of contracts, particularly of complex commercial contracts such as the insurance contract containing the Truth of Statement clause with which your Lordships are concerned, cannot be sensibly addressed otherwise than in the context of their factual matrix and commercial purpose, objectively ascertained. As Lord Wilberforce observed in Reardon Smith Line Ltd v Yngvar Hansen-Tangen  1 WLR 989, 995-996:
104. In the paradigm case of insurance arranged by a broker, the broker is acting as agent for the insured. As it is put in Arnould, Law of Marine Insurance and Average, 16th ed (1981), vol 1, p 104, para 161:
105. In the paradigm case, the would-be assured uses the services of the broker to procure insurance against a particular risk, so the relationship of principal and agent is easy to understand. But the present case is not the paradigm case. At least it may emerge after investigation of the facts at trial that it is not.
106. Much of the provenance of the insurance policies within which this case is concerned seems not to be in dispute. In paragraph 29 of Lord Hoffmann's opinion the part played by Mr Bradstreet and his company, Premier Media Ltd ('PML'), is described. Under the agreement of 7 July 1995 between PML and Phoenix Pictures Ltd ('PPI'), arrangements were made for the financing of films which PPI proposed to produce. The financing was to be by bank loan to a limited liability company to be established by PPI for the purpose of being the producer of the film in question. Since the producer company's covenant for repayment of the loan would be likely to have little weight, adequate security would have to be provided to the lending bank. The security was to take the form, first, of an assignment to the lending bank of a share of receipts from the film and, secondly, of the benefit of a policy of time variable contingency ('TVC') insurance. TVC insurance was an insurance product developed in about 1992 for the purpose of supporting loans for the financing of film productions. Heaths had played a part in the development of TVC insurance and had brokered it in the marketplace. So under the 7 July 1995 agreement recoupment by the lending bank of the bank loan to finance each film was to be insured by a TVC insurance policy in respect of which Heaths was to be the broker. The production company and the lending bank were to be co-assured, but the production company was to assign to the bank all its rights under the policy. Paragraph 5.1.2 of the agreement said :
107. Pursuant to this agreement Heaths began "broking the Phoenix insurance programme in the marketplace" (para 21 of the amended particulars of claim). The broking led to the insurance contracts that are in issue in the present case.
108. In paragraph 19 of the amended particulars of claim it is pleaded:
and in paragraph 20, it is pleaded:
109. The allegation in paragraph 19 is denied by Chase (see paragraph 9 of Chase's interim defence), but its truth is to be assumed for the purpose of the preliminary issue. The agency allegation is not, however, one which achieves any obvious credibility from "the premises" referred to and there must be a fair prospect that it will not be sustained at trial. As to Heaths' role as the insurance broker, Heaths was not placed in that position by Chase but by PML and PPI pursuant to the terms of the 7 July 1995 agreement. One view of the role of Heaths is that they and PML were middlemen whose job it was to put together the finance package consisting of a bank willing to lend on the security of a share of film receipts backed by TVC insurance and insurers willing to effect the TVC insurance. On this view it is difficult to see why PML and Heaths, together or individually, were any the more agents for the bank lenders than for the insurers. In broking the TVC insurance Heaths were not placing a risk against which Chase had requested them to obtain cover. They were marketing to Chase a pre-conceived package. This, in my opinion, is the commercial matrix in the context of which the insurance contract, and the Truth of Statement clause in particular, must be construed.
110. In considering the part played by Heaths in bringing into existence the TVC insurance contract of which Chase claim the benefit in this litigation, your Lordships ought, in my respectful opinion, to be on guard against attributing to the brokers, Heaths, a relationship with the assured, Chase, that would necessarily correspond to the normal broker/assured relationship. Heaths were not chosen by Chase to be their brokers. Heaths were appointed brokers by PML/PPI. The evidence at the trial may show that Chase had no knowledge at all of the commercial prospects of the film that they were to finance and no knowledge as to whether their slice of receipts would be likely to suffice to recoup the loan or whether or to what extent it would be likely they would need to claim under the policy. This knowledge would have been held by one or other of PPI, PML and Heaths.
111. Lord Halsbury LC in Blackburn, Low & Co v Vigors  12 App Cas 531, 537 warned against "the somewhat vague use of the word 'agent'" which, he said, "leads to confusion". The case concerned a different problem from that which arises in the present case but the warning is salutary. Heaths, the brokers, were agents of Chase only in form, in that it was through Heaths' brokerage that the insurance was effected. Chase had every reason to want to distance themselves from responsibility for what Heaths, and PML for that matter, had done, or said or omitted to say in bringing the insurance contract into being. As my noble and learned friend Lord Steyn commented in the course of Mr Sumption's submissions, the commercial purpose of the Trust of Statement clause was surely to insulate Chase from the entire broking process. The comment is, in my respectful opinion, an apt one and one that the evidence at trial is likely to endorse.
112. The language used in the Truth of Statement clause was in very wide, all-embracing, terms. Phrase 6 is expressed to absolve Chase from "any duty or obligation to make any representation, warranty or disclosure of any nature "; phrase 7 says that Chase shall have "no liability of any nature to the insurers for any information provided by any other parties"; phrase 8 says that "any such information provided by or nondisclosure by other parties shall not be a ground or grounds for avoidance of the insurers' obligations under the policy " (Emphasis added).
113. It is true that these are general words. They do not specifically refer to negligent or dishonest or fraudulent (if different from dishonest) provision of information or nondisclosure of information. Taken simply as a matter of literal meaning, these words are apt to cover all information, supplied or withheld, as the case may be, for whatever reason. Why should a court of construction give to these words a restricted scope? Only if it is necessary to do so in order to give effect to the commercial purpose of the clause.
114. As to negligence, it is suggested that because the words are general words that would cover information that had been supplied or withheld without negligence, the words should not be allowed to cover information supplied or withheld negligently. Canada Steamship Lines Ltd v The King  AC 192 is cited as authority.
115. The Canada Steamship case, an appeal from the Supreme Court of Canada, concerned a provision in a lease of a freight shed exonerating the lessor from "any claim for damage to goods being in the said shed" and requiring the lessee to indemnify the lessor "from and against all claims ". The negligent use of an oxy-acetylene torch by one of the lessor's employees led to a fire which destroyed the shed and all its contents. The question was whether the lessee could claim against the lessor for the loss of its goods that had been in the shed. Lord Morton of Henryton giving the judgment of the Board, summarised in three paragraphs the duty of a court in construing exemption from liability clauses. The first paragraph said that if there were an express exemption from the consequences of negligence the court must give effect to it. The second paragraph said that in the absence of an express exemption the court should consider whether the words were wide enough to cover negligence and, in the event of doubt, should apply the contra proferentem rule. The third paragraph said that if the words were wide enough to cover negligence the court should consider whether the words might have been directed at a possible head of damage other than negligence and that, if so, the exemption should be construed as not covering negligence.
116. Mr Sumption has submitted that phrases 7 and 8 in the Truth of Statement clause fall within Lord Morton's third paragraph. There is no express reference to negligence; the words are wide enough to cover negligence; but the words would cover also a withholding or supplying of material information that could not in the circumstances be categorised as negligent. So, he submitted, the scope of the words should be limited accordingly. He drew your Lordships' attention to Toomey v Eagle Star Insurance Co Ltd (No 2)  2 Lloyd's Rep 88 where, applying Lord Morton's third paragraph, Colman J held, at p 93:
My Lords, I am unable to agree that this approach can be right. Lord Morton was expressing broad guidelines not prescribing rigid rules. It cannot be right mechanically to apply the guideline incorporated in his third paragraph so as to produce a result inconsistent with the commercial purpose of the contract in question.
117. Given the commercial purpose of the Truth of Statement clause, namely, to insulate Chase from representations or nondisclosures by Heaths and others material to the effecting of the TVC insurance policy, it is impossible to conclude that the parties did not intend negligent representations or nondisclosures to be covered. I agree with my noble and learned friend Lord Hoffmann that that purpose would be substantially undermined if negligence were held to be not covered.
118. The next question is whether the words are wide enough to cover dishonesty on the part of Heaths or others. No charge of dishonesty is levelled at Chase, so phrase 6 is not here engaged. The question is whether a dishonest representation or nondisclosure by Heaths, or by PML, is covered by phrases 7 and 8.
119. Heavy reliance has been placed by Mr Sumption on S Pearson & Son Ltd v Dublin Corporation  AC 351. The action arose out of a building contract under which Pearsons were the building contractors engaged by the corporation to carry out building works. It was alleged that agents of the corporation had made false representations about the extent of the work that had to be done. They sued the corporation in deceit. The corporation relied on provisions in the building contract requiring the contractor to satisfy itself as to all things connected with the contract works and under which the corporation disclaimed responsibility for the accuracy of information supplied to the contractor. There were eight members of the House who took part in the case. Lord Loreburn LC said, at pp 353-354:
However, he reserved his opinion as to whether a person might "guard himself by apt and express clauses from liability for the fraud of his own agents."
120. Lord Halsbury treated the contractual provisions as inapplicable (see p 356). He said, at p 359:
As Lord Hoffmann has observed, it is difficult to identify a clear majority ratio from the Pearson case. But it certainly provides some support for Mr Sumption's submission.
121. On the question whether a contractual clause exonerating a party from liability for misrepresentations or nondisclosures covers fraudulent misrepresentations or dishonest non-disclosures, two lines of argument become relevant and both have been addressed to your Lordships in this appeal. The first line of argument proposes a rule of public policy. A party cannot be allowed to benefit from his own fraud or from the fraud of his alter ago. So if an exclusion clause on its true construction purports to cover such fraud, it cannot, on public policy grounds, be permitted to have that effect.
122. I would, for my part, be content to accept the need for and the existence of such a rule. If the Truth of Statement clause in the present case had contained a phrase expressed to exonerate Chase from any liability for fraudulent representations made by itself, Chase could not have relied on the phrase to bar an action based on its own fraudulent misrepresentation. I can, however, for my part see no reason of public policy why a party should not exclude his contractual liability for fraudulent misrepresentation by his agent. And I can see no reason of public policy why parties should be unable by contract to exclude a right of rescission for misrepresentation by an agent, whether the misrepresentation be innocent, negligent or fraudulent. Public policy would, in my view, come into play only where the agent's principal knew of or was otherwise complicit in the fraud or where the agent was the alter ego of the principal, as an executive director may be of his company.
123. The other line is that of construction. The need for a rule of public policy is because it is possible, as a matter of language, to so draft a contract as to make it clear that the exclusion clause is intended to cover fraud not only of agents of the principal but also of the principal himself.