Deutsche Ruckversicherung Aktiengesellschaft v Walbrook Insurance Company Ltd [QBD (Comm)]

JurisdictionEngland & Wales
JudgePhillips J
Judgment Date21 April 1994
CourtQueen's Bench Division (Commercial Court)
Date21 April 1994

(Queen's Bench Division (Commercial Court)

Phillips J.

Deutsche Ruckversicherung Aktiengesellschaft
Walbrook Insurance Co Ltd & Ors
Group Josi Re (formerly Known As Group Josi Reassurances Sa)
Walbrook Insurance Co Ltd & Ors

Andrew Bartlett QC and Marion Egan (instructed by Cameron Markby Hewitt) for the plaintiffs.

Stewart Boyd QC and David Joseph (instructed by Freshfields) for the defendants.

The following cases were referred to in the judgment:

Agip (Africa) Ltd v Jackson & OrsELR [1991] Ch 547.

American Cyanamid Co v Ethicon LtdELR [1975] AC 396.

Belmont Finance Corp Ltd v Williams Furniture Ltd & OrsELR [1979] Ch 250.

Blackburn Low & Co v VigorsELR (1887) 12 App Cas 531.

Bolivinter Oil SA v Chase Manhattan Bank & Ors [1984] 1 LI Rep 251.

Container Transport International Inc & Anor v Oceanus Mutual Underwriting Association (Bermuda) Lid [1984] 1 LI Rep 476.

Dong Jin Metal Co v RaymetUNK (unreported, 13 July 1993, CA).

Edward Owen Engineering Ltd v Barclays Bank International Ltd & AnorELR [1978] QB 159.

El Ajou v Dollar Land Holdings plc & AnorUNK [1994] BCC 143.

Fitzherbert v MatherENR (1785) 1 TR 12; 99 ER 944.

Grosvenor and West-end Terminus Railway Hotel Co Ltd, Re (1897) 76 LT 337.

Hampshire Land Co, ReELR [1896] 2 Ch 743.

Hamzeh Malas & Sons v British Imex Industries LtdELR [1958] 2 QB 127.

Harbottle (R D) (Mercantile) Ltd v National Westminster Bank Ltd & OrsELR [1978] QB 146.

Houghton (J C) & Co v Northard, Lowe and Wills Ltd [l928] AC 1.

Kwei Tek Chao & Ors v British Traders & Shippers LtdELR [1954] 2 QB 459.

Metall und Rohstoff v Donaldson Lufkin & Jenrette lnc & AnorELR [1990] 1 QB 391.

Newsholme Bros v Road Transport and General Insurance Co LtdELR [1929] 2 KB 356.

Pan Atlantic v Pine Top [1993] 1 LI Rep 496.

Richardson v Polimex [1978] 1 LI Rep 161.

SBA Properties Ltd, ReWLR [1967] 1 WLR 799.

Savings and Investment Bank Ltd v Gasco Investments (Netherlands) BVWLR [1984] 1 WLR 271.

Siskina v Distos Compania Naviera SAELR [1979] AC 210.

United City Merchants (Investments) Ltd & Anor v Royal Bank of Canada & OrsELR [1983] 1 AC 168.

United Trading Corporation v Murray Clayton [1985] 2 LI Rep 554.

Reinsurance — Interlocutory injunctions — Avoidance of reinsurance contracts by reinsurers on basis of own illegality — Whether contracts void — Whether letters of credit similarly tainted by illegality — Whether reinsurers entitled to injunctions to prevent reinsured from drawing on letters of credit or disposing of proceeds.

Evidence — Affidavit in support of interlocutory injunction applications — Whether deponent entitled to depose to facts not within own knowledge obtained from intermediate source without specifying primary source — Whether Department of Trade and Industry report admissible — Rules of the Supreme Court, O. 41, r.5(2).

These were two consolidated actions in which the plaintiff reinsurance companies sought to avoid onerous contractual obligations by relying on their own illegality, and to taint letters of credit with that illegality in order to prevent the defendant reinsured from drawing on those letters of credit.

The plaintiff reinsurers and the defendant reinsured entered into a number of reinsurance contracts between 1973 and 1980. The reinsured claimed that sums greatly exceeding the premiums paid were due to them under those policies. The reinsured retained substantial reserves in respect of potential liabilities of the reinsurers until 1983. In consideration of the reinsured making over those loss reserves to the reinsurers, the latter procured the opening of a number of letters of credit issued by banks in favour of the reinsured.

In each action as originally pleaded the reinsurers claimed declarations that the reinsurance contracts were illegal, unenforceable and void because the reinsurers had themselves carried on insurance business in the UK without the authorisation required by statute. They further claimed that the letters of credit were also illegal, void and unenforceable and sought, inter alia, an order restraining the reinsured from assigning, charging, presenting documents or drawing upon the letters of credit. In July 1993 the reinsurers obtained an ex parte injunction restraining the reinsured from drawing on the letters of credit, which was set aside on 21 December 1993 by Clarke J. He held that illegality of the underlying contracts of reinsurance would not taint the letters of credit. The amended points of claim averred that the contracts of reinsurance had been duly avoided for fraudulent misrepresentation and/or non-disclosure. The fraud relied on was the improper diversion by certain directors for their own purposes of a five per cent “overriding commission”, which under the contracts was to be retained by the reinsured. On 19 November 1993 the reinsurers purported to avoid the reinsurance contracts on the ground of that non-disclosure, and contended that in consequence the reinsured were no longer entitled to payments under those contracts. It followed that they could not properly draw on the letters of credit.

The reinsurers issued summonses in each action claiming interlocutory injunctions restraining the reinsured from drawing on the letters of credit, or from disposing of the proceeds of the letters of credit. In support the reinsurers relied on the contents of a Department of Trade and Industry report of investigations under s. 432(2) of the Companies Act 1985 into two companies in liquidation (“the DTI report”). The reinsurers sought by cross-summonses to strike out those part of the reinsurers” affidavits referring to the DTI report and the DTI report exhibited to the affidavits.

Held, refusing to grant the injunctions sought:

1. In interlocutory proceedings affidavit evidence was admissible under RSC, O. 41, r. 5(2) if it contained material not factually within the knowledge of the deponent without the original source of that information or belief necessarily being identified, where those facts were learned from an intermediate source which there was good reason to believe would itself have had access to primary sources of information. (Savings and Investment Bank Ltd v Gasco Investments (Netherlands) BVWLR[1984] 1 WLR 271 not followed.)

2. The DTI report, which consisted largely of conclusions of fact based on evidence considered by the inspectors but not within the personal knowledge of the deponents to whose affidavits it was exhibited, and to which reference was made in those affidavits, was nevertheless admissible in interlocutory proceedings by reason of O.41, r. 5(2).

3. The test to be applied where an injunction was sought against a beneficiary was no different from the test applicable when an injunction was applied for against a bank which had issued or confirmed the letters of credit. In order to obtain the injunctions sought the reinsurers had to establish that, in drawing on the letters of credit, the reinsured would be acting fraudulently in that they knew they had no entitlement to the payment they were claiming.

4. Material was required to be disclosed to an insurer where it probably tended to increase the risk. Although there was prima facie evidence of fraud in relation to the diversion of overriding commission by certain of the reinsurers' directors, that fact did not on the face of it have an impact on the risks being reinsured. It was therefore questionable as to whether the non-disclosure to the reinsurers of fraud by certain of their own directors was material and as such required to be disclosed.

5. Where a director or broker committed a fraud on a company which had no direct impact on a risk which was placed on behalf of that company with insurers or reinsurers, but that fraud was said to be only a moral hazard, the company was not imputed with the fraudulent knowledge of the fraudster. (Re Hampshire Land CoELR[1896] 2 Ch 743 applied; Fitzherbert v MatherENR(1785) 1 TR 12 not followed.)

6. In those circumstances the reinsurers had not established that they had validly avoided the contracts of reinsurance. It followed that the reinsurers had not made out a clear case that the reinsured would be acting fraudulently if they drew on the letters of credit. Accordingly the application for injunctions restraining them from doing so were dismissed.

7. Since the reinsured had failed to establish a proprietary interest in moneys that might be paid to the reinsured by the banks under the letters of credit, their claims for injunctions restraining disposal of the proceeds of the letters of credit were refused.


Phillips J: I am concerned with two actions which are now consolidated. The second is almost, but not quite, a carbon copy of the first. The defendants in each action are the same. They are insurance companies which belonged to a pool for some or all of the period 1974-1980. The plaintiffs in the first action are a German reinsurance company. The plaintiffs in the second action are a Belgium reinsurance company. Pleadings and proceedings in the second action have so closely mirrored those in the first that I can in this judgment deal with both at the same time. I shall refer to the plaintiffs in each action as “the reinsurers” and the defendants in each action as “the reinsured”. As this nomenclature indicates, the reinsured and the reinsurers were party to a number of reinsurance contracts concluded between 1973 and 1980. The reinsured claim that there is due to them under these contracts sums which greatly exceed the premiums paid.

In the course of 1983 the reinsurers procured the opening of a number of letters of credit in favour of the reinsured. In the first action these were issued by Vereins-und Westbank, Hamburg and confirmed by Citibank in London. In the second action the letters of credit were issued by Chase Manhattan Bank in London. The letters of credit were in the same terms and provided for the payment against sight drafts accompanied by...

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