LORD JUSTICE CHRISTOPHER CLARKE
The central question
- An insured under a marine policy brings a claim after a casualty. In his communications with the underwriters he does not dishonestly overvalue the claim. At trial he succeeds in establishing that his claim was a good one. But in the course of those communications he recklessly tells the underwriters an untruth. He reports to them what the Master had reported about certain circumstances relating to the casualty. At the time of communication with the underwriters the Master had made no such report. But, having spoken to the Master a little later, the insured understood the Master to be saying what he had reported to the underwriters. Does that mean that he cannot recover?
- In the present case Popplewell J, with manifest reluctance, held that it did, following the decision of this Court in Agapitos v Agnew  QB 556, hereafter "The Aegeon" and gave permission to appeal. Whether he was right so to hold depends on whether the rule whereby a fraudulent claim deprives the insured of any right to recover anything applies also in the case of fraudulent devices – the expression used for the making of statements which are known by the insured to be untrue or which are made recklessly, not caring whether they are true or false, in support of a claim honestly believed by him to be good both as to liability and amount.
- In addition to this legal issue the insured contends that the judge erred in reaching the factual conclusions that he did. I deal with this aspect of the appeal first.
- The insured claimants, now the appellants ("the Owners"), were the owners of a gearless general cargo ship named "DC MERWESTONE" ("the Vessel"). The defendants, and now respondents ("the Underwriters"), are the hull and machinery underwriters of the Vessel under a time policy for 12 months at 1 April 2009. The policy incorporated the Institute Time Clauses – Hulls 1/10/83 and the Institute Additional Perils Clause – Hulls.
- On 27 January 2010 the Vessel completed loading a cargo of scrap steel at Klaipeda in Lithuania. At about 09:30 she left Klaipeda bound for Bilbao. At about 20:58 on 28 January 2010 the Engineer noticed water rising beneath the floor plates in the engine room. He went to the bridge to alert the Master. The two of them went down to the engine room where they saw water below the level of the floor plates, which appeared to be pushing up. At about 21:08 the Master ordered the Engineer to start pumping out the engine room bilges. Despite attempts to empty these bilges using the Vessel's two general service pumps, the water levels continued to rise. The crew could not locate the source of the ingress which they believed to be in the engine room. They cut a hole in the ballast suction line in an attempt to use the ballast pump to empty the engine room bilges. This should have been capable of pumping the floodwater overboard but for the fact that a mop was sucked into the suction line.
- By 02:46 on 30 January 2010 the main engine had become fully submerged and stopped working. The engine room was sealed off; and the crew went to the bridge where they spent the night. At about 10:00 on 30 January 2010 the tug "AGIS" came alongside and the Vessel was towed to Gdynia. She was pumped out and it was determined that there was in fact no leak in way of the engine room. The Vessel's main engine was damaged beyond repair and was replaced by a new engine and gearbox. The Owners' claim was for the resultant loss in the sum of € 3,241,310.60.
- The Vessel is 90.74m long, 15m in beam and has one hold divided into 3 by 2 non-watertight (moveable) bulkheads. Outboard of the cargo hold are five fuel and ballast wing tanks. There are five port and starboard double bottom ballast tanks which are divided longitudinally by a duct keel tunnel. It was this tunnel which was to play a critical part in the casualty.
- The judge described the tunnel thus:
"4 The duct keel ... is 62.48m long, 1.8m wide and 1.2m high. It runs most of the length of the vessel, from the bowthruster room in the foreship to the engine room at the aft of the vessel. It has what ought to be watertight bulkhead separation from the bowthruster room at frame 112 forward, and from the engine room at frame 24 aft. It runs along the centre line beneath the hold, separating the five pairs of port and starboard double-bottom ballast tanks. Within the duct keel are remotely operated ballast valves, ballast pipes and electrical cables..."
The cause of the casualty
- The cause of the casualty was this. At Klaipeda, where it was freezing cold, the crew had used the emergency fire pump (housed in the bowthruster area) and lines to blast chipped ice away from the hatch covers before opening them. They had then drained the deck lines but did not drain the seawater from the fire pump or close the sea inlet valve to the pump located in the bowthruster area. As a result, as the judge described it:
"16 … When the crew finished using the emergency fire hose prior to cargo operations at Klaipeda, seawater remained in the emergency fire pump and in the filter located at the inlet side of the pump. The water froze and expanded. The expansion caused a crack in the casing of the emergency fire pump. It also distorted the bar restraining the lid on the filter, so that the lid no longer formed a seal with the filter itself. After the vessel sailed from Klaipeda on 28 January 2010, the ice in the pump and filter began to melt. Once the ice melted, seawater leaked and entered the bowthruster space from the open sea inlet valve through the crack in the fire pump casing and the displaced filter cap.
17 The water then entered the duct keel tunnel through an aperture where the cables ran through the bulkhead from the bowthruster room into the tunnel. The aperture, which was referred to in the evidence as the cable gland, was not packed or sealed and the cables passed loosely through it. The aperture was at a level below the floor plates in the bowthruster room. The water was therefore free to fill the duct keel tunnel once it had entered the bowthruster room.
19 At the engine room bulkhead end of the duct keel tunnel at frame 24, the cables emerged from the tunnel horizontally through an aperture into a pipe. This aperture was not sealed at the bulkhead. The cables emerged into the engine room not horizontally but vertically as a result of the pipe being L-shaped. The aperture where the cables emerged vertically into the engine room was sealed. However the "pipe" between the aperture in the bilge keel tunnel and the aperture in the engine room was not in fact a continuous watertight pipe but had gaps which did not create a watertight seal. Accordingly water from the duct keel tunnel was free to flow into the engine room through these spaces.
20 In this way entry of water through the emergency fire pump and filter lid in the bowthruster room led to the flooding of the engine room. The vessel's engine room pumps should have been able to cope with the rate of ingress which led to the loss and damage in the engine room if operating at their rated capacity, but they failed to do so for reasons explored more fully below."
- The judge identified the chain of causation as being:
i) crew negligence consisting of the crew's failure to close the sea suction valve and drain the pump which allowed the water to freeze in the system and the system to remain open to the sea;
ii) unseaworthiness because, as a result, the Vessel lost her watertight integrity in the bowthruster room because the freezing of the water in the emergency fire pump system caused the pump to crack and the filter lid to be displaced and because water could enter through both of those defects as a result of the open suction valve;
iii) ingress of sea water into the bowthruster room;
iv) lack of watertight integrity of the bulkhead at frames 24 and 112; and
v) the defective state of the vessel's engine room pumping system which should have been but was not able to cope with the rate of ingress which led to the loss and damage in the engine room.
- His analysis of the position under the policy was as follows:
i) the casualty was a loss proximately caused by a peril of the sea (an insured peril), namely the fortuitous entry of sea water, the fortuity being brought about by crew negligence  and ;
ii) crew negligence in failing to drain down the emergency fire pump and close its suction valve did not result from want of due diligence by the Assured in failing to promulgate appropriate cold weather procedures (so that there was another insured peril) ;
iii) the loss was proximately caused in relation to all damage other than that in the bowthruster room itself by negligence other than that of the Vessel's Owners or Managers (a further insured peril), namely the negligence of the contractors responsible for the modification of the Vessel who failed to seal the cable duct at each end of the duct keel tunnel ;
iv) the deficient state of the bulkheads at each end did not result from want of due diligence on the part of the Assured ;
v) the loss did not result from want of due diligence of Owners or managers in relation to the bilge alarms [105-108]; and
vi) nor was it caused by unseaworthiness of the Vessel to which the owners were privy (said to consist of a deficient engine room pumping system) .
Accordingly, but for the question whether the Owners had forfeited their claim because of what they had said to the Underwriters, it would have succeeded. In effect he rejected the numerous bases upon which the Underwriters had denied liability.
The circumstances giving rise to the alleged forfeiture
- The Vessel was managed at the time by Redrij Chr. Kornet & Zonen B.V. ("K & Z"), a Dutch company, whose directors were (a) Chris Kornet, who was the General Manager; (b) his brothers Gertjan and Dolf Kornet; and (c) Mr Kees Parel. These individuals were accepted to be the alter egos of the Owners. The forfeiture was said to arise because Chris Kornet had deliberately or recklessly given Underwriters a false narrative in relation to the casualty. In essence he is said to have falsely claimed (i) that the bilge alarm had gone off at about noon on 28 January 2010; (ii) that it had been ignored because its sounding was attributed to the rolling of the Vessel in heavy weather; and (iii) that he had been told both of these things by the Master and the crew. The account of the relevant events that follows is largely taken from that of the judge.
- On 29 January 2010 Gertjan Kornet attended the Vessel at Gdynia as did the surveyors appointed by the Underwriters. On 30 January 2010 the crew signed a joint declaration, pursuant to Gertjan Kornet's request that they talk together and prepare a joint statement. The declaration consisted of a narrative of the casualty and started with an account of the bilge alarm sounding at 20:58 on 28 January.
- At Gdynia water was pumped from the Vessel and the cargo discharged. The Vessel was moved to dry dock and inspected and surveyed by Gertjan Kornet and Underwriters' surveyor among others.
- On 24 February 2010 Gertjan Kornet prepared a report headed (in translation) "EXPLANATION OF THE CAUSE OF THE LEAKAGE DC MERWESTONE". This was emailed to Chris Kornet and to Carins, Owners' Dutch broker. The report concluded that the initial suspicion that the stern screw was the source of ingress was misplaced; that the sealing and pressure testing of compartments through which the leak might have come pointed to the bowthruster room as the source but that the question which "everyone was wondering" was whether that could have caused the engine room to fill so quickly. Gertjan Kornet recorded his discussions with the crew which referred to the bilge alarm going off at 21:15 but made no reference to it having gone off earlier in the day.
- The claim was presented to Underwriters through Carins, the producing broker, and Jardine Lloyd Thompson ("JLT"), the placing broker. At Underwriters' request arrangements were made for the Underwriters' Admiralty Manager, Mr Billowes of Ince & Co, to attend the Vessel and interview the crew. He did so on 2 April 2010 and interviewed the Masters (Capt. Loosman and Capt. Lilipaly), the Chief Officer and the Second Officer in Holland on 3 days in April, and the Engineer in Manila on 12-13 April. Gertjan Kornet and Kees Parel appear to have sat in for at least part of the interviews in Holland.
- As is apparent from the circumstances of the casualty, the ingress of seawater had gone unnoticed for a substantial period of time whilst it had passed through two supposedly watertight bulkheads from the bow to the engine room. The Underwriters were, as the judge held, understandably sceptical about how the debilitative flooding of the engine room could have resulted from a relatively small leak in the bowthruster room.
- On Friday 16 April 2010 in the evening Mr Billowes sent an email to Mr Werner Schurink at Carins asking him to ask the Owners to provide 36 categories of documentation and information of which item 1 was "Owner's explanation for the cause of the ingress, the spread of the ingress into the engine room and the reason why the ingress could not be controlled by the ship's pumps". The email was forwarded by Mr Schurink to Chris and Gertjan Kornet, Ton Schootens, the adjuster, and Han Gravendeel of Doldrums, the Underwriters' surveyor, with the suggestion that they all work on it.
- On 21 April 2010 Chris Kornet signed a letter in response which Carins forwarded to Mr Billowes. It was sent to him on 23 April and included the following:
"After further internal investigation due to the problems on board DC Merwestone we will inform you as follows.
Floating visual by crew 28 January 2010 around 21.00 hrs.
Bilge alarm from bow thrusters and engine room have the same alarm point so nobody can see exact which area gives alarm.
First alarm was going off around noontime due to rolling vessel (weather SSE 7) vessel rolling. No investigation in bow thruster room.
When bilge alarm activate during rolling nobody has controlled this due the rolling.
Due to the weather circumstances the first bilge alarm has go gone of off [sic] in the morning. If there was leakage or due to rolling we are not sure.
1. starting time of leakages is around 13.00 hrs on 28 of January"
- On 1 June 2010 the two case handlers at Ince & Co sent an email to Mr Schurink in which they sought clarification in the form of questions on 13 topics. Question 2 was as follows:
"2(a) What evidence do Owners rely on that the bilge alarm operated around noon on 28 January?
(b) Who heard it and when?
(c) Who acknowledged it?
(d) Who took the decision not to investigate it?"
- The response came in a letter to Underwriters signed by Chris Kornet dated 27 July 2010 with the following answers:
"2(a) Owners were told by the vessel's captain that the bilge alarm operated around noon on 28 January.
2(b) Owners believe it was the watchkeeper/Master on the bridge and the Engineer in the engine room. They thought the alarm was routine. For further information, Owners suggest Underwriters refer to their own interview notes.
2(c) Owners do not know. They suggest that Underwriters refer to their own interview notes.
2(d) Owners assume it was the Master. It was in any event not possible to go forward. Temperatures were minus 10 to minus 20, and the vessel was shipping heavy seas and water over the fore deck. Furthermore, Underwriters have interviewed the crew members."
- The Report of Captain Barker of TMC dated 27 January 2011 was forwarded through the broking channel to JLT on 22 February 2011. At paragraph 3.3 it included the following as part of the narrative of the casualty:
"Whilst at sea, in SSE'ly Beaufort force 7 winds, at about noon on 28th January the bilge alarm sounded. There is a bilge alarm fitted in the Bow Thruster Room and the Engine Room however the alarm is connected to a single buzzer/warning light in the Engine Room and on the Bridge. If the alarm sounds it is necessary to verify the bilge levels by visual inspection. The vessel was rolling, and due to the adverse weather (which would have been just aft of the port beam), the alarm was accepted without anyone going forward to inspect the Bow Thruster Compartment. The crew's experience was that the alarm is sometimes triggered when the vessel was rolling and they were not unduly concerned. The bilge warning light would have remained on."
- At trial the Owners no longer contended, as they had in their Particulars of Claim, that an alarm had gone off before 20:58 on 28 January 2010.
The preparation of the 21 April and 27 July letters and the TMC Report
- On the morning of Tuesday 20 April Mr Chris Kornet sent his draft response to Mr Schurink. It contained the passages about the noon alarm in materially identical form to those in the letter sent on 23 April: see  above.
- When cross examined Chris Kornet said that before preparing that draft he spoke to the Master on the telephone for 5 to 10 minutes on 20 April and that the Master told him during that conversation that the alarm had gone off at around noon, although not that it had been ignored as attributable to the Vessel rolling. The Master took the 09:00-13:00 watch and so would have been on watch at noon. Chris Kornet accepted that the explanation for not investigating the alarm was speculation on his part. He thought it the most likely explanation. His understanding that the weather at noon on 28 January 2010 was SSE 7 originated in the deck log which records that as the wind speed and direction on that day, together with rough sea and moderate swell. The judge accepted that, despite some indications to the contrary in the deck log entry, when preparing his response Chris Kornet believed, as a result of his reading of it, that the weather at noon was as he stated.
- The judge did not, however, accept Chris Kornet's evidence that he had spoken to the Master before preparing that letter and was told by the Master that the alarm had gone off at around noon. This was for a number of reasons including the fact that the Master was on holiday in Indonesia at the time when the conversation is supposed to have taken place. The conversation was, the judge held, an invention.
- Chris Kornet's draft was promptly passed on by Mr Schurink to Mr Gravendeel with a request to consider whether the theory of ingress was plausible from a technical aspect. Mr Gravendeel responded later that day with a calculation that the cable duct openings were equivalent to a six inch diameter pipe, and with other points not presently relevant, which were passed to Chris Kornet for preparation of his final draft. The 21 April letter, sent on 23 April, was drafted by Chris Kornet on his own, and not in conjunction with his brother Gertjan.
- When the 1 June email (see  above) was received by the Kornets after it had been forwarded to them by Mr Schurink, Gertjan Kornet prepared a response which answered questions 2 (a) to (d) as follows:
"No crew member report this. But according the last ism report it was working so theoretical it have to be working. Also at that time. We have to be aware the report which was send by owners was a report about the situation which most probably happened, not the one who happens. Looking to the weather forecast and wind direction the vessel was rolling at that time, so from experience we have the idea what has happened. No crew member has report this."
- That response was forwarded to Chris Kornet that afternoon. He did not then or later take up with Gertjan Kornet the latter's assertion that no crew member had reported a noon alarm. On 2 June Mr Schurink coordinated the answers into a single document and sent it to Chris and Gertjan Kornet emphasising that it was a very important document and that "you as shipowners have to back it completely". It answered question 2 as follows:
"2a. According to the last ISM report it was working properly
2b. no crew member reported this to us
2d. we cannot say if this decision was made at all as no comment was made on this alarm."
- This draft was also forwarded to Mr Gravendeel for his advice from a technical aspect, which resulted in a slight change to the answer to question 6. When Mr Schurink forwarded a revised version to both Chris and Gertjan Kornet on 3 June he left the answers to questions 2(b), (c) and (d) blank. His covering message recorded that Chris Kornet was going to give him the correct answers and commented "after all on 21/4 we wrote "alarm was sounded at noon"". This drew attention to the difficulty in reconciling what had been drafted as a result of Gertjan's Kornet's response with what Chris Kornet had said in the 21 April letter.
- Chris Kornet's response was to draft a form of wording which he sent by email to the Master at 15:15 on the same day, 3 June, in the following terms (correcting some of the typographical errors and linguistic and syntactical infelicities in the original):
"In the morning a bilge alarm went off do you know roughly at what time and what did you do and why? If I say the following can you go along with it think about what you stated earlier. [This part was in Dutch, the remainder was in English]
Please be aware the report we sent was based on brief information from various persons. Based on the information we sent the message as what could happen based on this info
When vessel starts rolling after leaving Klaipeda we had bilge alarm. This is a combined alarm between bow thruster room and engine room. We check the engine room but this looks in normal condition. Due to the rolling we take it as a fact bilge alarm was from bow thruster room and activated due to rolling.
Alarm sound is on the bridge and in the engine room so watch keeping person should have heard this
Acknowledgement has to be done in the engine room
We cannot give a clear answer on the last questions. It should be motorman or officer of watch."
- The judge concluded that there was a conversation with the Master after the email set out above in which Chris Kornet made clear to the Master his view that the alarm must have gone off around noon and the Master ultimately conceded that there must have been such an alarm which Chris Kornet took to be confirmation from the Master that he must have heard it because it was during his watch. The Master gave Chris Kornet confirmation that he would support the account which Chris Kornet had sent to him including the explanation that the alarm had been ignored because it was attributed to the Vessel rolling.
- A little under four hours later on the evening of 3 June Chris Kornet sent an email to Carins saying that he had checked the information set out with the Master and setting out answers in materially identical terms to the text of what he had sent the Master that afternoon to see if he could "go along with it".
- On 7 June Mr Schurink adapted the answers he had been sent into a further draft and sent it back to Gertjan Kornet and Chris Kornet with the following rubric:
"The further edited version. Read your corrected item two (a/b/c/d) very carefully again! If I see things from the point of view of the insurers, I would still have a question about why the bow thruster room was not checked? Possible reply could be weather on board too bad and therefore dangerous?????"
- In fact the account which Chris Kornet had sent to Mr Schurink confirming what he had checked with the Master did include a reference to the strong wind and temperatures of minus 20, but Mr Schurink had not included it in his redraft. Chris Kornet replied a week later on 14 June:
"We as owners have asked the crew why they have not checked the bow thrusters.
Answer weather was very bad se 7/8 see log book. Vessel was rolling water covers deck and hatches temperature -20 degrees, so it was not safe for crew to go outside"
- When the final version was signed by Chris Kornet on 27 July 2010 and sent to the Underwriters the answer was in the form set out in  above. This, as the judge pointed out, included:
i) confirmation that the Master had said that he had heard the noon alarm;
ii) confirmation that the Owners believed that it had been heard also by the Engineer;
iii) confirmation that it had not been investigated because they thought it was routine; and
iv) reference to the notes of interviews taken by Ince & Co on behalf of the Underwriters; this latter reference suggests that Chris Kornet believed that his account would be at least consistent with, if not corroborated by, what the crew had previously said during those interviews.
- As to the TMC Report the judge found that the report treated as fact the sounding of the noon alarms and gave the rolling of the Vessel as the reason for the crew's failure to investigate it. He also found that the report had been sent to Chris Kornet and that by sending the report in support of the claim Owners were putting those matters forward as their explanation of what had happened and that Chris Kornet was aware that that was taking place.
Chris Kornet's state of mind
- As to Chris Kornet's state of mind, the judge found that when he was preparing his responses in the 21 April and 27 July letters and sending the TMC Report he believed that it would assist the claim if he minimised any opportunity for attributing fault to the Owners, rather than the crew, in relation to the cause of the casualty. The judge inferred this from a number of matters including an email of 26 March 2010 sent by Mr Schurink in which he advised Chris and Gertjan Kornet as follows:
"This email is strictly confidential, please do not forward.
….. Important; nobody can say "the insured is to blame" (in the sense of the shipowner, let's say "Werkendam"). That would unleash a discussion about the final sentence in 6.2.5 of the policy conditions, namely;
Provided such loss or damage has not resulted from want of due diligence by the Assured, Owners or Managers.
On the other hand, it will probably not come to that; after all, we've got nothing to hide.
However, the men (crew) must not screw things up at the expense of the office. Admit mistakes. Everybody makes mistakes once in a while, especially if there is a bit of panic, and errors by the crew (crew's negligence) is covered."
- Chris Kornet was also increasingly frustrated that the Underwriters were not paying his claim, particularly because Owners needed money to secure the release of the Vessel from the repairers.
- In relation to the 21 April letter the judge found  that:
"……..his principal focus was on addressing a source and rate of ingress which was realistic. In doing so he reached a conclusion that the water in the bowthruster room was probably sufficient to trigger the alarm at around noon. He was conscious that that required an explanation as to whether the alarm had gone off at around noon, and if so why it had not been investigated. He also believed that it would not assist Owners' case if the alarm had failed to trigger, because it would point to the defective condition of the Vessel rather than crew negligence, and that an explanation that the alarm had gone off, and been ignored, would be preferable to one which involved the alarm not sounding. He had had no evidence from the crew that an alarm had gone off around noon, or been ignored, or as to what the reason was for ignoring it. He genuinely believed that if the alarm had gone off, it would probably have been ignored as a result of the weather conditions he believed the Vessel was encountering; ignoring alarms being triggered by rolling, with little water present, was from his experience a plausible explanation for ignoring the alarms. As he accepted in evidence, this was an explanation he himself hit upon as a matter of speculation, rather than based on anything the crew had told him. His account was given to fit his theory of ingress without making any attempt to check whether it was supported by anything the crew had said about the alarm going off. He suspected that his account might not be supported by the crew, because he knew that Gertjan Kornet had asked "critical questions" of the crew in preparing his report, and he had not been told by his brother or anyone else that any of the crew had heard an alarm earlier in the day. He genuinely believed that his account of the noon alarm and the crew ignoring it was a realistic explanation of events, but he was reckless whether it was supported by the crew's recollection because he did not want the absence of confirmation from the crew to get in the way of an explanation which involved no fault on the part of the Owners or managers. He was indifferent to whether the Master or any other crew member had previously said that the alarm had gone off."
- In relation to the answers in the 27 July letter, his state of mind was as follows:
"When the specific questions were posed in paragraph 2 of Ince & Co's email of 1 June, he recognised that the account he had given had not been based on evidence from the crew but that the 21 April letter had given the impression that it had. He was therefore anxious to answer the question by suggesting that it was supported by what had been said by a member of the crew, so as not to appear to have said anything misleading in the letter. To this end he asked the Master whether he could live with an account which involved the Master having heard the alarm at noon, and the crew having ignored it as attributable to the rolling of the vessel. He received confirmation from the Master that he could support that account of events. He took this to be confirmation by the Master that he had heard a noon alarm. Accordingly his confirmation that the Master had said that he had heard the noon alarm was true; and he honestly believed that it had been heard also by the Engineer and that it had not been investigated because they thought it was routine. Although he did not check the latter aspect with the Engineer or the crew, he was not reckless as to its truth: it had been confirmed by the Master's confirmation that he could support the account set out in the email Chris Kornet sent to him. Chris Kornet believed the answers given in the 27 July letter to be true, and that his answers would be at least consistent with, if not corroborated by, what the crew had previously said during Mr Billowes' interviews."
- For similar reasons the judge held that the account given in the TMC Report was believed by Chris Kornet to be true. As a result the Underwriters' defence only fell to be considered by reference to the 21 April letter.
- The judge held  that the letter of 21 April, read as a whole, contained an assertion that one or more members of the crew had claimed to have heard the alarm going off and had given an explanation that the alarms had not been investigated because that was attributed to the rolling of the Vessel, and that that was the impression which Chris Kornet intended that the letter should give. In this respect the letter was false and misleading. He had no grounds to believe that that assertion was true. It was an untruth told recklessly in support of the claim, to which it was directly related, in the hope of a prompt settlement.
The Owners' appeal in respect of the judge's factual findings
The alleged misrepresentation
- The Owners contend that the judge was in error in concluding that the letter of 21 April 2010 amounted to a fraudulent device. The statement that there was a noon alarm which was ignored by the crew was simply, they submit, an attempt to explain what had happened, and would have been so understood by a reasonable person in the position of the Underwriters - the relevant test: Kyle Bay Ltd v Underwriters subscribing to policy No 019057/08/01  Lloyd's Rep IR 460 at . Further the existence of the representation found by the judge had not been established with the clarity and to the heightened burden of proof required for a claim in fraud.
- In support of this the Owners rely on the fact that they had given Underwriters unfettered access to the crew. Mr Billowes had interviewed them. Owners had neither notes of those interviews nor any statements from the crew and had no reason to think that the crew would have said anything but the truth. Chris Kornet did not know what the crew had told Mr Billowes but Underwriters knew that they had not told him about hearing the noon alarm.
- The letter set out, as the judge found, Mr Kornet's theory as to the source and volume of water ingress at various stages. Read in full the letter contains no express representation as found by the judge and there is no basis for any implied representation having regard to the circumstances in which the letter came to be written. The judge chopped the letter up into too fine slices when he should have looked at it more broadly and in its context. He was over influenced by the words "Facts" and "after further internal investigation" which do not in context import the representation relied on. The heading "Facts" is at the beginning of the whole letter, which contains material, some of which is, on no view, an account of facts but is theory or analysis. The words "after further internal investigation" cannot bear the weight placed on them. Read in context they refer to the further technical analysis and calculations which Chris Kornet carried out with the technical guidance and approval of Mr Gravendeel, Underwriters' own surveyor. Moreover in two other passages in the letter Chris Kornet relies in terms on reports from the crew ("According crew the water came on engine room floor around 2100../When the vessel has a compete black out the crew report faster ingress of water...").
- I am not persuaded that the judge was wrong in his conclusion as to the meaning of the letter. The relevant passage is at the beginning immediately following the heading "Facts" and is not expressed in terms of theory or hypothesis. The "Facts" were said to result from "further internal investigation" as a result of which the Owners "inform" Underwriters "as follows". The natural inference was that this was a record of what the crew had said, particularly since the information given was that the alarm had sounded coupled with an explanation of why it had been ignored i.e. an assertion of what the crew members had heard and thought and why they did nothing.
- It was, as the judge held , apparent from the questions asked by Ince & Co in their email of 16 April 2010 that the Underwriters had concerns as to the underlying condition of the Vessel, the Owners' knowledge as to that condition, and the reason why the ingress of an apparently small quantity of water could have given rise to such a major casualty. It must have been apparent to Owners that Underwriters were investigating whether they had a defence to the claim which related to Owners' knowledge and want of due diligence, particularly when Mr Schurink had emailed Chris Kornet on 26 March 2010 in the terms set out in  above. The Underwriters could, in those circumstances, reasonably expect that the answers to their questions would be based on actual inquiry of those who knew the facts and not hypothesis.
- The fact that later passages in the letter refer to a report from the crew explicitly (see  above) does not signify that the beginning of the letter was not reporting what the crew had said. On the contrary, they serve to indicate that the factual material (as opposed to other passages which are clearly analytical) is derived from them.
- On 1 June Ince & Co responded with a series of factual questions. Owners contend that this email shows that Underwriters did not understand the 21 April letter to contain the representation relied on since question 2 (a) was: "What evidence do Owners rely on that the bilge alarm operated around noon on 28 January?" and not: Which member of the crew reported it? But questions 2 (b) – (d) ask who heard it, acknowledged it, and took the decision not to investigate it, which indicates Underwriters' understanding that somebody had reported it. If they had understood that Chris Kornet was merely theorising the questions would have been pointless.
- I also do not accept that the letter, even though written by a native Dutch speaker, is insufficiently clear to serve as a false representation. The judge, who heard from Mr Kornet, made all due allowance for that fact  and regarded him as proficient but not completely fluent in English. The judge was in the best position to assess whether Mr Kornet's English meant that the 21 April letter should be interpreted in a different way and he was well aware that "the cogency and strength of the evidence required to prove fraud is heightened by the seriousness of the allegation" .
- Mr Kornet's response to Ince's inquiries was not that the letter had just been a theory. Instead he emailed the Master to ask him if he "could go along with …" a draft answer to Ince & Co that "the report we sent was based on brief information from various persons" (it was not).
- The judge, having heard Chris Kornet give evidence and being cross examined, was left in little doubt  that he understood the letter to assert that the noon alarm account was the result of a conversation with the crew and intended the letter to have that effect. He was entitled to come to that conclusion such that, even if the letter had been ambiguous in meaning, which it was not, the representor intended it in the sense in which it was understood (as is apparent from the email of 1 June) and in that sense it was untrue which suffices to establish fraud (if intention or recklessness as to that meaning is shown): The Kriti Palm  1 Lloyd's Rep 555 at .
Fraudulent intent to promote Owners' claim
- The Owners also contend that Underwriters had not established, to the necessary standard, that Chris Kornet made the alleged 21 April representation fraudulently or with the necessary intent to improve the Owners' prospects of settlement or success in the claim. The latter is the relevant test suggested in The Aegeon, which I consider below.
- The Underwriters have to show that when he sent the 21 April letter Mr Kornet applied his mind to the fact that he was making the representation which the judge found him to have made, and dishonestly intended Underwriters to understand the letter in that sense; Akerhielm v Rolf de Mare  AC 789, 805; Gross v Lewis Hillman Ltd  1 Ch 445, 459G-H, 464H-465A or was willing that they should do so.
- Neither of these things was made out. The judge rightly found that, when he wrote his 21 April letter, Chris Kornet's "principal focus was on addressing a source and rate of ingress which was realistic" . The letter "self-evidently" contained his "theory as to the source and volume of water ingress at various stages"  and sought to respond to Ince's request of 16 April for an explanation of the cause, spread and inability to control the ingress. Its focus was not on whether the forward bilge alarm had sounded at noon, much less on whether the crew had reported to Chris Kornet that it had. Whether the noon alarm had sounded, as he believed it did - since he believed that the water that would have come into the bowthruster room was probably sufficient to trigger the alarm at around noon  - was a side issue. Whether the crew had reported that it had sounded was an aside to that aside. If the crew had not so reported, he had no reason to doubt that they would if properly questioned.
- It was unrealistic, therefore, to find that he had conscious knowledge of the falsity of such a tangential comment. Nor was it plausible that he should attempt to mislead Underwriters into believing that the crew had reported the noon alarm when he knew that such a representation would be immediately falsified by the crew's testimonies which (as he knew) Ince already had. That he had no such intent is apparent from the fact that he replied to Ince's questions on 1 June by saying that "Owners suggest Underwriters refer to their own interview notes". He would not have said this unless he genuinely believed that the crew's account would confirm what he had said in the 21 April letter (which, at the trial, he said was his belief).
- I do not accept these submissions. Mr Kornet's state of mind was a question of fact for the judge to determine. He saw and heard him give oral evidence. I am not satisfied that he reached a conclusion which was not open to him or with which this Court should interfere. Mr Kornet, as the judge was entitled to find, invented a telephone conversation which never took place, to which he had never referred in his witness statement, and the account of which emerged only during his cross examination. As the judge held he felt the need to invent this conversation (and to approach the Master after 21 April) because he realised that the 21 April letter had represented what on 21 April he had no basis for saying namely that the crew had reported that the alarm had sounded and had not investigated it on account of the rolling of the Vessel. This was an inference that, on the evidence, it was open to the judge to draw.
- As to the absence of any basis for the representation that crew members had reported a noon alarm, Chris Kornet did not suggest that anyone other than the Master spoke to him. His brother Gertjan had produced a four page report on the casualty which was sent to him on 24 February 2010. Although it said that he had asked the crew some "critical questions" it contained no reference to the noon alarm. Before preparing the letter of 21 April 2010 Chris Kornet had not asked his brother any questions even though his brother had conducted a thorough investigation and sat in on some of the interviews conducted by Ince & Co.
- In the light of the above the judge was entitled to find at least recklessness on his part as to whether the explanation for the events which he gave was supported by the crew's recollection. As the judge put it  he "suspected that his account might not be supported by the crew, because he knew that Gertjan Kornet had asked "critical questions" of the crew in preparing his report, and he had not been told by his brother or anyone else that any of the crew had heard an alarm earlier in the day" and was "indifferent to whether the Master or any other crew member had previously said that the alarm had gone off" . He did not ask any questions of the crew to test his theory "because he did not want the absence of confirmation from the crew to get in the way of an explanation which involved no fault on the part of the Owners or managers". I regard this finding as unassailable. The Owners' contention that Chris Kornet would not have been so foolish as to attempt to mislead Underwriters given that they had already interviewed the crew is far from compelling and ignores the fact that he was foolish enough to seek to mislead the judge.
- The Owners contend that the judge applied the materiality test to the wrong representation. The Owners had accepted that the representation that the alarm had sounded at noon and been ignored by the crew was directly related to the Owners' claim and would, if believed, have satisfied the "limited objective element" of the test of materiality laid down in The Aegeon, namely that it tended to yield a not insignificant improvement in their prospects. This was because it would show that the alarm was working and negate a defence of lack of due diligence under the Inchmaree clause. Chris Kornet had been acquitted of fraud in relation to that representation. But Owners did not accept, not least because they did not understand it to be suggested, that the statement (if made) that the crew had given that account satisfied the test. Further in his judgment  the judge referred to the fact that an explanation "for the failure of the Vessel's alarms to prevent such a result" would satisfy the test rather than the fact that that had been reported by the crew. As it is, the representation relied on (that the crew had reported the alarm etc.) does not satisfy the materiality requirement since it is not directly related to the claim, nor would it, if believed, have satisfied the "limited objective element" of the test. It was the fact that the alarm had sounded, which showed that it was working, not the fact that the crew had reported that. Any improvement in the Owners' prospects was achieved because of the former and not the latter fact.
- I disagree. It is plain from  of his judgment that the judge regarded the statement that the crew had reported the bilge alarm episode as directly related to the claim and intended to promote it. He also concluded that that false statement met the limited objective element of the test. The words used by him in , to which the Owners refer, were part of a set of paragraphs [221-3] in which the judge was considering what representation was made and the materiality thereof. It is clear from them that he was applying the materiality test to the representation that he had found to have been made.
- Further the fact that the narrative was one given by the crew would tend to improve the Owners' prospects. A factual account supported by the crew's recollection would be markedly more significant than one based on a theory and not so supported. It would be highly material to Underwriters to know what was the evidence of those best placed to know the true facts. Underwriters' interest in what the evidence showed is illustrated by the follow up questions they asked about it in Ince's 1 June email.
Underwriters' alternative claim
- Underwriters claim, in the alternative, that the judge should have held that the fraudulent device consisted not simply of an assertion that the crew had claimed to have heard the alarm go off at about noon and not to have investigated that because it was attributed to the rolling of the Vessel but that the alarm had in fact sounded at noon and the crew had in fact failed to investigate for that reason. What was being put forward was a narrative about the alarm which was represented to be true (the 'Facts'). But in truth Mr Kornet merely believed that it was a "plausible explanation" or "theory" (as the judge at points in his judgment  and  described it). He accepted in his evidence that the only evidence he had for the noon alarm was his supposed conversation with the Master on 20 April 2010 (which was an invention) and that the asserted reason for the failure to investigate was his speculation. The crew had confirmed no such thing, and there was no other source of information to that effect. The judge held that Chris Kornet was recklessly indifferent to whether or not the crew had heard an alarm. But, on those facts, Underwriters submit, he must also have been recklessly indifferent as to the truth of the statement that the alarm actually sounded.
- In circumstances where the judge has found Mr Kornet to have represented that the alarm narrative had been reported by the crew and reckless as to the truth of that representation it seems to me somewhat otiose to examine his state of mind as to the narrative alone. As to that, the judge found  that Mr Kornet had concluded that the water in the bowthruster room was "probably sufficient to trigger the alarm at around noon" and "genuinely believed", in the light of his own experience, that, if it had done so, it would probably have been ignored as a result of the weather conditions which he believed that the Vessel was encountering. That it had been ignored was a matter of his speculation but "he genuinely believed that his account of the noon alarm and the crew ignoring it was a realistic explanation of events".
- Whilst I see the force of Underwriters' submission, it seems to me to represent a gloss on the judge's finding that Chris Kornet genuinely concluded that the incoming water was sufficient to cause the alarm to sound at noon and that he genuinely believed that, if so, it would have been ignored. In the light of those findings it does not seem to me possible to say that Chris Kornet was guilty of fraud in relation to the facts of what happened. On those findings he honestly believed the scenario he put forward and did not put it forward knowing that it was false or not caring whether it was true or false. Further this Court should not be disposed to make a finding of fraud that the judge below has not made save in clear cases of which I do not regard this as one.
- The Owners contend that there was a procedural irregularity which should lead to a reversal of the judgment. They say that they were not given fair notice of the allegation of fraudulent device on which the defence succeeded because the case advanced was that the fraudulent device was the statement that the noon alarm had sounded and been ignored rather than the contention that the crew had reported to the Owners that fact.
- I regard this contention as without substance. The Underwriters pleaded:
a) that the Owners presented "their detailed account of the 'Facts' surrounding the casualty 'after further investigation'": para 34 A (iii) of the Re-Amended Defence;
b) that they could have had no factual basis for the account set out in the letter: para 34A(vi);
c) that the Master never recollected a noon day alarm and that the Owners allegation that the bilge alarm sounded then was the product of "retrospective reconstruction" by Mr Kornet: 34A (xvii);
d) that the Owners knew that the statements in the 21 April 2010 letter were false, or were reckless as to their truth or falsity, in that they had "no evidential basis whatever" in that, inter alia, "there was no factual evidence to support the 'facts' that (a) the first alarm went 'off around noontime due to rolling vessel'": 34A(xix)(a); and
e) that "it was or must have been clear to Mr Kornet that the so-called 'Facts' as presented in the Claimants' letter dated 21 April 2010 were in effect retrospective speculation or reconstruction on the part of Mr Kornet as 'Facts' following 'further internal investigation'": 34 A (xix) (e).
- It seems to me apparent from those passages that one of the things that was being said was that the noon alarm account was not, as asserted, a fact that the further internal investigation had revealed; not least because the Master had never recollected that and there was no factual evidence from the crew or elsewhere to support it. Put more simply, that which was said to have been reported had not been.
- The Underwriters' opening submissions [157-9] reflected the pleaded case. Mr Kornet was cross examined to the effect that the 'Facts' section in the letter clearly set out a narrative of the facts which he had found after further investigation and that what he was saying was that, as a result of that internal investigation, he had found that the crew had heard an alarm that went off at noon. He accepted both propositions. It was put to him (a) that there were in fact no internal investigations to establish (i) that the alarm sounded at noon and (ii) that the crew did not then investigate the cause of the sounding on account of the weather conditions; and (b) that he had falsely represented that the internal investigations had established each of those matters when to his knowledge there had been none that did so. He agreed in terms that there had been no internal investigation which established as a fact that the crew did not investigate the sounding of the bilge alarm because of the conditions.
- The allegations in relation to the alleged fraudulent device were precisely formulated in closing thus:
"By stating that he had carried out a further investigation and then setting out various matters as "Facts" CK presented the claim to Underwriters on the basis that further investigations had been carried out and that the "facts" resulted from those investigations. Put another way, CK was representing that the crew had told him the "facts" that he was simply repeating to the Underwriters, or that there was some other primary evidence (e.g. a log) from which the "facts" had been deduced"
Underwriters went on to contend that this statement was untrue because Mr Kornet was not aware of any internal investigations which established the so called 'Facts'. The oral closing made clear that this was the Underwriters' case.
- It was not suggested by Owners (who, I accept, were under acute time pressure in the closing stages) that this allegation was not open to Underwriters, although it was suggested that another alleged fraudulent device relating to who had suggested cutting a ballast pipe was unpleaded. The Owners' response to the allegation was that the Master had indeed reported on the noon day alarm.
- Even if, which I do not accept, the Underwriters' case was inadequately pleaded, the Owners have, in my view, suffered no injustice on that account. As Tuckey LJ observed in Keith Davy (Contractors) Ltd v Ibatex Ltd  EWCA Civ 740 an appellant who relies on serious procedural irregularity must show not only the irregularity but also that it was serious and caused injustice. They have not done so.
- The Owners contend that the trial would have proceeded differently had the case been properly pleaded since they would have adduced factual evidence to demonstrate that the assertion that K & Z had derived the account from the crew could not be implied into the 21 April letter. It is not clear to me what further admissible evidence they would have called for this purpose. If there was some it must have been apparent at the trial that it should have been called then.
The appeal on the law
- A long line of authority establishes that if an insured makes a fraudulently inflated claim under the policy he forfeits any lesser claim which he could properly have made. An owner who claims $ 10,000,000, knowing that the claim could not possibly be worth more than $ 9,000,000 recovers nothing. The rule, which was established by the early nineteenth century, was described by Mance LJ in Axa General Insurance v Gottlieb  Lloyd's Rep IR 369 as a special common law rule. It applies even if there is no clause in the policy incorporating it and is designedly draconian. It functions as a deterrent to the deception of insurers who, in the nature of things, will have no, or very little, knowledge of the incident which is said to give rise to the claim. Part of the rationale is that if lying to the insurers did not attract that sanction, the dishonest insured would enjoy a one way bet. In the example given, if the lie was never found out, the insurers might end up paying out $ 10,000,000. If the insured was found out there would be no effective sanction (at any rate where the claim did not come to litigation where costs penalties might apply). He would still recover the true value of his claim.
- The rule applies to insurance claims but not to others. The claimant who suffers personal injury and dishonestly exaggerates his symptoms does not, save in very exceptional circumstances, lose his right to damages reflecting the true value of his real injury. Yet the defendant in such a case may be as ignorant as the insurer as to what injury the claimant has really suffered. The cardinal difference between the two circumstances is that the personal injuries claimant (like most civil claimants) does not owe the person who caused his injury a duty of the utmost (or any) good faith.
- The juridical basis for the rule has been said to derive from that continuing duty of good faith in insurance contracts. That is the basis upon which it was explained to the jury by Willes J in Britton v Royal Insurance Co (1866) 4 F & F 905, 908 ("The law is, that a person who has made such a fraudulent claim [for twice the amount actually lost] could not be permitted to recover at all. The contract of insurance is one of perfect good faith on both sides and it is most important that such good faith should be maintained"). Willes J referred to the common practice to insert in fire policies conditions that they shall be void in the event of a fraudulent claim; and said that such a condition is "only in accordance with legal principle and sound policy".
- The duty stops with the commencement of litigation. When that happens a different regime applies, namely that of the Civil Procedure Rules and the court's own procedures: The Star Sea  1 AC 469.
The two issues
- The resolution of this case depends on the answer to two issues: (a) does the rule about fraudulent claims apply to fraudulent means or devices; (b) if it does can it stand, at any rate in this case, in the light of Article 1 of the First Protocol to the European Convention on Human Rights ("A1P1"), a question which no previous authority has addressed.
- An affirmative decision has been given to question (a) by the Court of Appeal in The Aegeon, the leading judgment being given by Mance LJ (as he then was), which was concurred in by Brooke LJ and Park J. The extension has been recognised by the Supreme Court in Summers v Fairclough Homes  1 WLR 2004 and applied by the Privy Council in Stemson v AMP General Insurance (NZ) Ltd  Lloyd's Rep IR 852, and recognised or applied in a number of first instance decisions: see [129 -130] below.
- None of these decisions are formally binding on this Court. The decision in The Aegeon is obiter because in that case the court held that the rule, whether or not it extended to fraudulent devices, did not apply after the commencement of litigation in the light of the decision of the House of Lords in The Star Sea. The alleged lie was in the claimant's statement of case. The decisions of the Privy Council, although subject to the highest respect, are not binding either and they did not, of course, consider A1P1 since it was inapplicable.
- Popplewell J thought that it would not be right for a judge at first instance to decline to apply the extension, however much he might regret that the submission of counsel for the insurers in The Aegeon (Andrew Popplewell QC) had prevailed.
- In The Aegeon the claimant's passenger ferry had been insured by the defendants under a policy containing a warranty that there would be no hot work. On 12 January 1996 the policy had been endorsed to indicate that hot works on deck were due to commence soon, the claimant warranting that the vessel's salvage association certificate had been updated and that he had complied with all recommendations prior to commencing hot work. On 19 February 1996 the ship was consumed by fire, by which date the vessel had not been surveyed nor a certificate issued. The insurers refused to meet the claim alleging a number of breaches of warranty relating to the failure to obtain a certificate. The claimant in his reply said that the hot works had not begun until 12 February and that the insurers were estopped from relying on the warranty. The claimant later disclosed statements from two workmen taken immediately after the casualty which showed that substantial hot work had been carried out from 1 February 1996. The insurers applied to amend their defence to plead a right to avoid the policy for fraud on the footing that the claimants must have known when hot work actually began and were in breach of the common law fraudulent claim rule and/or the duty of utmost good faith under section 17 of the Marine Insurance Act.
- At first instance  Lloyd's IR Rep. 191 Toulson J, as he then was, refused the insurers permission to amend on the footing that any continuing duty not to deceive underwriters was discharged by the breach of warranty and that any additional plea of breach of such duty would be superfluous. On the hypothesis that the claimant was otherwise entitled to succeed he considered that alleged lies could only be material if told in circumstances where the truth would have provided underwriters with a defence which, on the hypothesis which he was considering was not the case. He refused to assimilate the principles governing the use of a fraudulent device with the rules governing fraudulent claims. To do so was, he thought, unsupported by authority and wrong in principle.
- Mance LJ outlined the fraudulent claims rule and considered two points on which the scope of the common law was not entirely clear. The first was whether a claim, which is honestly believed in when initially presented, may become fraudulent for the purposes of the rule, if the insured subsequently realises that it is exaggerated but continues to maintain it. The second was whether the fraud must relate to the claim in the narrow sense or could go to any aspect of its validity including any known defence. He answered the first, and the second alternative in the second question, in the affirmative.
- The judgment contains a scholarly exposition and consideration of the question whether the fraudulent claim rule extends to fraudulent devices and as to the scope of the former rule itself. Mance LJ began it with the observation that there was "a dearth of convincing authority standing positively for, or indeed against" the submission that the rule extended to fraudulent devices. He drew attention to a direction to the jury by Roche J in Wisenthal v. World Auxiliary Insurance Corp. Ltd. (1930) 38 Ll. Rep 54 that:
"Fraud ... was not mere lying. It was seeking to obtain an advantage, generally monetary, or to put some else at a disadvantage by lies and deceit. It would be sufficient to come within the definition of fraud if the jury thought that in the investigation [by the insurers] deceit had been used to secure payment or quicker payment of the money than would have been obtained if the truth had been told".
- At  Mance LJ defined a fraudulent device as being used if "the insured believes that he has suffered the loss claimed but seeks to improve or embellish the fact surrounding the claim by some lie". Having done so he drew attention to the potential need to draw a distinction between a test of materiality which would apply to a breach of the duty of good faith under section 17 of the Marine Insurance Act 1906 and the test applicable to fraudulent means or devices. The gist of what he derived from the authorities was that if a fraudulent claim was made to recover a non-existent or exaggerated loss there was no additional test of materiality which had to be established in order to forfeit the genuine part of the claim, provided that the extent of the non-existent loss, looked at on its own, was "substantial" and not immaterial, such as to justify stigmatising it as a breach of the insured's duty of good faith.
- He then said:
"36. What relationship need there then be between any fraud and the claim if the fraudulent claim rule is to apply? And need the fraud have any effect on insurers' conduct? Speaking here of a claim for a loss known to be non-existent or exaggerated, the answers seem clear. Nothing further is necessary. The application of the rule flows from the fact that a fraudulent claim of this nature has been made. Whether insurers are misled or not is in this context beside the point. The principle only arises for consideration where they have not been misled into paying or settling the claim, and its application could not sensibly depend upon proof that they were temporarily misled. The only further requirement is that the part of the claim which is non-existent or exaggerated should not itself be immaterial or unsubstantial: see paragraphs 32-33 above. …
37. What is the position where there is use of a fraudulent device designed to promote a claim? I would see no reason for requiring proof of actual inducement here, any more than there is in the context of a fraudulent claim for non-existent or exaggerated loss. As to any further requirement of "materiality", if one were to adopt in this context the test identified in the Royal Boskalis case  LRLR 523 and The Mercandian Continent  2 Lloyd's Rep 563, then, as I have said, the effect is, in most cases, tantamount to saying that the use of a fraudulent device carries no sanction. It is irrelevant (unless it succeeds, which only the insured will then know). On the basis (which the cases show and I would endorse) that the policy behind the fraudulent claim rule remains as powerful today as ever, there is, in my view, force in Mr Popplewell's submission that it either applies, or should be matched by an equivalent rule, in the case of use of a fraudulent device to promote a claim—even though at the end of a trial it may be shown that the claim was all along in all other respects valid. The fraud must of course be directly related to and intended to promote the claim (unlike the deceit in The Mercandian Continent). Whenever that is so, the usual reason for the use of a fraudulent device will have been concern by the insured about prospects of success and a desire to improve them by presenting the claim on a false factual basis. If one does use in this context the language of materiality, what is material at the claims stage depends on the facts then known and the strengths and weaknesses of the case as they may then appear. It seems irrelevant to measure materiality against what may be known at some future date, after a trial. The object of a lie is to deceive. The deceit may never be discovered. The case may then be fought on a false premise, or the lie may lead to a favourable settlement before trial. Does the fact that the lie happens to be detected or unravelled before a settlement or during a trial make it immaterial at the time when it was told? In my opinion, not. Materiality should take into account the different appreciation of the prospects which a lie is usually intended to induce on insurers' side, and the different understanding of the facts which it is intended to induce on the part of a judge at trial.
38. The view could, in this situation, be taken that, where fraudulent devices or means have been used to promote a claim, that by itself is sufficient to justify the application of the sanction of forfeiture. The insured's own perception of the value of the lie would suffice. Probably, however, some limited objective element is also required. The requirement, where a claim includes a non-existent or exaggerated element of loss, that that element must be not immaterial, "unsubstantial" or insignificant in itself offers a parallel. In the context of use of a fraudulent device or means, one can contemplate the possibility of an obviously irrelevant lie—one which, whatever the insured may have thought, could not sensibly have had any significant impact on any insurer or judge. Tentatively, I would suggest that the courts should only apply the fraudulent claim rule to the use of fraudulent devices or means which would, if believed, have tended, objectively but prior to any final determination at trial of the parties' rights, to yield a not insignificant improvement in the insured's prospects—whether they be prospects of obtaining a settlement, or a better settlement, or of winning at trial. Courts are used enough to considering prospects, e g when assessing damages for failure by a solicitor to issue a claim form within a limitation period.
45. What then is the appropriate approach for the law to adopt in relation to the use of a fraudulent device to promote a claim, which may (or may not) prove at trial to be otherwise good, but in relation to which the insured feels it expedient to tell lies to improve his prospects of a settlement or at trial? The common law rule relating to cases of no or exaggerated loss arises from a perception of appropriate policy and jurisprudence on the part of our 19th century predecessors, which time has done nothing to alter. The proper approach to the use of fraudulent devices or means is much freer from authority. It is, as a result, our duty to form our own perception of the proper ambit or any extension of the common law rule. In the present imperfect state of the law, fettered as it is by section 17, my tentative view of an acceptable solution would be: (a) to recognise that the fraudulent claim rule applies as much to the fraudulent maintenance of an initially honest claim as to a claim which the insured knows from the outset to be exaggerated; (b) to treat the use of a fraudulent device as a sub-species of making a fraudulent claim—at least as regards forfeiture of the claim itself in relation to which the fraudulent device or means is used (the fraudulent claim rule may have a prospective aspect in respect of future, and perhaps current, claims, but it is unnecessary to consider that aspect or its application to cases of use of fraudulent devices); (c) to treat as relevant for this purpose any lie, directly related to the claim to which the fraudulent device relates, which is intended to improve the insured's prospects of obtaining a settlement or winning the case, and which would, if believed, tend, objectively, prior to any final determination at trial of the parties' rights, to yield a not insignificant improvement in the insured's prospects—whether they be prospects of obtaining a settlement, or a better settlement, or of winning at trial; and (d) to treat the common law rules governing the making of a fraudulent claim (including the use of fraudulent device) as falling outside the scope of section 17… On this basis no question of avoidance ab initio would arise."
- If the view expressed in that case is applicable, then on the judge's findings the Underwriters were entitled to decline the claim in its entirety.
Stemson v AMP General Insurance (NZ) Ltd
- In Stemson v AMP General Insurance (NZ) Ltd  2 Lloyd's Rep IR 252 the Privy Council in an appeal from New Zealand applied The Aegeon to a case where an insured claimed against his insurers in respect of fire. His claim was dismissed (a) on the ground that he had set the fire himself; and (b) he had on 21 May 1992 made a knowingly false statement to the insurers' claims investigator to the effect that he had never attempted to sell the property or even considered putting it on the market, when in fact he had both considered selling it and made a serious attempt to do so. This was so even though the appellant had admitted the true position on 3 December 1992, before the insurers had rejected the claim.
- Lord Mance, as he had now become, gave a judgment, concurred in by the other members of the Committee, upholding ground (b). He did so in circumstances where counsel for the appellant had taken no issue with the statements of law in The Aegeon.
Summers v Fairclough Homes
- In Summers v Fairclough Homes  1 WLR 2004 the plaintiff had claimed over
£ 800,000 from his employers following an accident at work on the basis that he was grossly disabled, unable to work and likely to remain so. Surveillance evidence showed that he appeared to have no significant disability, and was in fact working and playing football. The judge accepted that the claim as presented was largely fraudulent, assessed his damages at just under £ 90,000 but considered himself unable to strike the action out as an abuse. The Court of Appeal agreed. The Supreme Court, observing that the driving force behind the appeal was the defendant's liability insurers, held that the Court had power to strike out a statement of case on the ground that it was an abuse of process, even after a trial where the court had been able to make a proper assessment of liability and quantum, overruling a decision of the Court of Appeal to the contrary.
- But, as it held, that was a power only to be exercised at the end of such a trial in very exceptional circumstances where the court was satisfied that the party's abuse of process was such that he had forfeited his right to have his claim determined; that in deciding whether to exercise that power the court had to have regard to the claimant's rights to have his claim fairly determined and to the enjoyment of his possessions, one of which was his cause of action, and to examine the case scrupulously in order to ensure that any decision to strike out the claim was a proportionate means of controlling the court's process and deciding the case justly. It would be a very rare case, of which this was not one, where it was proportionate or appropriate to strike the case out rather than give judgment in the ordinary way. Deterrence of fraudulent and dishonest claims could be achieved by penalising a claimant in costs, offers by the defendant to settle the genuine part of the claim on terms that the claimant pay his costs in relation to the fraudulent parts on an indemnity basis, reduction in any award of interest, proceedings for contempt and possibly criminal proceedings.
- Lord Clarke, giving the judgment of the Court, referred to the explanation given by Toulson LJ, as he had now become, in the Court of Appeal in Ul-Haq v Shah  1 WLR 616  of the "special rule of insurance law" that an insured cannot recover in respect of any part of a claim in a case where the claim has been fraudulently exaggerated or "where a genuine claim has been supported by dishonest devices", citing, inter alia, The Aegeon. The Court of Appeal had declined to apply those principles in a non-insurance context. No suggestion was made that The Aegeon was or might have been wrongly decided.
Beacon Insurance Co Ltd v Maharaj Bookstore Ltd
- After the hearing before us the Privy Council gave judgment in Beacon Insurance Co Ltd v Maharaj Bookstore Ltd  UKPC 21. The claim was made against insurers in respect of a fire at a bookshop. The policy contained Condition 8 which provided:
"If any claim be in any respect fraudulent, [or if any false declaration be made or used in support thereof], or if any fraudulent means or devices are used by the Insured or any one acting on his behalf to obtain any benefit under this Policy,… all benefit under this Policy shall be forfeited". Brackets added.
A clause in identical terms, save for the words in brackets, featured in the policy in Insurance Corporation of the Channel Islands v McHugh  1 Lloyd's Rep 94, 98.
- The insurers repudiated liability on the ground that the insured had made false or fraudulent declarations in 10 bills or invoices said to vouch the purchase of stock. The trial judge held that the insured had not made a fraudulent claim or used fraudulent devices. The Court of Appeal reversed him. The Judicial Committee held that the Court of Appeal had no proper basis for concluding that the trial judge had gone plainly wrong in his assessment of the evidence. The trial judge had set out the law relating to fraudulent devices quoting Mance LJ's distinction between fraudulent devices and fraudulent claims in The Aegeon. The Board concluded that the Court of Appeal had been wrong to conclude that the trial judge had failed (i) to distinguish between the two and (ii) to address the latter allegation. It recorded Mance LJ's statement at  of The Aegeon that "a fraudulent device is used if the insured believes that he has suffered the loss claimed but seeks to improve or embellish the facts surrounding the claim by some lie". It held that there was a proper basis for the trial judge's conclusion on fraudulent devices.
- In that case there was an express condition. No submission could, therefore, usefully have been made, nor does one appear to have been made that, without it, there was no freestanding fraudulent devices rule. Nor is there any hint of that in the judgment – which is not surprising given that Lord Mance was a party to the decision.
- Against that background I turn to consider whether this Court should, as a matter of ratio, follow The Aegeon.
- The Owners submit that we should not do so for these reasons. The fraudulent claims doctrine involves a disproportionately harsh sanction and is an anomaly. In seeking to penalise and deter it usurps the function of the criminal law but with a lesser burden of proof and lesser safeguards. The forfeiture of the whole claim, without even the return of the premium, provides insurers with a windfall and a powerful weapon. (The Bar Council in its response to the Law Commission said that The Aegeon had led to a sudden surge in insurers' lawyers pleading "fraudulent means and devices"). It does not apply to other civil claims for damages where there may well be asymmetry of information between claimant and defendant and where a claimant may have both motive and opportunity to put forward false evidence before litigation starts. The court should not, as a matter of policy, extend the doctrine of fraudulent claims so as to apply it to fraudulent devices. This would be so even if there were no logical divide between cases to which the fraudulent claims doctrine applies and those to which the fraudulent devices doctrine would apply. But there is, in any event, a critical distinction between a fraudulent claim and a fraudulent device. In the former case the insured is seeking to obtain a benefit to which he is not entitled; in the latter he is not. In short, the claim in a case such as this was payable when it was made, before any fraud had even been considered. That is the central difference between a fraudulent claim, which is never properly payable either at all or, at any rate, in relation to the part fraudulently exaggerated, and a fraudulent device (where the claim may have been properly due and payable before the fraud occurred).
- In this connection the Owners placed considerable reliance on Cassell v Broome  AC 1027. The House of Lords was there concerned with the circumstances in which exemplary damages should be awarded in defamation cases. Lord Reid regarded them as highly anomalous since they confused the compensatory function of the civil law with the function of the criminal law to inflict deterrent and punitive penalties. In his view that "undesirable anomaly should not be permitted in any class of case where its use was not covered by authority". In Rookes v Barnard (No. 1)  AC 1129 the House had recognised that it could not abolish the anomaly and had thought it better to confine it strictly to classes of cases where it was firmly established, although that produced an illogical result, rather than to allow any extension. Other members of the House spoke to similar effect.
- In addition there is no justification for applying such a doctrine before, but not after, proceedings, particularly when, if it is to apply, the need for it is likely to be greater after they have begun. To do so would encourage premature resort to litigation to avoid the effect of the doctrine. It would also encourage insurers, whose obligation is to indemnify upon the occurrence of the loss, to keep asking questions in the hope that the assured will slip up and make what can then be characterised as a recklessly false statement.
- The former argument does not seem to me tenable in the light of The Star Sea. If in respect of fraudulent claims the rules of civil practice and procedure replace the more onerous insurance law rules once litigation begins, there is no reason why that should be different in relation to fraudulent devices. In any event the ratio of The Aegeon is that that is so.
- The court, Owners submit, should not adopt as ratio a principle which "would simply serve the interests of one party and do so in a disproportionate fashion" per Lord Hobhouse in The Star Sea nor allow "the assured's duty of good faith to be used by the insurer as an instrument for enabling the insurer himself to act in bad faith" ibid. Fraud may require deterrence but that should not be by depriving an insured of accrued rights but by the means suggested in Summers.
- The Underwriters for their part accept that the rule, whether applied to claims or devices, is anomalous in the sense that it does not apply in other circumstances. But that is for good reason. Other relationships are not founded on the duty of utmost good faith, which goes back to Lord Mansfield: see The Star Sea at ; and of which dishonesty is the most egregious breach: The Aegeon at . Further it is an anomaly which this Court has recognised.
- They also submit that it is not as anomalous as all that. Since Summers, judges have showed a willingness to strike out claims including personal injury claims before trial or award nominal damages where those claims were pursued fraudulently: Scullion v Bank of Scotland (HHJ Cotter QC, Exeter County Court, 24 May 2013), where a claim for personal injury was struck out on the basis of sustained dishonesty during the litigation; Homes for Haringey v Fari  EWHC 757 which records at  the striking out of an exaggerated claim for personal injury; Joseph v Spiller  EWHC 2958 where Tugendhat J refused to award more than nominal damages in a defamation case because of the fraudulent presentation of special damages despite the fact that some were genuine. Those cases, the Owners contend, involve the exercise of a discretion not a rule.
- There are several powerful reasons why we should apply The Aegeon as a matter of ratio.
- First, The Aegeon, albeit not binding, is authoritative.
- Second, a fraudulent device is, in a way, as Mance LJ described it, a sub-species of a fraudulent claim. A claim can be put forward fraudulently by making a claim known to be bad (in whole or in part) or by supporting a valid claim with, e.g., a forged document, a device which may be used in respect of claims known to be bad as well as those believed to be good. The application of the rule to fraudulent devices is consistent with the basis of its application to fraudulent claims; and such dual application provides a coherent whole.
- The foundation of the rule is the obligation of the utmost good faith - an incident of the special relationship between insured and insurer. The effect of the rule is that if you lie to your insurer in respect of anything significant in the presentation of the claim you will not recover anything from him. Once it is accepted, as it has long been, that an assured who fraudulently exaggerates his claim forfeits the whole of it - so that a fraudulent claimant can lose almost all of his otherwise valid claim (say 95%) - there seems to me no satisfactory reason in principle why the user of a fraudulent device should not lose 100%. It is true that the user of such a device may turn out not to have been seeking a benefit to which he was not entitled; but the same is true, in the example given, in respect of the fraudulent claimant as regards most of his claim. In the case of both the fraudulent claim and the fraudulent device, fraud is used to obtain something to which the insured is either not entitled or would not otherwise have received: in a fraudulent claim case, the bogus part of the claim; and in a fraudulent device claim, earlier payment than full investigation would otherwise permit.
- That the rule should encompass fraudulent devices is consistent with the rationale that underpins it in relation to fraudulent claims. In The Star Sea Lord Hobhouse described it thus: "Fraud has a fundamental impact upon the parties' relationships and raises serious public policy questions. Remediable mistakes do not have that character". In the same case  he explained that the rationale for the rule was that "The fraudulent insured must not be allowed to think if the fraud is successful, then I will gain; if it is unsuccessful, I will lose nothing": see, also, Mance LJ in Axa General Insurance Ltd v Gottlieb at  to similar effect.
- In Galloway v Guardian Royal Exchange (UK) Ltd  1 Lloyd's Rep 209, where the insured forfeited a legitimate claim for £ 16,133 when he fraudulently added a false claim for £ 2,000 (so that the false claim was 11% of the whole) – the result, as Millett LJ observed, seemed harsh but was "necessary and salutary" to counter the "widespread belief that insurance companies are fair game and that defrauding them is not morally reprehensible".
- The harshness of the result of a fraudulent devices rule is most apparent when, as here, the Court has, in the end, determined that the claim is otherwise valid. But the rule is directed to an earlier stage. Fraudulent devices, as their definition shows, are used by those who think their use desirable in order to bolster a claim which appears to have potential weaknesses (e.g. as here Owners' possible responsibility for a deficiency in the bilge alarm system) and to avoid or cut short lines of inquiry or investigation which might prevent or postpone the payment of it. At the stage when they are used it will probably not be possible to tell whether the claim is one that will in the end be accepted, or held, to be valid. The risk to the insurer is that the device may achieve its purpose, so that the insurer fails to explore the claim properly and pays out in respect of a claim where he may have a defence. If he does do so it will never be known whether, had he not done so, the result would have been the same.
- Third, there is a public policy justification for the rule as applied to both claims and devices. In either case its draconian consequence only applies to those who are dishonest. The importance of honesty in the claiming process is manifest. Most insurance claims get nowhere near litigation because insurers rely on their insured. It is true that, if the rule applies to claims and devices, insurers' scope for asserting an entitlement to avoid will be greater than if it only applies to claims. But insurers are entitled to protection from either type of fraud and the scope of the rule should not be determined by the fact that unscrupulous insurers might assert a fraudulent device without good reason to do so.
- Fourth, between 2010 and 2012 the Law Commissions of both England and Scotland (hereafter "the Law Commission") looked at the fraudulent device doctrine in some detail as part of its research into the post-contract duty of good faith on the part of an insured. It published two papers and the responses thereto.
- The first of the papers – Issue Paper 7: The Insured's Post-Contract Duty of Good Faith (July 2010) – drew attention (a) to the particular vulnerability of insurers to fraud; (b) to the size of the problem – according to data from the Association of British Insurers about £ 730 million worth of claims were refused on account of detected fraud in 2008 with a possible value of undetected fraud of around
£ 1.9 billion a year; (c) to its increase –fraudulent claims nearly doubled from 2.2% in 2004 to 4.2% in 2008; and (d) to the rarity of criminal prosecution (2.1-2.6). The paper proceeds on the basis that the fraudulent devices doctrine as laid down in The Aegeon exists (3.36-3.47).
- So does Consultation Paper No 201: Insurance Contract Law: Post Contract Duties and Other Issues (December 2011) at paras 6.40 - 6.49. This paper records that for 2010 the figure for detected fraud was £ 919 million in respect of 133,000 claims – 5% of the value of all claims made. The responses to the paper indicated that 35 of the 38 who responded on this question agreed that a policyholder should forfeit a claim in relation to which he had committed fraud. However, of the responses that the Commission had received only one was from "policyholders and policyholder/consumer groups".
- Since the hearing The Law Commission has published (July 2014) a finalised draft bill dealing with, inter alia, fraudulent claims, which is in the same form as an earlier draft produced before the hearing. The draft bill provides that "If the insured makes a fraudulent claim under a contract of insurance - (a). The insurer is not liable to pay that sum": clause 12 (1) (a); but does not define "fraudulent claim". The Report takes the view that it is for the Court to decide what amounts to a fraudulent claim (22.6). However, the notes to the initial draft bill indicated (3.19) that one of the fraudulent acts which made a claim fraudulent would be the use of a fraudulent means or device to support a genuine claim.
- The Report reiterated at 19.1 – 19.3 and 21.2 – 21.6 the scale of the problem (detected fraud in 2013 valued by the ABI at £ 1.3 billion) and the importance of the law setting out clear sanctions to deter them. It considered that the area of controversy in relation to fraudulent claims was "relatively small" (20.36) as a result of which the authors' recommendations only targeted remedies for fraud. They said that, despite the potentially anomalous nature of the forfeiture rule, they had no mandate to recommend more substantial change than their recommended removal of avoidance as a statutory remedy (21.20). They expressed the view that "Given the moral hazard involved in fraud by policy holders, we think there is a clear case for strong remedies" (21.23).
- Care must, however, be taken with the fraud statistics because it is not clear whether and to what extent they include fraudulent devices. It may be that very few of the fraudulent claims are claims that have been rejected for use of such a device although otherwise wholly valid. In the ABI report for July 2009 the most common form of general insurance claims fraud was said to be opportunistic retail fraud where individuals exaggerate or inflate genuine claims to increase the value of a pay-out. Owners submit that this is a reference to fraudulent claims.
- Underwriters observe correctly that the usual fraudulently inflated claim may well be accompanied by lies about the circumstances of the occurrence which taint the genuine as well as the false part of the claim. (There would, however, in that case be a claim which was fraudulent as to part and not merely a fraudulent device). Further, if the ABI Report did not consider fraudulent devices, properly so called, the consequence is that the quantity of claims affected by such devices is unknown, but is unlikely to be small. In any event the Law Commission was considering all forms of fraudulent claim including devices when it expressed the view that fraud was widespread, not adequately pursued by the police and required a deterrent.
- The Report discusses the judgment at first instance in the present case (22.22 – 22.24) without suggesting that the application of the rule to fraudulent devices is inapposite (22.22 – 22.24). Whilst leaving the definition of fraud to the Courts, the Commission proceeds on the basis that a fraudulent device is part of the fraudulent claims doctrine and that The Aegeon was good law.
- There is, therefore, nothing in the Law Commission's reports that militates against, and much that supports, the application of the rule to devices as well as claims. However, the Law Commission does not appear to have considered the impact of A1P1.
- Fifth, although in The Aegeon Mance LJ referred to a dearth of convincing authority, there is antecedent authority which provides some support to the application of the rule to fraudulent devices.
Lek v Matthews
- In Lek v Matthews (1927) 29 Ll. L. Rep. 141 Mr Lek claimed against his insurers in respect of the theft of a stamp collection, valued at £ 44,000. He appears to have thought that the policy was a valued policy and that, when the whole collection was stolen from his hotel in Berlin, he was entitled to recover the full value as a total loss, less a figure for such stamps as were recovered. The policy contained a clause, which was in the common Lloyd's form avoiding it in the event that the insured made "any claim knowing the same to be false or fraudulent, as regards amount or otherwise". Branson J rejected Mr Lek's claim on the basis that he had dishonestly submitted a list of stamps which contained some that he had never had. The Court of Appeal by a majority gave judgment in his favour. The House restored the first instance judgment.
- Viscount Sumner construed the false claim clause as referring:
"to anything falsely claimed, that is, anything not so unsubstantial as to make the maxim de minimis applicable, and it is not limited to a claim which as to the whole is false... It means claims as to particular subject matters in respect of which a right to indemnity is asserted, not the mere amount of money claimed without regard to the particulars or the contents of the claim..."
- Whilst the case turned on a clause in the policy, and on its facts involved a fraudulent claim, it indicates that a fraudulent claim may have a wide embrace, including assertions as to the contents of the claim - which would cover the evidential material said to support it. Since, however, the clause included "or otherwise" the width of the concept could be said to derive from the words of the clause which may go wider than the common law.
Wisenthal v World Auxiliary Insurance
- The direction in Wisenthal v World Auxiliary Insurance (1930) 38 Ll. L. Rep. 54 that it would be fraud:
"if the jury thought that in the investigation [by the insurers] deceit had been used to secure payment or quicker payment of the money than would have been obtained if the truth had been told"
is apt to cover fraudulent devices and the finding of the jury seems to have been limited to them. The jury was not satisfied that there had been a fraudulent exaggeration of the claim but was satisfied that there had been a fraudulent concealment of a stock book and documents relating to a particular bank account.
- To similar effect, the edition of Halsbury's Laws 4th Ed, Vol 25, (1978) para 510 cited in The Michael  2 Lloyd's Rep 1, 21-2 by Roskill LJ (after he had said that there was curiously little authority on the topic) stated that the making of a fraudulent claim would cause the assured to forfeit all benefit under the policy, whether it contained an express condition to that effect or not. At para 511 under the heading "What claims are fraudulent?" the answer given was:
"A claim which is put forward when the assured knows he has suffered no loss or which is supported by false evidence is clearly fraudulent…"
- Sixth, The Aegeon has been cited without disapproval in a number of subsequent cases: (i) Axa v Gottlieb (per Mance LJ), where the fraud relied on amounted to a fraudulent claim; (ii) The Game Boy  1 All ER (Comm) 560; (ii) Sharon's Bakery (Europe) Ltd v AXA Insurance  Lloyd's Rep IR 164; and (iii) Aviva Insurance Ltd v Brown  Lloyd's IR 211. The last three cases were in the Commercial Court. In The Game Boy Simon J described the fraudulent device rule as "well established" in the light of The Aegeon and applied it to a fraudulent device. In Sharon's Bakery there was a clause in materially identical terms to that in Beacon Insurance. It was common ground between the parties that it replicated the common law rule and the claim failed because of the use of a fraudulent device (but not a fraudulent claim). The Aegeon test of materiality was applied. In Aviva Insurance there was a clause that provided that the insurers would not pay any claim which is "in any respect fraudulent". The Aegeon was followed in respect of a fraudulent device.
- These cases were followed by the Privy Council case of Stemson – see  above, where recognition of the fraudulent device defence was part of the ratio, and The Aegeon was referred to in the Supreme Court in Summers without any apparent disapproval.
- Most leading textbooks refer to the fraudulent devices doctrine without any suggestion that it is controversial: Arnould: Law of Marine Insurance and Average 18th Edition 18-81 et seq; MacGillivray on Insurance Law 12th Ed (2012) at 20-060 – 20-064; MacDonald Eggers et al: Good Faith and Insurance Contracts, 3rd Ed (2010) at 11-70; Rose's Marine Insurance, Law and Practice 2nd Ed (2012) at 5.102.
- The exception is Professor Clarke's The Law of Insurance Contracts 4th Ed at 27.2 B. He expresses the view that the settlement of a claim is or is closely akin to a legal agreement and that it would be an unusual departure from principle to vitiate it on account of a lie which was not causative unless designed to uphold a clear overriding principle of public policy. He also expressed the view that to do so would overlook the concerns expressed by Lord Mustill in Pan Atlantic  1 AC 501, 549D. Lord Mustill's concern was against allowing avoidance for non-disclosure without any reference to causation since "to enable an underwriter to escape liability when he has suffered no harm would be positively unjust". As to that it does not seem to me that an insurer who has been lied to can be said to have suffered no harm. He may be put off relevant inquiries or be driven to irrelevant ones and he loses the opportunity to investigate the claim after an honest presentation of the facts. Further the fact, that at the end of the day, the fraud may be discovered and the Court may still rule that the insurer had no defence, takes no account of the policy concern that would-be fraudsters should not be allowed a one way bet.
- Professor Clarke also expresses the view that the recognition of a fraudulent devices rule gives rise to concerns for the interests of consumers and small businesses and would potentially encourage insurers continually to attempt to question the insured after the loss in the hope of obtaining misstatements.
- The six considerations set out above point to the desirability of our now deciding to apply the principles in The Aegeon, particularly when that decision was reached over 12 years ago and has been acted upon meanwhile.
- There remains, however, a consideration which has had either no or limited consideration in the authorities – that of proportionality.
- The Owners contend that the application of the forfeiture rule to fraudulent devices is capable of producing, and in this case does produce, manifest injustice. Forfeiture in the present case was neither just nor proportionate. For the rule to apply (if it applies at all) it needs to be both, either because that should be a requirement of what amounts to an extension to the rule or by virtue of the provisions of A1P1. The court should consider whether, taking into account all the circumstances, it is just and proportionate to deprive the Assured of his otherwise valid rights. Whether there is to be forfeiture should be determined on a case by case basis having regard, inter alia, to the gravity of the fraudulent device.
- The judge was strongly attracted to such a test and recognised – rightly as the Owners submit – that "the blunt instrument of a relatively inflexible test of materiality....must surely be capable of yielding to a more proportionate response, which can be meet the varying requirements of each case" . There was however no submission made to him that he should depart from The Aegeon, that question being reserved for this Court.
- In support of this contention Owners identify what they say is a constant theme running through modern insurance and other authorities concerning the need for proportionate remedies. Thus in Galloway v Guardian Royal Exchange  Lloyd's Rep IR 209, 214 Millett J referred to the need to consider whether the making of the fraudulent claim was "sufficiently serious to justify stigmatising it as a break of [the assured's] duty of good faith so as to avoid the policy" (although the proposition that a fraudulent claim avoids the policy has not been followed). Further in the context of illegality the Court of Appeal has indicated that a contract should only be rendered unenforceable if that would be a proportionate response: ParkingEye Ltd v Somerfield Stores  QB 840. However, that case was not one in which either party had defrauded the other.
- If the Owners' propositions are well founded they ought, as it seems to me, to apply with equal, or almost equal, force to the rule in respect of partially fraudulent claims. The latter rule has, however, never had a proportionality requirement of the type suggested as a requirement for its application. A claimant who fraudulently overstates his claim recovers none of it whatever the size or proportion of the overstatement (provided it is not trivial). Nor has the rule in respect of fraudulent devices as expounded in The Aegeon ever been expressed as subject to such a requirement. On the contrary the drastic effect of the forfeiture rule is what gives it its deterrent effect and its justification rests on that basis.
The Human Rights Act 1998
- Under section 6 of the Act it is unlawful for a public authority, which includes a court, to act in a way which is incompatible with a Convention right. Article 1 of the First Protocol provides that:
"Protection of property
Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties."
- It is common ground between the parties that the Court should, so far as possible, develop the common law in a way that gives effect to the ECHR or, as it has been put, to "weave the Convention rights into the principles of the common law and of equity". The Underwriters accept that an amount payable under an insurance contract – a right which accrues at the time of loss – is a "possession" within the meaning of the Article and that forfeiture of an insurance claim is an interference that engages Article 1.
- The contention that Article 1 was infringed was not made before Popplewell J. Nor was any argument to that effect advanced in The Aegeon, where the events occurred on 19 February 1996, prior to the coming into force of the Human Rights Act. It is, nevertheless, incumbent on us to consider it. For that purpose it is necessary to consider whether the interference in question "pursue[s] a legitimate aim by means that are reasonably proportionate to the aim sought to be realised": AXA General Insurance Ltd v HM Advocate  1 AC 868 at ; and strikes a "fair balance… between the demands of the general interest of the community and the requirements of the protection of the individual's fundamental rights": per Toulson JSC in Barnes v Eastenders Cash & Carry plc  2 WLR 1269, 1286. The assessment of proportionality requires careful consideration of the particular facts: ibid .
- Some apparent qualification of the latter provision is to be found in James v UK  8 EHRR 123, where the Duke of Westminster's Trustees complained that compulsory transfer under the Leasehold Reform Act 1967 infringed their A1P1 rights. The court held that, where the essence of the complaint was as to the terms and conditions of the contested legislation, the Court's attention should be primarily directed to the compatibility of the legislation itself, although the consequences of the application of the legislation such as occurred in the 80 specific transactions before the court should be taken into account. The same approach is, in my view, appropriate where what is in issue is a common law principle of general application.
- The same decision makes clear  that the availability of alternative solutions to fulfil the relevant aim does not itself render the legislation unjustified. It is but one factor relevant for determining whether the means chosen could be regarded as reasonable and suited to achieving the legitimate aim.
- There is no real dispute but that the fraudulent device doctrine has a legitimate public policy aim. That aim is to deter fraud in the making of claims and to frustrate any expectation that, if the fraud fails, the fraudster will not lose out. Such an aim was described by Millett LJ in relation to fraudulent claims as "necessary and salutary" in a case – Galloway at  – where the claim, fraudulent as to 11%, forfeited the whole. It also serves to protect insurers from the risks inherent in the imbalance between the information available to the insured and that available to them. The aim has a strong public policy element since fraud is intrinsically wrong and usually criminal and the costs of it are ultimately borne by premium payers. I do not regard the recoverability of exemplary damages as raising materially identical considerations.
- The more difficult question is whether the means employed to pursue that aim is reasonably proportionate to the aim sought to be realised and whether there is a fair balance between the means adopted to fulfil the relevant aim and the insured's interest in the indemnity afforded by the policy.
- Owners submit that there is no real proportionality to the rule. It ignores the gravity or culpability of the device and, as the judge said, makes no distinction between "a reckless untruth ... told on one occasion" and "a carefully planned deceit or conspiracy". The same consequence applies (to take the judge's example ) to the man who claims a large sum for a totally fictitious loss as it does to someone who has a house and contents claim worth £ 500,000 including the real loss of a computer, who provides an invoice for a similar one which he has not lost because he cannot be bothered to find the right one. Nor is account taken of the consequences of the lie for the insurer, whether and for how long the insurer was deceived by it, or the size of the penalty or its impact on the assured. A doctrine which has the potential to inflict disproportionately harsh sanctions on an individual, when a downright lie in a non insurance civil claim would not have that consequence, cannot have struck a fair balance. Nor is there any statistical evidence which justifies so disproportionate a rule in relation to fraudulent device, whatever may be the position in relation fraudulent claims.
- The Owners rely in this respect on a number of authorities.
- First, in Summers itself the Supreme Court accepted the submission that in deciding whether or not to exercise a power to strike out the court must examine the circumstances of the case scrupulously in order to ensure that striking out the claim is a proportionate means of achieving the aim of controlling the process of the court and deciding cases justly: .
- Secondly, in R v Waya  1 AC 294 the Supreme Court held that a confiscation order which did not conform to the test of proportionality would constitute a violation of a defendant's right to peaceful enjoyment of his property and read down section 6 (5) (b) of the Proceeds of Crime Act 2002 so as to make it subject to the qualification that an order should not be made if it was disproportionate. It pointed out that where the defendant had restored to the loser any proceeds of crime a confiscation order would not achieve the statutory objective of removing his proceeds of crime from him but would simply be an additional penalty.
- Thirdly, in Pressos Compania Naviera S.A. v Belgium  21 EHRR 301, where retrospective Belgian legislation deprived the applicants of claims against Belgian pilots in respect of ship collisions, the Court held that "the taking of property without payment of an amount reasonably related to its value will normally constitute a disproportionate interference and a total lack of compensation can be considered justifiable under Article 1 only in exceptional circumstances". But this is not necessarily so. As Toulson LJ pointed out in Barnes  a confiscation order has that effect but it is done for the salutary purpose of depriving someone of the fruits of crime.
- The Underwriters submit that the rule in The Aegeon contains its own restrictions which ensure proportionality to the relevant aim. First, the device must be directly related to the claim, as opposed to some dispute with a third party such as arose in The Mercandian Continent  2 Lloyd's Rep 563. Secondly, the device must have been intended by the assured to promote his prospect of success. Thirdly, it must not be irrelevant but such that, if believed, it would have tended to yield a not insignificant improvement in the assured's prospects of success prior to any final determination of the parties' rights. Between them these conditions ensure that only relevant lies, told to deceive and objectively capable of doing so, will lead to forfeiture.
- These criteria supply the necessary proportionality and a fair balance between (a) the rights of the insured and (b) the need to recognise the impact of fraud on the transaction and society as a whole. It is moreover wrong to describe the clause as penal. The right to an indemnity is forfeit because the condition of its existence is that the insured has not been guilty of fraud.
- The critical question, in my judgment, is whether a bright line rule that the use of a fraudulent device which fulfils the conditions set out in  above forfeits the claim is, looking at the matter overall, a proportionate means of securing the aim of deterring fraud in relation to insurance claims. This is not the same question as asking whether the consequence in any given case is proportionate to the relevant fault.
- In my judgment the answer is in the affirmative. Once it is accepted that deterrence is itself a legitimate aim, the fact that forfeiture is a harsh, in some circumstances very harsh, sanction does not mean that it is disproportionate to that aim. The rule is only applicable in the case of fraud, from which no insured should have any difficulty in abstaining. The careless or forgetful insured is not affected, nor is the insured who tells some irrelevant lie or whose lie is not told in order to induce payment. These limitations on the scope of the rule render it a proportionate response to the aim of deterrence of fraud, which crosses a moral red line, and has, as Lord Hobhouse put it "a fundamental impact upon the parties' relationships", and may be difficult to detect.
- Fraud is also likely, in the present context, to constitute an offence (actual or attempted) under sections 2 and 5 (2) of the Fraud Act 2006, although it is unlikely to be the subject of criminal prosecution. In Broniowski v Poland  40 EHRR 21, at  the Grand Chamber of the ECHR regarded the conduct of the parties as relevant to the fair balance between the general interest and the protection of an individual's property and, although the circumstances of that case were entirely different, the principle is relevant.
- If such a rule is not adopted and some form of "just and proportionate" test is adopted, its application would be problematic and its outcome difficult to predict. That would be a recipe for litigation. If such a rule were adopted, it is not easy to discern what degree of moral obliquity should be required for forfeiture in whole or in part. How do you assess what part of a £ 10,000,000 claim should be forfeit on account of any given fraudulent device? If the size of the claim or the impact of forfeiture on the insured are material considerations, how and on what objective basis are they to be taken into account? If there are two different claimants, each using fraudulent devices of the same level of iniquity, is the large claim to be allowed when the small one is not? If the insured with the large claim is very wealthy does he face forfeiture when the poorer insured with the small claim does not?
- I appreciate that it would be possible simply to rule that in each case there should be forfeiture to such extent as may be just and proportionate, leaving it to the court to decide the outcome in the event of dispute. That is likely to reduce the deterrent effect of the rule since to introduce degrees of fraud runs the risk that people come to think they can lie to their insurer about the circumstances of their claim without risk of sanction, provided that the lie is not one that the law takes seriously. The Law Commission expressed such a view in Issue Paper 7 at [4.73] in relation to an Australian statute which provided for a discretion where a minimal part of the claim was fraudulent. The Commission did not go down this route. It agreed with Professor Merkin that this approach "might be seen to encourage policyholders to commit minor frauds in the expectation that such conduct would not affect the legitimate element of the claim".
- There is also an inherent timing problem. If some form of "just and proportionate" limitation is imported, an insurer who discovers an obvious fraudulent device may well find himself having to wait until trial for a determination as to whether the claim is forfeit since the validity of the claim, apart from the device, will no doubt be said to be relevant to the assessment of what is a proportionate step in relation to the device. If the case goes to trial and fails on its lack of merits, the fraudulent device issue becomes irrelevant. If it succeeds, that success will be relied on as precluding forfeiture, save in exceptional circumstances; and the Court, in the light of Summers, is likely to regard forfeiture as wholly exceptional. In such circumstances the deterrent force of any fraudulent claims doctrine is likely to be very much reduced.
- Lastly, it is material to note that the Owners invoke the Convention not in respect of some legislative or administrative act but in relation to the operation of a common law doctrine which is an incident of a commercial relationship of a special character. In Pye v UK  46 EHRR 1083 the ECHR said that a margin of appreciation was particularly essential in commercial matters – an indication that in this field the range within which a measure may be treated as proportionate is greater than in others. It also indicated that the fact that the relevant rules had been in force for many years was relevant to an assessment of the overall proportionality. It is apparent from the same case that the fact that the relevant rule (in that case the law of adverse possession) will give rise to a windfall and in some cases a loss of great size did not mean that A1P1 was breached if overall the fair balance was struck.
- An example of a case where the requisite balance was struck is Wilson v First County Trust Ltd (No 2)  1 AC 816 where the House of Lords considered the statutory provision disentitling a money lender to enforce the agreement if the amount of the credit was misstated. The provision was held not to be contrary to A1P1 even though Parliament had chosen to exclude consideration of what was just and equitable and the rules had drastic, even harsh effects. Considered overall the course could be considered proportionate and a response tailored to the facts of each individual case inappropriate.
- Those cases concerned statutory schemes of general application adopted for public policy purposes, which is not this case. However, the court should, in my view, be reluctant now to characterise as disproportionate a common law doctrine of general application, which, so far as fraudulent claims is concerned, is of long standing, and which has operated in the insurance field for over 150 years. The fraudulent claims doctrine arises, as Lord Mance put it, "from a perception of appropriate policy and jurisprudence on the part of our 19th century predecessors, which time has done nothing to alter". The need to deter fraud which underlies the fraudulent claims doctrine applies also to fraudulent devices and, although the rule in relation to the latter was most clearly expounded only 12 years ago in The Aegeon, it has been applied both before and since.
- Moreover the doctrine is one which the Law Commission has shown no instinct to change either in respect of claims or devices. Express clauses dealing with both fraudulent claims and fraudulent devices are and have been for many years standard in non-marine policies. Whilst the Owners contend that the fact that parties can agree such a clause, if they choose, militates against extending the fraudulent claims rule to fraudulent devices where they have not done so, the fact such clauses are in common use militates against a conclusion that they are necessarily disproportionate to the end in view.
- Mr Karia submitted that because the fraudulent devices doctrine mandates forfeiture without any proportionality review in the individual case it thereby ipso facto violates A1P1. He referred us to Paulet v United Kingdom  Lloyd's FC 484. In that case a confiscation order was held to be disproportionate because the applicant did not have a reasonable opportunity of putting his case to the competent authority with a view to enabling it to establish a fair balance between the competing interests at stake. I do not accept that that case lays down that a bright line rule such as the one presently under consideration (in a case where individual review would significantly impair the deterrence which constitutes the relevant legitimate aim) must necessarily offend A1P1 simply because of the absence of such individual review. Indeed were that so it would seem that Wilson v First County Trust was wrongly decided by the House.
- I have considered whether the test of materiality adumbrated by Mance LJ in The Aegeon and summarised at  above is correctly formulated. It will be noted that the first and third parts of the test are objective and the second part subjective: (a) the fraudulent device must be directly related to the claim, (b) the fraudulent device must have been intended by the insured to promote his prospect of success, and (c) the fraudulent device must have tended to yield a not insignificant improvement in the insured's prospects of success prior to any final determination of the parties' rights. Little argument was addressed to this question, since on the facts of this case, the third part of the test would still be satisfied even if it were to require that the fraudulent device should objectively have tended to produce a significant or even a substantial improvement in the insured's prospects. In the circumstances, it does not seem to me that we should express a concluded view. For my part, however, I am not quite sure why the negative formulation was adopted, and I would prefer the requirement to demand a significant improvement in the insured's prospects.
- For all these reasons I would hold (i) that the principles of The Aegeon were applicable to the Owners' claim, subject to the qualification in the previous paragraph; (ii) that the fraudulent devices doctrine as there expounded should in this case be applied by way of ratio; (iii) that the judge was right to hold that the Owners made a claim which was fraudulent by reason of a fraudulent device consisting of the recklessly false representation which he found to have been made; and (iv) that the claim was forfeit on that account.
- I would, therefore, dismiss the appeal.
Lord Justice Vos
- I agree.
Sir Timothy Lloyd
- I agree with Lord Justice Christopher Clarke that the appeal should be dismissed, for the reasons that he gives, both as to the facts and as to the law. I also agree that it is not necessary for us to decide whether Mance LJ's expressly tentative formulation of the test of materiality in relation to fraudulent devices is correct as regards the third element, because it is clear that the test would be satisfied on the facts of the present case even if it were restated in a more demanding way than that suggested by Mance LJ. I express no view as to the extent or degree to which the use of the device must have tended to improve the insured's prospects of a successful outcome in the claim.