Banque Financiere de la Cite S.A. (formerly Banque Keyser Ullmann S.A.) v Westgate Insurance Company Ltd (formerly Hodge General & Mercantile Company Ltd); Banque Keyser Ullmann S.A. v Skandia (U.K.) Insurance Company Ltd

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLord Brandon of Oakbrook,Lord Bridge,Lord Templeman,Lord Ackner
Judgment Date19 July 1990
Judgment citation (vLex)[1990] UKHL J0719-2
Date19 July 1990

[1990] UKHL J0719-2

House of Lords

Lord Bridge of Harwich

Lord Brandon of Oakbrook

Lord Templeman

Lord Ackner

Lord Jauncey of Tullichettle

Banque Financiere De La Cite S.A. (Formerly Banque Keyser Ullman S.A.)
Skandia (U.K.) Insurance Company Limited and Others
Lord Bridge

My Lords,


I gratefully adopt the lucid account given in the speech of my noble and learned friend Lord Templeman of the facts of this case. As appears from that account both the banks and the insurers were defrauded by the principal villain of the piece, Mr. Ballestero. It is not a little surprising that presumably hard-headed businessmen were taken in by his barefaced deceptions. Quite independently of any fraud on the part of Mr. Ballestero the banks had the misfortune to employ insurance brokers whose dishonest servant, Mr. Lee, twice deceived them into believing that they had insurance cover to protect them in the event of non-repayment of their loans to Mr. Ballestero and his companies when in fact they had not. Mr. Lee's first fraud was in the issue of a cover note in respect of the first and second excess layers of cover required in connection with the first Ultron loan before he had found insurers willing to complete that cover. But by mid-June 1980 the necessary cover was completed. Mr. Lee's second fraud was to issue a cover note in respect of the additional cover required in connection with the second Ultron loan when he had obtained no effective insurance cover at all. Mr. Dungate, the employee of Hodge, came to know of Mr. Lee's first fraud and, as the judge held, could have foreseen his second.


There can never have been any doubt that the frauds of Mr. Ballestero entitled the insurers to repudiate liability under the fraud exclusion clause. But a question of central significance in relation to the other issues in the case is whether Mr. Lee's fraud had the same effect. Both courts below seem to have taken it for granted that it did. The clause provides that the insurers shall not be liable for:

"Any claim or claims arising directly or indirectly out of or caused directly or indirectly by fraud, attempted fraud, misdescription or deception by any person, firm, organisation or company."


This is very wide language, but I cannot think that it embraces a fraud practised on the insured by his own agent in a matter with which the insurers are not concerned. Hodge and the other insurers who had covered the first and second excess layers were not affected in any way by the fact that the banks were induced by Mr. Lee's first fraud to advance the first Ultron loan before the insurance cover was complete. Still less was it any concern of theirs that when the banks made the second Ultron loan they had not obtained the additional insurance cover they wanted. If there had been no fraud on the part of Mr. Ballestero, but he had simply become insolvent, the claim by the banks to repayment in virtue of the insurance cover which they had obtained could not in any sense be said to have arisen out of or been caused by Mr. Lee's fraud in relation to the insurance cover which they had not obtained. In that event I would have regarded an attempt by the insurers to repudiate liability under the fraud exclusion clause on the ground of Mr. Lee's fraud as virtually unarguable.


This conclusion is of relevance first to the question whether Mr. Dungate's failure to disclose to the banks his knowledge of Mr. Lee's first fraud was a breach of duty as falling within the ambit of the obligation of the utmost good faith which it is common ground both insured and insurer owed to each other. Slade LJ, delivering the judgment of the Court of Appeal, said [1989] 3 W.L.R. 25, 80-81:

"In adapting the well established principles relating to the duty of disclosure falling upon the insured to the obverse case of the insurer himself, due account must be taken of the rather different reasons for which the insured and the insurer require the protection of full disclosure. In our judgment, the duty falling upon the insurer must at least extend to disclosing all facts known to him which are material either to the nature of the risk sought to be covered or the recoverability of a claim under the policy which a prudent insured would take into account in deciding whether or not to place the risk for which he seeks cover with that insurer."


I do not dissent from this statement of the ambit of the duty. But an obligation on Mr. Dungate to disclose what he knew of Mr. Lee's first fraud could only fall within the ambit of the duty as "material … to the recoverability of a claim under the policy" if Mr. Lee's frauds were such as would entitle the insurer to repudiate liability. Having concluded that they were not, it follows, in my opinion, that Mr. Dungate's failure to disclose to the banks the dishonesty of their agent, whatever may be said about it as a matter of business ethics, did not amount to the breach of any legal duty.


The second relevance of the conclusion that the insurers could not have repudiated liability on the ground of Mr. Lee's fraud is that, even if Hodge, as employers of Mr. Dungate, owed a duty of care to disclose Mr. Lee's fraud to the banks, the breach of that duty did not cause the banks' loss. The reasons for this conclusion are fully explained in the speech of my noble and learned friend Lord Templeman and I need not repeat them.


Thus, at the end of this long and complex litigation the outcome is dictated by a short point on the construction of the fraud exclusion clause as applied to a combination of circumstances of a very unusual nature which is unlikely ever to be repeated. This ground alone means that the appellants fail on the issues of both duty and causation. The result is that the questions of law so fully and carefully canvassed in both judgments below become academic. I reserve my opinion on the issues of law on which the judge and Court of Appeal differed, thinking it better that they should be resolved if and when they arise again on facts which require their determination.


I would accordingly dismiss the appeal.

Lord Brandon of Oakbrook

My Lords,


For the reasons given in the speeches of my noble and learned friends, Lord Bridge of Harwich, Lord Templeman, and Lord Jauncey of Tullichettle, I would dismiss the appeal.

Lord Templeman

My Lords,


By an agreement the terms of which were embodied in a consortium loan agreement dated 23 January 1980 ("the loan agreement") the appellant, Banque Financiere de la Cite S.A. then named Banque Keyser Ullman Suisse S.A. ("Kusa") with two other banks, namely, the American Fletcher Bank and Banca Unione di Credito, agreed to advance between them to Ultron A.G. a Liechtenstein company, ("Ultron") S.F.26,250,000 for the purchase of the capital of certain Spanish companies which owned and were developing property in Menorca appropriately named "Shangri-La." The loan was for a limited period of two years with interest payable on 20 June 1980 and thereafter at the end of every six months. The advance was to be made after delivery of the specified guarantees. These guarantees included the pledge of a parcel of gemstones (emeralds, rubies and sapphires) of a replacement value of S.F.75,000,000 later increased to S.F.95,000,000, and an insurance for S.F.37,000,000 "guaranteeing, in the event of the borrower defaulting, payment to the Banks of any outstanding sum after realisation of the pledge." Ultron was a company controlled by a Mr. Ballestero.


Kusa appointed a firm of insurance brokers, Ernest A. Notcutt & Co. Ltd. ("Notcutts") to be the agents of the banks in arranging the required insurance. The employee of the brokers who undertook the task of effecting the insurance was a Mr. Lee. He arranged the insurance in three layers. Under the primary cover layer insurance, the respondent, Westgate Insurance Co. Ltd. (then Hodge General & Mercantile Insurance Co. Ltd. ("Hodge") was the sole insurer. By the terms of the primary cover the banks warranted that the contemplated advance to Ultron including accumulated interest would not exceed S.F.37,000,000. Hodge agreed to insure the banks against any difference between the proceeds of sale of the pledged gemstones and the amount outstanding on the loan on 20 December 1981. The liability of Hodge was limited to S.F.9,250,000.


Under the first excess layer insurance each of a number of insurers agreed to pay a proportion of any loss suffered by the banks so far as that loss exceeded the S.F.9,250,000 insured by the primary cover. The aggregate liability of the insurers under the first excess layer was limited to S.F.9,250,000.


Under the second excess layer insurance each of a number of insurers agreed to pay a proportion of any loss suffered by the banks so far as that loss exceeded the S.F.18,500,000 insured by the primary cover and the first excess layer. The aggregate liability of the insurers under the second excess layer was limited to S.F.18,500,000. Thus the three insurances together provided the cover of S.F.37,000,000 required by the loan agreement.


By 28 January 1980, Mr. Lee had issued three cover notes certifying that total insurance had been effected. The cover note in respect of the primary cover correctly stated that Hodge had agreed to insure S.F.9,250,000. The cover note in respect of the first excess layer has been held in these proceedings to have been fraudulent. The cover note showed Hodge as being liable for 20 per cent. of the cover although Hodge had only agreed to insure for 14 days pending written confirmation from other insurers replacing them. The cover note in respect of the second excess layer was also fraudulent because some promised lines of insurance had not been confirmed and a substantial part of the cover had not been placed at all.


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