HIH Casualty and General Insurance Ltd v Chase Manhattan Bank and Others

JurisdictionUK Non-devolved
JudgeLORD BINGHAM OF CORNHILL,LORD STEYN,LORD HOFFMANN,LORD HOBHOUSE OF WOODBOROUGH,LORD SCOTT OF FOSCOTE
Judgment Date20 February 2003
Neutral Citation[2003] UKHL 6
Date20 February 2003
CourtHouse of Lords
HIH Casualty and General Insurance Limited

and others

(Respondents)
and
Chase Manhattan Bank
(Appellants)

and others

HIH Casualty and General Insurance Limited

and others

(Appellants)
and
Chase Manhattan Bank
(Respondents)

and others

(First Appeal)
HIH Casualty and General Insurance Limited

and others

(Appellants)
and
Chase Manhattan Bank
(Respondents)

and others

(Second Appeal) (Conjoined appeals)

[2003] UKHL 6

The Appellate Committee comprised:

Lord Bingham of Cornhill

Lord Steyn

Lord Hoffmann

Lord Hobhouse of Woodborough

Lord Scott of Foscote

HOUSE OF LORDS

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 …"

...

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