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United Kingdom House of Lords Decisions
You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> HIH Casualty and General Insurance Ltd & Ors v Chase Manhattan Bank & Ors  UKHL 6 (20 February 2003)
Cite as:  UKHL 6,  Lloyds Rep IR 230,  ICR 1708,  Lloyd's Rep IR 230,  2 LLR 61,  1 CLC 358,  2 Lloyd's Rep 61,  1 All ER (Comm) 349
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HIH Casualty and General Insurance Limited and others (Respondents) v Chase Manhattan Bank (Appellants) and others HIH Casualty and General Insurance Limited and others (Appellants) v Chase Manhattan Bank (Respondents) and others (First Appeal) HIH Casualty and General Insurance Limited and others (Appellants) v Chase Manhattan Bank (Respondents) and others (Second Appeal) (Conjoined appeals)
OF THE LORDS OF APPEAL
FOR JUDGMENT IN THE CAUSE
HIH Casualty and General Insurance Limited and others (Respondents) v. Chase Manhattan Bank (Appellants) and others
HIH Casualty and General Insurance Limited and others (Appellants) v. Chase Manhattan Bank (Respondents) and others (First Appeal)
HIH Casualty and General Insurance Limited and others (Appellants) v. Chase Manhattan Bank (Respondents) and others (Second Appeal) (Conjoined appeals)
THURSDAY 20 FEBRUARY 2003
The Appellate Committee comprised:
Lord Bingham of Cornhill
Lord Hobhouse of Woodborough
Lord Scott of Foscote
HOUSE OF LORDS
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
HIH Casualty and General Insurance Limited and others (Respondents) v. Chase Manhattan Bank (Appellants) and others
HIH Casualty and General Insurance Limited and others (Appellants) v. Chase Manhattan Bank (Respondents) and others (First Appeal)
HIH Casualty and General Insurance Limited and others (Appellants) v. Chase Manhattan Bank (Respondents) and others (Second Appeal)
(Conjoined appeals) UKHL 6
LORD BINGHAM OF CORNHILL
1. The appeal and cross-appeal before the House arise from answers given first by Aikens J ( 1 Lloyd's Rep 30) and then the Court of Appeal (Aldous and Rix LJJ and Lloyd J:  2 Lloyd's Rep 483) to preliminary issues ordered to be tried in the Commercial Court. The issues (so far as they remain contentious) are:
The Court of Appeal (in the judgment of Rix LJ, paragraph 180) answered these issues in this way:
These answers differed from those given by Aikens J:  1 Lloyd's Rep 30 at page 59, paragraph 117.
2. The issues between the parties concern the correct interpretation of a "Truth of Statement" clause contained in policies of insurance made between Chase (as representative of a syndicate of lending banks) as the insured and HIH which, although now in liquidation and not an appellant, has been treated as the lead company among a group of underwriting companies. The full terms of the truth of statement clause, conveniently broken down into its constituent phrases and numbered for ease of reference, are cited in the opinion of my noble and learned friend Lord Hoffmann (see paragraph 44 below), and need not be repeated in full. It is enough to cite here the phrases on which argument before the House has focused:
I gratefully adopt Lord Hoffmann's account of the relationship between the parties and the commercial background to the transactions giving rise to these proceedings.
3. In paragraph 2 of his judgment ( 2 Lloyd's Rep 483 at 487) Rix LJ drew attention, in terms which are not contentious, to the role of the lender in such transactions:
Chase was advancing substantial sums to finance the making of future films. If the films, when made, proved successful and generated substantial revenue, Chase would expect or hope to recoup its outlay from the revenue stream assigned to it. But the films might not prove successful and might either produce no revenue stream or a revenue stream insufficient, after deductions, to repay the loan. To the extent that the revenue stream fell short of the sum advanced, Chase would look to the insurance policies. These provided the security without which, it seems safe to infer, Chase would not have lent at all.
4. The policies under consideration provided for English jurisdiction and the application of English law. They formed part of a complex web of interlocking contracts involving substantial sums of money and made between sophisticated commercial parties. They were plainly the product of careful legal draftsmanship. It seems to me safe to attribute to the draftsman of the truth of statement clause a sound knowledge of English law so far as applicable to insurance contracts. In assessing the extent to which the draftsman of that clause intended to modify the respective rights and obligations of the parties it is helpful to recall what, in the absence of such a clause, the rights and obligations of the parties would have been, a matter the draftsman must have had in mind.
5. "A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party": section 17 of the Marine Insurance Act 1906, which is accepted as expressing generally applicable insurance principles. The legal and practical implications of this familiar but far-reaching rule are spelled out in the succeeding sections of the Act. Thus subject to some limited and obvious exceptions the insurer may avoid the contract of insurance if the assured fails, before the contract is concluded, to disclose to the insurer every material circumstance known to the assured, who is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him; and every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk: section 18(1), (2). Where, as in the ordinary case and as in the present case, insurance is effected for the assured by an agent, the agent is subject to a very similar and independent duty of disclosure: section 19. The insurer may also avoid the contract of insurance if any material representation made by the assured or his agent to the insurer during the negotiations for the contract is untrue, the test of materiality being the same as that already noted: section 20(1), (2). A representation may be as to fact, in which case it must be substantially correct, or as to a matter of expectation or belief, in which case it must be made in good faith, but a representation may be withdrawn or corrected before the contract is concluded: section 20(3), (4), (5), (6). Thus, put simply and applied to the present situation (in the absence of the truth of statement clause), the insurers might avoid the policy and deprive Chase of its intended security if either Chase, or its agent Heaths, however innocently, were to fail to disclose any circumstance found as a fact to be material (section 18(4)) or were to make any representation found as a fact to be material (section 20(7)) and to be untrue. For the assured (and not least an assured in the position of Chase) avoidance of the policy would be serious enough. But if the non-disclosure or misrepresentation were other than innocent, the insurer might have rights additional to that of avoidance: the right to damages given by section 2(1) of the Misrepresentation Act 1967 to the victim of a negligent misrepresentation; and the right to recover damages for deceit given by the common law to the victim of a fraudulent misrepresentation.
6. When the phrases numbered ,  and  in the truth of statement clause are read against the backcloth of the general law very briefly summarised in the last paragraph of this opinion, three points are immediately striking. First, Chase as the insured, although expressly relieved of any obligation to make any representation at all (phrase ), is not relieved of liability for any misrepresentation which it may voluntarily choose to make. Secondly, Chase is expressly relieved of any duty or obligation to make any disclosure of any nature (phrase ). Thirdly, no attempt has been made (whether by joining Heaths as a party to the contract or in any other way) to relieve Heaths of any liability to which it might be liable as an agent. The parties have left Heaths to look after itself. In the present case, no allegations of misrepresentation or non-disclosure have been made against Chase at all, so the crucial question is: in what circumstances and to what extent, on a proper interpretation of the truth of statement clause, is Chase to be liable for misrepresentation or non-disclosure by Heaths? While the clause must of course be read as a whole, it can only be conveniently analysed by considering in a little detail the three phrases on which the argument turns.
7. This phrase reflects the obvious intention of the draftsman to distance Chase from the underlying transaction. It need make no representation and no disclosure, such duties being expressly waived. It was argued for Chase that this waiver relieved Heaths also of its disclosure duty, since section 18(3)(c) of the 1906 Act provides that
Since the disclosure obligation of the agent under section 19 is expressly subject to the provisions of section 18 as to circumstances which need not be disclosed, it was argued, the insurers' waiver of Chase's duty relieved Heaths also and thus operated to relieve Chase of any liability as principal.
8. This is not in my opinion a tenable argument. For reasons which are readily understandable in the commercial context, the insurers relieved Chase of its usual obligation to disclose. It could not be supposed that the insurers did not require any disclosure of information of material circumstances, only that they were not looking to Chase to get it. Phrase  makes plain that the insurers were not waiving disclosure of information of any material circumstances but were relieving Chase of its disclosure obligation altogether. Chase relied in argument on the rhetorical question posed by Saville LJ in Société Anonyme d'Intermediaries Luxembourgeois v Farex Gie  LRLR 116 at 157:
But on the present assumed facts the answer is clear: it is a breach because the insurers have chosen to rely not on disclosure by Chase, distanced from the detail of the transaction, but on disclosure by the agent, actively involved.
9. It was common ground, and rightly so, that phrase , read with phrase , precludes avoidance of the policy by the insurers on the ground of innocent misrepresentation by Heaths: if the phrase does not have that effect, it has no effect at all. But the parties were divided as to how much further protection the phrase gives to Chase and in particular whether its effect is to deny Heaths' authority to speak for Chase and whether it denies the insurers their usual remedies if Heaths were guilty of negligent or fraudulent misrepresentation.
10. Chase contended that the effect of phrase  is to deny the authority of Heaths to speak for Chase. The judge and the Court of Appeal both rejected this argument:  1 Lloyd's Rep 30, paragraphs 47, 70;  2 Lloyd's Rep 483, paragraph 144. These decisions were plainly correct. There is nothing in the clause which could reasonably be understood as denying or restricting the implied and apparent authority of Heaths as Chase's agent.
11. In submitting that phrase  does not deny the insurers their usual legal remedies for negligent misrepresentation by Heaths, the insurers drew sustenance from the well-known principles propounded by Lord Morton of Henryton giving the judgment of the Board in Canada Steamship Lines Ltd v The King  AC 192 at 208. There can be no doubting the general authority of these principles, which have been applied in many cases, and the approach indicated is sound. The courts should not ordinarily infer that a contracting party has given up rights which the law confers upon him to an extent greater than the contract terms indicate he has chosen to do; and if the contract terms can take legal and practical effect without denying him the rights he would ordinarily enjoy if the other party is negligent, they will be read as not denying him those rights unless they are so expressed as to make clear that they do. But, as the insurers in argument fully recognised, Lord Morton was giving helpful guidance on the proper approach to interpretation and not laying down a code. The passage does not provide a litmus test which, applied to the terms of the contract, yields a certain and predictable result. The courts' task of ascertaining what the particular parties intended, in their particular commercial context, remains.
12. In relation to negligent misrepresentation, the key to the understanding of phrase  in my view lies in the provision that Chase shall have "no liability of any nature . . .". This is comprehensive language, clearly chosen to give Chase an extended immunity. It cannot refer simply to the liability of Chase to suffer the avoidance of the contract, since that is the subject of express provision in clause . So the language must be intended to preclude the liability of Chase for damages under section 2(1) of the 1967 Act for any negligent misrepresentation by Heaths and also any right of the insurers to avoid the policy on that ground.
13. I find nothing commercially surprising in this interpretation, from the viewpoint of Chase or the insurers. In a complex transaction of this kind, the possibility that Heaths as agent might make and fail to correct a representation which was later held to be both untrue and negligent would be very real. Chase, distanced from the transaction, would have little knowledge of what was represented and little opportunity to correct it. It could reasonably seek protection against loss or diminution of its security on such a ground. The insurers for their part might reasonably accept this chink in their armour, recognising that their rights against Heaths in such an eventuality would remain unimpaired.
14. Does phrase  then operate to protect Chase against any liability for damages or any risk of avoidance if the insurers should be induced to enter into the contract by any fraudulent misrepresentation of Heaths acting as the agents of Chase? In submitting that such is the effect of the phrase, Lord Grabiner QC for Chase emphasised the comprehensive language already noted, "no liability of any nature". Read literally, those words would cover liability for fraudulent misrepresentation, or deceit. If Chase's security for its loan is to be cast-iron, the policy must stand even if induced by the deceit of Heaths.
15. This is not a negligible argument. But neither the judge nor the Court of Appeal accepted it and I am satisfied that they were right not to do so. For, as Rix LJ observed more than once in his judgment (paragraphs 160, 169), fraud is a thing apart. This is not a mere slogan. It reflects an old legal rule that fraud unravels all: fraus omnia corrumpit. It also reflects the practical basis of commercial intercourse. Once fraud is proved, "it vitiates judgments, contracts and all transactions whatsoever": Lazarus Estates Ltd v Beasley  1 QB 702 at 712, per Denning LJ. Parties entering into a commercial contract will no doubt recognise and accept the risk of errors and omissions in the preceding negotiations, even negligent errors and omissions. But each party will assume the honesty and good faith of the other; absent such an assumption they would not deal. What is true of the principal is true of the agent, not least in a situation where, as here, the agent, if not the sire of the transaction, plays the role of a very active midwife. As Bramwell LJ observed in Weir v Bell (1878) 3 Exch D 238 at 245,
16. It is clear that the law, on public policy grounds, does not permit a contracting party to exclude liability for his own fraud in inducing the making of the contract. The insurers have throughout contended for a similar rule in relation to the fraud of agents acting as such. After a very detailed examination of such authority as there is, both the judge ( 1 Lloyd's Rep 30 at 45, paragraph 35) and the Court of Appeal ( 2 Lloyd's Rep 483 at 504, paragraph 109) decided against the existence of such a rule. It is true that the ratio of the leading authority on the point, S Pearson & Son Ltd v Dublin Corporation  AC 351, despite the distinction and numerical strength of the House which decided it, is not easy to discern. I do not however think that the question need be finally resolved in this case. For it is in my opinion plain beyond argument that if a party to a written contract seeks to exclude the ordinary consequences of fraudulent or dishonest misrepresentation or deceit by his agent, acting as such, inducing the making of the contract, such intention must be expressed in clear and unmistakable terms on the face of the contract. The decision of the House in Pearson v Dublin Corporation does at least make plain that general language will not be construed to relieve a principal of liability for the fraud of an agent: see in particular the speeches of Lord Loreburn LC at page 354, Lord Ashbourne at page 360 and Lord Atkinson at page 365. General words, however comprehensive the legal analyst might find them to be, will not serve: the language used must be such as will alert a commercial party to the extraordinary bargain he is invited to make. It is no doubt unattractive for a contracting party to propose a term clearly having such effect, because of its predictable effect on the mind of the other contracting party, and this may explain why the point of principle left open in Pearson v Dublin Corporation has remained unresolved for so long. But I think it clear that, judged by this exacting standard, the language of phrase  falls well short of what is required to meet Chase's objective, as both the judge (paragraph 81(3)) and the Court of Appeal (paragraphs 159, 160) held.
17. It appears, from authority to which we were referred by Chase, that a different approach would be taken in New York. In The Chase Manhattan Bank v AXA Reinsurance UK plc (unreported, index number 603080/00, 26 July 2001) Gammerman J considered the effect of a truth of statement clause in a film-finance insurance contract and observed (at page 7):
The judge's decision was upheld by the Appellate Division of the Supreme Court on 23 May 2002. In a judgment also of that date in The Chase Manhattan Bank v New Hampshire Insurance Company and AXA Reassurance SA (unreported, index number 602759/01) the same judge, construing (it would appear) similar clauses, in a similar context, said (at page 38):
As these citations make plain, the law in our respective jurisdictions has a different point of departure. English law knows no rule comparable with that described as well-established in New York. Instead, it requires a party seeking to exonerate himself from the consequences of his agent's fraud (assuming that is legally possible) to do so expressly and openly. I can see no persuasive argument for varying or relaxing our domestic rule which, as it seems to me, serves to encourage an open and cards-on-the-table (face upwards) approach to the making of contracts.
18. In relation to misrepresentation, phase  adds nothing to phrase : there may be no avoidance for innocent or negligent misrepresentation, but the phrase does not, for reasons already given, apply to fraudulent misrepresentation. In relation to non-disclosure, there was some difference of opinion between the judge and the Court of Appeal.
19. I think it plain, giving fair effect to the language of this phrase, that innocent or negligent non-disclosure by Heaths is to give the insurers no right to avoid the policy. The phrase refers to "any . . . nondisclosure by other parties . . ."; the English law on non-disclosure is widely recognised to be very strict; and any other reading would weaken Chase's security to a point which would, it may be inferred, have been unacceptable to it. But fraudulent non-disclosure raises a more difficult problem.
20. The judge held that phrase  did not exclude the insurers' right to avoid the contract of insurance in circumstances where the breach of the independent duty of disclosure by Heaths was the result of deliberate concealment of material facts:  1 Lloyd's Rep 30, paragraphs 76-77. In the Court of Appeal, doubt was cast on the meaning of "fraudulent non-disclosure" ( 2 Lloyd's Rep 483, paragraph 165) and it was questioned whether the law had distinguished between innocent, negligent and fraudulent non-disclosure (paragraphs 163, 168). In paragraph 168, Rix LJ said:
21. In the passage quoted, Rix LJ makes an important but uncontentious point: that silence, where there is a duty to speak, may amount to misrepresentation: see Brownlie v Campbell (1880) 5 App Cas 925 at 950, per Lord Blackburn; Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd  1 QB 665 at 773-774, 782-783, per Slade LJ; Spencer Bower, Turner & Sutton, Actionable Non-Disclosure (2nd ed 1990) at 249-250. Since an agent to insure is subject to an independent duty of disclosure, the deliberate withholding from the insurer of information which the agent knows or believes to be material to the risk, if done dishonestly or recklessly, may well amount to a fraudulent misrepresentation. If, in the present case, the insurers establish non-disclosure by Heaths of this kind, nothing in the truth of statement clause deprives them of their ordinary right to avoid the policy and recover damages against Chase and Heaths.
22. Whether, on the facts of this case, the insurers can establish any deliberate and dishonest or reckless non-disclosure by Heaths which does not amount to a misrepresentation, must be doubtful. In Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd  1 AC 501 at 549, Lord Mustill pointed out that "in practice the line between misrepresentation and non-disclosure is often imperceptible." But section 84 of the 1906 Act appears to accept the possibility of fraudulent non-disclosure and I do not think such possibility need be rejected on conceptual grounds. If it were to be established, I would agree with the judge that phrase  does not exclude the insurers' ordinary right to avoid.
23. I would for my part answer the preliminary issues in this way:
On the Court of Appeal's narrow point relating to fraudulent non-disclosure not amounting to misrepresentation, the insurers' appeal succeeds, and should be allowed to that extent. The cross-appeal by Chase fails and must be dismissed.
24. I have had the advantage of reading the opinion of my noble and learned friend Lord Bingham of Cornhill. For the reasons given by Lord Bingham I would also make the order which he proposes.
Film finance insurance
25. This appeal is concerned with a new high risk, high premium insurance product used in financing film production. The risk insured against is that a party who has advanced money for the production of a film against the security of a defined share of future revenue will fail to recoup his advance within a specified period. It is high risk, first, because the commercial success of a film is notoriously difficult to predict and, secondly, because a good deal will turn upon how the lender's revenue entitlement is defined. If all expenses have first to be paid, the lender will be subject to unpredictable cost overruns. Fees, commissions, royalties, overriding payments to director and stars and similar skimmings may also deplete the lender's share of gross revenue. And in an industry where possession of the money tends to be nine-tenths of the law, much will depend upon who banks the money and keeps the books. It is a form of insurance in which the players need to have their wits about them.
The original TVC facility
26. The use of insurance in connection with film finance appears to have been developed about ten years ago by a company called Screen Partners Ltd ("SPL") in conjunction with Heath North America & Special Risks Ltd, a specialist subsidiary of Heath Insurance Broking Ltd. I shall refer to them both as Heaths. They occupied the usual somewhat ambiguous position of insurance brokers in taking the initiative in putting together an insurance product and offering to procure it for lenders of film finance. Lenders who participated in such a scheme would make it a condition of the loan that the borrower, the production or distribution company, should procure the issue of an insurance policy and pay the premium and any other associated expenses. But in presenting the proposal to underwriters Heaths acted in their traditional role as agents for insured.
27. In 1992 a number of insurers (including six of the eight involved in these proceedings) subscribed to a line slip for film finance insurance which was renewed annually until 1996. The insurance offered was known in the market as a "time variable contingency" or "TVC" facility. Several films were declared under the line slip and, so far as the insurers were aware, the outcome was uniformly successful.
28. The insurers attributed this happy state of affairs, at least in retrospect, to certain features of the arrangements which limited their risk. First, the underwriters were advised by an independent risk manager (a role played under the line slip by SPL) who reviewed the script, production budget, revenue estimates and certain other matters. Secondly, the rights of other persons such as the distributor, producer, director, lead cast and other investors to payment out of the gross revenue were subordinated to the rights of the insured until the insured loan had been fully repaid. Thirdly, the gross revenues were paid into a designated collection account under the control of the lending bank. Fourthly, the insurers were able, in the event of a revenue shortfall and prospective claim, to take control of the distribution of the film.
The Phoenix slate
29. The policies in issue in the present proceedings were devised by Mr Graham Bradstreet, a film finance consultant, who operated through a company called Premier Media Ltd ("PML"). On 7 July 1995 PML entered into an agreement with a newly formed American production company called Phoenix Pictures Inc ("Phoenix") by which it undertook to find TVC insurance to support borrowings for films which Phoenix proposed to make. PML warranted that the insurance would be broked by Heaths and that underwriting capacity of between US$75m and US$120m would be available to insure all films produced by Phoenix during a period of at least three years. It was a condition of the agreement that PML should be the underwriters' risk manager. Pursuant to the agreement, PML obtained from Heaths an undertaking that it would use its best endeavours to procure TVC insurance for the bank or banks providing finance for Phoenix's films during the currency of the agreement. In the event, the bank which agreed to act as leader in the syndicated financing of what has been called the "Phoenix slate" of films was Chase Manhattan Bank, now called JP Morgan Chase Bank. I shall call it "Chase".
30. Five contracts of insurance for films forming part of the Phoenix slate were placed between June 1996 and March 1997. Two, for films called The Mirror has Two Faces ("Mirror") and The People vs Larry Flynt ("Flynt") were placed facultatively, insurers subscribing to primary and excess slips for Mirror on various dates between June and September 1996 and to a primary slip for Flynt on various dates in October 1996. The contracts of insurance relating to the other three films were placed by declarations off a line slip which was scratched by various insurers between June and September 1996. The declarations were made in November 1996, December 1996 and March 1997.
31. Separate policies were issued for Mirror and Flynt. A single policy in respect of the line slip was issued, referring to the three declarations. The terms of the three policies are in all material respects identical. For the purposes of these proceedings the parties have taken the first layer policy issued for Mirror as representative of the others.
32. The policy was taken out for the benefit of Chase by a company called Elmwood Films Inc, a corporation formed solely for the purpose of borrowing money from Chase and acquiring the participation in revenue which was to be assigned to Chase as security. Elmwood entered into a Reimbursement and Term Loan Agreement ("RTLA") with Chase and the other banks providing the syndicated loan by which it borrowed money on a non-recourse basis, that is to say, its liability was limited to whatever was recovered by Chase under its security. Elmwood's entitlement to the revenue assigned to Chase was derived from a Revenue Participation Agreement ("RPA") made between itself and TriStar Pictures Inc ("TriStar"), a company associated with Phoenix which held the distribution rights. Under the RPA, Elmwood acquired its revenue participation in return for payment of the money it was borrowing from Chase. The RPA contained an elaborate definition of the revenue to which Elmwood (and so Chase) would be entitled.
33. It was a condition precedent of the RTLA that Elmwood should take out the insurance policy in the name of Chase and pay Heaths a sum sufficient to pay PML's fee, the insurance premium, tax and brokerage fees.
34. There have been substantial shortfalls in the revenue assigned by way of security to Chase in respect of all five films and it has made claims under the policies. The insurers have repudiated liability on the grounds of misrepresentation and nondisclosure, either fraudulent or negligent, on the part of Heaths as broker. I shall in due course outline these allegations in detail. No allegation is made against Chase itself.
35. Chase has brought proceedings in respect of the Mirror and Flynt insurances, which the insurers are defending on the ground that they have lawfully rescinded the contracts of or for insurance and counterclaiming for damages against Chase and Heaths for misrepresentation and nondisclosure. The insurers in turn have brought proceedings against Chase and Heaths in respect of the three line slip insurances, claiming that the contracts have been rescinded and damages. The three actions have been consolidated. Chase claims that upon the true construction of the policies, the insurers are not entitled to repudiate liability or claim damages against Chase even if all the allegations made by the insurers against Heaths are true. As the issue is one which, if resolved in favour of Chase, would result in it recovering under the policies, Longmore J ordered the questions of law and construction to be tried as a preliminary issue:
The case for the insurers
36. As the preliminary issue is in the nature of a demurrer, requiring an assumption that the insurers' allegations are true, it is necessary to summarise the facts which have been pleaded. It must however be emphasised that there has of course been no trial and the allegations against Heaths are strongly denied.
37. First, it is said that Heaths made a number of misrepresentations. The insurers' primary case is that Heaths knew that it was being untruthful and the misrepresentations were therefore fraudulent. In the alternative, they say that if there is some honest explanation, Heaths should reasonably have known that the representations were untrue and were therefore negligent.
38. The principal misrepresentation alleged is that the risk involved in insuring the Phoenix slate was substantially the same as that under the 1992 line slip. In fact it was very different because, first, the risk manager was PML, which had a financial interest in procuring the insurance in accordance with its agreement with Phoenix and was therefore not independent; secondly, the revenue assigned to Chase was subject to numerous prior deductions of uncertain extent; thirdly, the revenue was not paid into an account controlled by the bank but directly to the distributor, TriStar, which passed on to the bank whatever remained after making such deductions as it thought appropriate and fourthly, the insurers could not assume control over distribution if the revenue fell short or a claim was made.
39. Heaths are also said to have represented that the 1992 line slip was claim free. This, as I have said, had been the impression of the insurers, but they say that Heaths concealed a claim by paying it themselves.
40. Next, Heaths are said to have concealed various material pieces of information. One was that SPL had expressed extremely unfavourable views about terms of the revenue participation agreement assigned to Chase ("among the most dangerous that Hollywood has ever devised"). The scale of deductions to which Chase's interest was subordinated made a shortfall virtually certain even if the film earned much more than had been estimated. Both the Lloyd's market and the original lead insurer, which had initially subscribed to the facultative insurances and line slip, were said to have shared this concern and withdrawn but Heaths are alleged to have falsely represented that they withdrew for other reasons.
41. The amended Particulars of Claim condescend to a good deal more detail and we were told that they have since been further amended, but the above summary should be sufficient for the purpose of enabling the preliminary issues to be determined.
The common law
42. Apart from the special provisions of the policy to which I shall come, the misrepresentations and nondisclosures alleged by the insurers would entitle them to avoid the contracts. This follows from sections 17-20 of the Marine Insurance Act 1906, which codified the common law in an area in which there is no difference between marine and other insurance and which have therefore been accepted as having general application: see PCW Syndicates v PCW Reinsurers  1 WLR 1136, 1140. Section 17 provides that a contract of insurance is "based upon the utmost good faith" and may be avoided by either party if the utmost good faith be not observed by the other. Section 20 requires, as part of the obligation of good faith, that any material representations made by the insured or his agent during the negotiations for the contract should have been true. Section 18 imposes obligations of disclosure of material circumstances upon the insured; these, as I have said, are not alleged to have been broken, but section 19 imposes upon an agent a separate obligation to -
It is this obligation which is alleged to have been broken, either dishonestly or negligently, by Heaths.
The Truth of Statement Clause
43. Chase contends however that the right of the insurers to avoid the contract on these grounds is excluded by what the policy calls the "Truth of Statement Clause". The clause has of course to be construed in its setting in the policy as a whole and I shall refer to some other parts of the policy which are said to throw light on what it was intended to mean. I start, however, by setting out the terms of the clause, dividing it for convenience (as it was by the judges in the courts below) into 8 paragraphs, sentences or phrases. This clause is taken, as I have said, from the policy issued in respect of Mirror:
44. It is a condition precedent to this policy that:
45. Phrases 6 to 8 are the only parts of the clause directly relied upon, so the earlier parts need only a brief explanation. The "questionnaire" was scheduled to the policy. Section I identified Elmwood as the applicant for insurance, gave the name of the film, the production company, the individual producers, the director and principal cast (Barbra Streisand and Jeff Bridges) and the distributors, attached the script and budget and stated the dates of commencement and completion of the principal photography. Section II contained some revenue estimates but was prefaced by a comprehensive disclaimer of which the following sentence gives the flavour:
46. Section III (largely blank) dealt with the bank facility being granted. The schedule ended with a certificate by PML as risk managers, saying that they had analysed the budget and were of opinion that the proposed TVC sum was an appropriate amount to be insured under the policy.
47. No complaint is made of any untruth in any section of the questionnaire. Nor has any reference been made to the due diligence clause which is mentioned in phrase 5. As I have said, the insurers' complaints of nondisclosure and misrepresentation are directed solely at Heaths and go much wider. As a defence to these complaints, Chase relies upon phrases 6-8.
48. The insurers admit that the general intention behind the Truth of Statement clause is to prevent Chase from losing the benefit of the policies because it failed to disclose material circumstances which it was "deemed to know" for the purposes of its own obligations under section 18 or because of nondisclosures or misrepresentations on the part of its agents in general and Heaths in particular. The main purpose, it was said, was to "distance" Chase from responsibility for anything said by or known to the other players. This purpose was easily explicable on the ground that Chase was, to the knowledge of the insurers, not in the usual position of an insured who, as Lord Mansfield said in Carter v Boehm (1766) 3 Burr 1905, 1909, could be expected to have knowledge of "the special facts upon which the contingent chance is to be computed." Chase was in no better a position to estimate the risk than the insurers themselves. The insurers concede that the clause protects Chase to the extent of relieving it from any personal obligation of disclosure and in protecting it from rescission on account of innocent misrepresentations or nondisclosures by Heaths or other agents. But the insurers say that, as a matter of construction, the language does not cover fraudulent or negligent misrepresentations or nondisclosures and they buttress part of this argument by a submission that, as a matter of law, a party cannot protect himself from liability to have a contract rescinded on account of the fraud of the agent who made it on his behalf.
49. Chase, on the other hand, says that phrase 6 not only relieves Chase itself of any obligation of disclosure but indirectly has the effect of waiving any disclosure obligations on the part of Heaths as well. Alternatively, phrases 7 and 8 expressly relieve for nondisclosure by Heaths and there is no reason to make exceptions for nondisclosures which can be characterised (if this is conceptually possible) as fraudulent or negligent. The same phrases also relieve Chase of liability for any representations by Heaths, whether fraudulent, negligent or otherwise, either because the language is wide enough to cover representations of any kind or because they deprive Heaths of authority to make such representations on behalf of Chase. Chase denies the existence of a rule of law preventing the exclusion of liability for the fraud of a contracting agent. It will therefore be seen that, apart from the question of general law about excluding liability for fraud, the issues turn entirely upon the construction of the Truth of Statement clause.
Phrase 6 and section 19 of the Marine Insurance Act 1906
50. I shall begin with the effect of phrase 6. Lord Grabiner QC, who appeared for Chase, accepted that it appeared to deal solely with the disclosure obligations of the insured. It said nothing about disclosure by agents, which was dealt with in phrases 7 and 8. Lord Grabiner also accepted that, as Lord Macnaghten explained in Blackburn, Low & Co. v Vigors (1887) 12 App. Cas. 531, 542-543, the duty of an agent to disclose circumstances within his own knowledge was independent of the duty of the insured. But Lord Grabiner referred to the opening words of section 19, which said that the agent's duty of disclosure was ?
This meant that if the circumstances in question need not have been disclosed by the insured under section 18, they need not be disclosed by the agent under section 19. The point was made by Saville LJ in Société Anonyme d'Intermediaries Luxembourgeois v Farex Gie  LRLR 116, 157:
51. Section 18(3)(c) provides that the insured need not disclose "any circumstances as to which information is waived by the insurer". Phrase 6, said Lord Grabiner, was a waiver of disclosure by Chase of any information whatever. It followed that the agent need not disclose any information either. And if the agent had no obligation to disclose anything, his failure to do so could not be characterised as fraudulent or negligent, whatever his motives may have been: National Westminster Bank v Utrecht-America Finance  3 All ER 733, 750, para 51, per Clarke LJ.
52. Aikens J. rejected this argument (see  1 Lloyd's Rep 30, 50) but Rix LJ, who gave the judgment of the Court of Appeal, accepted it. He said, at  Lloyd's Rep 483, 509, para 137:
53. I respectfully think that Aikens J. was right. The insurers may have waived disclosure of information on the ground that it was not material or that they were prepared to treat the information as not being material. In that case, I agree that the reasoning of Rix LJ would be pertinent and, for the reasons given by Saville LJ in the SAIL case, it would be illogical to say that good faith required the agent to disclose circumstances which the insured would not have had to disclose. In the SAIL case the circumstance which it was claimed that the broker should have disclosed was that the insurer (for whom he also happened to be acting as broker for the purpose of obtaining reinsurance by way of retrocession) had not actually obtained it. Saville LJ said that the insured had no obligation to disclose this fact under section 18 because it was a matter which the insurer, in the ordinary course of his business, ought to have known: "in the ordinary course of his business an insurer ought to know the state of his retrocession". It followed that the duty of disclosure by the insured was excluded by section 18(3)(b). It was in this context that Saville LJ said that the broker could not be under an obligation to disclose circumstances which his principal would not have had to disclose.
54. The reasoning of Saville LJ seems to me to depend upon being able to identify the circumstances which the principal insured is not obliged to disclose. It is those circumstances which need not be disclosed by the agent either. But I do not think that phrase 6 can be construed as constituting a waiver of any particular circumstances or all circumstances whatever. In my opinion the more natural construction is that it is a waiver personal to the principal insured. He is relieved of the obligation of disclosure without prejudice to the question of whether the circumstances would otherwise have had to be disclosed or not. The structure of phrases 6 to 8 suggests that the draftsman was well acquainted with sections 17-20 of the 1906 Act and its distinction between the obligations of the principal insured and the agent. Phrase 6 deals with the principal insured by excluding his disclosure obligations altogether. The disclosure obligations of other parties are the subject of phrases 7 and 8, which does not exclude them but limits their effect by saying that they shall not be a ground for the avoidance or cancellation of the policy. Phrases 7 and 8 contemplate that the disclosure obligations of the agent exist despite the exclusion of the principal's obligations by phrase 6.
55. Phrase 6 does not therefore in my opinion impinge upon Heaths' duty of disclosure. Any limitation upon the effect of nondisclosure must be found in phrases 7 and 8.
56. The next question is whether phrases 7 and 8 had the effect of limiting the authority of Heaths to make representations on behalf of Chase. If they did, then Chase say that it does not matter whether they were fraudulent or negligent. Chase cannot be liable for them because they were not made on its behalf.
57. This argument was rejected by the judge and the Court of Appeal and as I agree with the reasons they gave, I can be brief. Phrase 7 does not purport to limit the authority of Heaths or any other agent acting on behalf of Chase. What it does is to limit the liability of Chase for their misrepresentations or nondisclosures made or omitted on its behalf. It is to be contrasted with one of the miscellaneous clauses of the policy, which says:
The Canada Steamship guidelines
58. As I have said, the insurers accept that phrases 7 and 8 prevent them from rescinding the agreement on account of innocent misrepresentations or non -disclosures by Heaths. But they say that the language does not cover fraud or negligence. I shall first consider the question of whether it covers negligence.
59. Phrases 7 and 8 do not say anything about negligence one way or the other. They simply exclude liability for "any information provided...or nondisclosure". Mr Sumption QC, who appeared for the insurers, submitted that in the absence of express reference to negligence, the words should not be construed as sufficient to cover it. This, he said, was a consequence of the rules for construing exemption clauses formulated by Lord Morton of Henryton in Canada Steamship Lines Ld v The King  AC 192, 208:
60. Mr Sumption said that although the words used in phrases 7 and 8 are wide enough to cover negligence (and indeed fraud), the principal insured was also liable to avoidance of the contract for entirely innocent misrepresentation or nondisclosure on the part of his agent. The rule of construction therefore required the phrases to be construed as limited to avoidance on these grounds and not as protecting the insured in the case of his agent's negligence or fraud.
61. Lord Morton's tests were applied by the House of Lords in Smith v South Wales Switchgear Co Ltd  1 WLR 165, but accompanied by words of caution about avoiding mechanistic construction. Lord Keith of Kinkel described the tests, at p 177, as "guidelines" but emphasised that:
62. Viscount Dilhorne, at p 168, likewise quoted with approval a remark of Salmon LJ (in Hollier v Rambler Motors (AMC) Ltd  2 QB 71, 80) that
and a passage in the judgment of Buckley LJ in Gillespie Brothers & Co Ltd v Roy Bowles Transport Ltd  QB 400, 419 in which he explained the basis of the guidelines as being an assumption that it was
63. Likewise in Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd  1 WLR 964, 970 Lord Fraser of Tullybelton said that the Canada Steamship guidelines were based upon the "inherent improbability that the other party to a contract including such a clause intended to release the proferens from a liability that would otherwise fall upon him." For this reason, Lord Fraser said that the guidelines were not "applicable in their full rigour" to clauses which limited rather than excluded liability. I doubt, however, whether Lord Fraser intended to introduce one mechanistic rule (a distinction between limiting and excluding liability) to mitigate the rigour of another. The question, as it seems to me, is whether the language used by the parties, construed in the context of the whole instrument and against the admissible background, leads to the conclusion that they must have thought it went without saying that the words, although literally wide enough to cover negligence, did not do so. This in turn depends upon the precise language they have used and how inherently improbable it is in all the circumstances that they would have intended to exclude such liability. In applying the Canada Steamship guidelines, it must also be borne in mind that, as Lord Denning MR pointed out in George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd  QB 284, 297-298 (a perception which was adopted on appeal by the House of Lords:  2 AC 803, 812-813), they date from a time before the Unfair Contract Terms Act 1977, when the courts had no remedy but construction to relieve consumers from the burden of unreasonable exclusion clauses.
64. In the present case, Aikens J held that the Canada Steamship guidelines did not have direct application to a clause excluding avoidance for misrepresentation or nondisclosure because negligence did not constitute a separate cause of action which could be expressly excluded. Misrepresentation or nondisclosure in an insurance context was a "unitary and absolute" duty to which negligence or fraud was irrelevant. If the clause excluded the duty at all, it excluded it altogether. Nevertheless, the judge went on to hold that the language was not clear enough to exclude a right to avoid when the nondisclosure or misrepresentation was the result of negligence or a deliberate intention to conceal or misrepresent material facts.
65. In the Court of Appeal, Rix LJ found this reasoning self-contradictory. Following what he had said earlier in HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co  2 Lloyd's Rep 161, 187, he agreed that the "unitary and absolute" nature of the duty of good faith meant that the Canada Steamship guidelines did not apply. They only made sense if there was a distinct liability for negligence which the parties could have decided not to exclude. Lord Morton's third test spoke of a "possible head of damage other than that of negligence". But, for reasons similar to those given by Clarke LJ in National Westminster Bank v Utrecht-America Finance Company  3 All ER 733, 750, para 51, the very concept of negligent nondisclosure as a separate head of liability was incoherent. If there was no duty of good faith which required disclosure, a failure to disclose could not be negligent. Having gone so far with the judge (and in disagreement with the judgment of Colman J in Toomey v Eagle Star Insurance Co Ltd (No 2)  2 Lloyd's Rep 88) Rix LJ said, at p 512, that this reasoning should have led the judge to conclude that the parties had not intended to distinguish between negligent and non-negligent breaches of the duty of good faith.
66. For my part, I would agree with the conclusion of Rix LJ, although I do not think that I would have placed the same emphasis upon the "unitary and absolute" nature of the duty of good faith as excluding any intention to distinguish between negligent and non-negligent breach. I thought that there was force in Mr Sumption's criticism that the most striking illustrations of the Canada Steamship approach are cases in which the law imposes a single "unitary and absolute" duty of strict liability, such as that imposed upon a common carrier, who is significantly referred to as an "insurer" of the goods which he carries. Nevertheless, in such cases, clauses excluding liability have been construed as limited to losses caused otherwise than by negligence. There is no logical reason why the parties should not have intended to distinguish between different ways in which the duty might be broken, even though the rule imposing the duty treats those differences as irrelevant.
67. Mr Sumption did however frankly concede that while negligence could conceptually exist as a head of liability separately from that of a common carrier, there were difficulties about the concept of negligent nondisclosure. But I would prefer to put my decision upon the wider basis adopted by Rix LJ in paragraph 156 of his judgment, namely that there is nothing in the language or context of phrases 7 and 8 to suggest that the parties did not intend them to cover negligence. There is no inherent improbability in such an intention. As Rix LJ said, in a case like this the question of negligence can never be all that far from the contemplation of the parties. It would be quite unrealistic to hold that when they said that Chase was have no liability for "any information provided by any other parties" or that such information or nondisclosure by any other parties should not be a ground for avoidance of the policy, it went without saying that they did not contemplate negligence. Negligence is a risk which the parties could reasonably have been expected to allocate to one party or the other, so as best to achieve the commercial objectives of the contract. And it seems to me that the commercial objective of the Truth of Statement clause would be substantially undermined if Chase's right to the policy monies depended upon an inquiry into whether Heaths had or had not taken reasonable care in checking the truth of representations or deciding which facts should be disclosed.
Does the clause cover fraud?
68. The next question is whether the words relieve Chase from liability to avoidance of the contract or damages in cases in which the misrepresentation by its agent has been fraudulent or avoidance in cases in which the nondisclosure has been dishonest. Here again I agree with Rix LJ that fraud is quite different from negligence: "Parties contract with one another in the expectation of honest dealing", particularly in an insurance context. I think that in the absence of words which expressly refer to dishonesty, it goes without saying that underlying the contractual arrangements of the parties there will be a common assumption that the persons involved will behave honestly. As Lord Loreburn LC said of the exempting clauses in S Pearson & Son Ltd v Dublin Corporation  AC 351, 354, "They contemplate honesty on both sides and protect only against honest mistakes."
69. Lord Grabiner said allowing the insurers to rescind or claim damages for fraud would undermine the purpose of the Truth of Statement clause just as much as allowing them to rescind or claim damages for negligent misrepresentation. What Chase wanted was to insulate its rights under the policies from any misconduct on the part of Heaths or anyone else. It wanted to be able to treat them as autonomous claims like documentary credits. No doubt, ideally, that is what Chase would have wanted. It does not follow that it is what the parties as reasonable people would have understood the clause to mean. Your Lordships were not referred to any case in which the language of the contract has been held to bar a remedy for inducing fraud, whether by the contracting party or his agent. I do not think that this contract does so either.
70. Rix LJ went on to say that although, for the reasons just given, the Truth of Statement Clause did not exclude a remedy for rescission or damages for fraudulent misrepresentation by Heaths, it did exclude any remedy for fraudulent nondisclosure. The reason was that whereas innocent, negligent and fraudulent misrepresentation were recognised causes of action, each with its own remedies, there were no such gradations of nondisclosure. There was either an obligation of disclosure or there was not. If there was, it did not matter whether it had been negligent or fraudulent and the only remedy was avoidance of the contract. If there was not, failure to disclose could not be described as fraudulent. Disclosure was a "unitary and absolute" duty and, if excluded, was excluded altogether. Rix LJ also confessed to some difficulty in saying exactly what fraudulent nondisclosure meant.
71. In saying that the Truth of Statement clause excluded liability for nondisclosure, I do not think that Rix LJ was intending to include that form of nondisclosure which makes a positive statement misleading - the half truth which, without disclosure of the other half, is, as Lord Macnaghten said in Gluckstein v Barnes  AC 240, 251 "no better than a downright falsehood". (See also Blackburn J in Lee v Jones (1864) 17 CBNS 482, 503-504.) The declaration made by the Court of Appeal allowing the insurers to rescind or claim damages on the basis of facts which would found a good claim in deceit shows that such half truths would be actionable. But this considerably reduces the scope of the ruling that liability for nondisclosure as such is excluded, because it cannot be easy to conceal material facts in the course of negotiating insurance contracts such as these without falsifying something which has been expressly or impliedly stated.
72. Even in respect of what may be called "pure nondisclosure", I must respectfully disagree. I would first observe that the carefully chosen language of phrases 7 and 8 does not say that the agent shall not be under a duty of disclosure. It says that the insurers shall not be entitled to avoid the contract on account of his breach of that duty. And if one asks whether the parties could have contemplated that this protection should extend to a dishonest breach of that duty, I would have no difficulty of saying what dishonesty meant. As Lord Blackburn said in Brownlie v Campbell (1880) 5 App Cas 925, 950:
73. The 1906 Act itself contemplates that one can distinguish between dishonest and innocent nondisclosure. Section 84(3)(a) lays down a general rule that when the policy is avoided (for example, for nondisclosure) the premium is returnable. But there is an exception when there has been "fraud or illegality on the part of the assured". In Rivaz v Gerussi Brothers & Co (1880) 6 QBD 222 the underwriters were held entitled to avoid the policies on account of concealment of the undervalue of the insured shipments. Brett LJ said (at p 229-230):
74. Even if phrases 7 and 8 are construed as removing the duty of disclosure, I do not think there is a conceptual difficulty about treating them as confined to cases in which noncompliance with such a duty, if it existed, would not be dishonest. As I have said earlier, the fact that the rule imposing the duty treats it as "unitary and absolute" and makes no distinction between the ways in which it may be broken is no reason why the parties should not make such distinctions in a contractual provision which limits its scope.
75. I would therefore hold that phrases 7 and 8 do not bar the right to rescind for a nondisclosure which is dishonest in the sense described by Lord Blackburn and Brett LJ. On the other hand, nondisclosure (whether dishonest or otherwise) does not as such give rise to a claim in damages: see Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd  1 QB 665, 777-781 and 788 ("without a misrepresentation there can be no fraud in the sense of giving rise to a claim for damages in tort") and  2 AC 249, 280 (per Lord Templeman) and 281 (per Lord Jauncey of Tullichettle).
A rule of law?
76. My view that the Truth of Statement clause, upon its true construction, does not exclude a remedy for fraudulent misrepresentation or nondisclosure by Heaths makes it unnecessary for me to decide whether there is a rule of law, based on public policy, which in any event would prevent it from doing so. There is no doubt that a party cannot contract that he shall not be liable for his own fraud. But whether he can contract that he should not be liable for his agent's fraud is less clear. Mr Sumption submitted that although he might be able to exclude liability for the fraud of an agent in the performance of a contract, he could not exclude the right of the other party to rescind for the fraud of an agent in inducing the conclusion of the contract. It would be contrary to public policy to allow him to enforce a contractual advantage which had been obtained for him by the fraud of his agent.
77. My Lords, I see the force of this submission and it has the support of remarks by some of the members of the House who took part in the decision in S Pearson & Son Ltd v Dublin Corporation  AC 351. The question in that case was whether a clause in a building contract which provided that the contractor should satisfy himself as to the dimensions, levels and nature of all existing works excluded an action based on alleged fraudulent misrepresentations by the council's engineers as to the position of an existing wall. Lord Halsbury said roundly, at p 356:
78. This passage was cited and adopted by Innes CJ in the leading South African case of Wells v South African Alumenite Co 1927 AD 69, 72-73. On the other hand, Lord Loreburn LC in Pearson's case expressed himself cautiously, at p 354:
79. He went on, however, in a passage I have already cited, to hold that the clause as a matter of construction did not cover cases of fraudulent misrepresentation.
80. The opinions of the other Law Lords who sat in Pearson's case (there were eight altogether) are less clear and some time was devoted by counsel on both sides in the course of argument to trying to enlist them on one side or the other, including the interpretation of judgments such as Lord Macnaghten's "My Lords, I entirely agree in the motion proposed", Lord Robertson's "My Lords, I concur in the judgment proposed" and Lord Collins's "My Lords, I agree." These exercises have more in common with reading tea leaves than with legal reasoning. I would suggest to your Lordships that the question remains undecided and that it is open to your Lordships to declare the law in the sense favoured by Lord Halsbury. The question is whether you think it right to do so.
81. I think it is significant that in the period of nearly a century which has elapsed since Pearson's case, although there have been further dicta, no court has found it necessary to decide the question one way or the other. Nor have your Lordships been referred to any Commonwealth authority which has done so. Even the statement by Innes CJ in Wells's case was an obiter dictum, since no fraud was alleged. This suggests that it is extraordinarily unlikely that parties to a contract will agree a term which excludes liability for fraud with sufficient clarity to raise squarely the question of whether it should be lawful to do so.
82. In this state of affairs, I do not think that your Lordships should try to foresee what Lord Loreburn LC called the peculiar circumstances in which the question may one day be raised. It is dangerous to try to legislate for the unforeseeable. In this case, it is sufficient to say that the question has not arisen for decision.
83. The Court of Appeal answered the preliminary issues by declaring, first, that the insurers were entitled to avoid and/or rescind the contracts of or for insurance against Chase "provided that they prove a positive case of fraud such as would entitle them to rescind the relevant contract at common law for fraudulent misrepresentation and/or to recover damages in deceit" and, secondly, that they were entitled to damages from Chase only on the basis of a good claim in deceit. The insurers have appealed against (i) the holding that they were not entitled to avoid the contracts and claim damages for negligent misrepresentation (ii) the holding that they were not entitled to rescind for negligent nondisclosure and (iii) the holding that the clause excluded the right to avoid the contracts for dishonest nondisclosure. Chase have cross-appealed against the holding that the insurers are entitled to avoid the contracts and claim damages for fraudulent misrepresentation.
84. I would dismiss the appeal on grounds (i) and (ii) but allow the appeal on ground (iii). I would dismiss the cross-appeal.
LORD HOBHOUSE OF WOODBOROUGH
85. The English law of insurance has, since the 18th century, put insurance contracts into a special category. They are contracts of the utmost good faith. What this involves is spelled out in sections 17 to 20 of the codifying Marine Insurance Act 1906. In brief, it means that if an assured or his agent has failed to make full disclosure to the underwriter of all facts, which he knows or ought in the ordinary course of business to know, material to the risk, the underwriter can avoid the policy. In other words the policy becomes valueless to the assured. This negates the purpose of insurance which is to provide a secure and certain financial safeguard against losses caused by the insured risks. It makes the safeguard insecure.
86. The practical circumstance which has since been said to justify this special treatment of insurance contracts is a disparity between the knowledge of the proposer (and his agent) and the underwriter. This may well be realistic in certain classes of business and certain types of insurance. But it is not in others. In some sectors, insurance contracts are devised and marketed by brokers as a 'product'. The 'product' is designed to be marketable to potential assureds and will usually have been negotiated by the broker with chosen leading insurers beforehand both as to terms and as to rates. The broker may have obtained a binder or open covers from the insurers. Such brokers may have a far greater expertise and ability to judge the extent of the risks and what circumstances are material to them than is possessed by most of those whom they invite to enter into the insurance contracts. The brokers will thus quite often have a relationship with the leading insurers which precedes the brokers' involvement with a given assured.
87. In such situations it becomes questionable whether it is appropriate to place on the assured the full burden of disclosure with its attendant risk of the avoidance of the policy. Clauses protective of the assured's position become appropriate. This need not affect the position of the broker. The broker has a separate and independent duty of disclosure to the insurer. Section 19 of the Act conveniently states what this is. It applies to the agent who places the insurance for the insured. The duty of the broker has two limbs. First, he must disclose every material circumstance actually known to him or which in the ordinary course of business ought to be known by, or to have been communicated to, him. Secondly, he must additionally disclose every material circumstance which the assured is bound to disclose (unless it comes to the knowledge of the assured too late). The duty of disclosure, whether by the assured or the broker, does not apply to any circumstance as to which information is waived by the insurer: s.18(3)(c) and s.19.
88. As regards representations, whether they are made by the assured or the broker, they must be true. If a material representation is untrue even though made in good faith, the insurer may avoid the contract: s.20. This duty is, like the disclosure duty, strict. It does not depend on dishonesty, negligence or fraud though it may arise from such a fault. Fault will only become relevant if some other remedy than avoidance is being sought by the insurers such as damages or denial of the restitutionary obligation to repay the premium: s.84.
89. This still leaves two problems for the assured. The first is that the insurer's only remedy for non-disclosure and the insurer's primary remedy for misrepresentation is the avoidance of the policy. The breach of duty on the part of the broker thus directly damages the position of the assured and, because it may lead to a claim over by the assured against the broker, only indirectly damages the position of the broker. The second is that, if the broker's breach of duty is accompanied by some fault amounting to a common law or statutory tort, the insurer may seek to make the assured vicariously liable for the tort of his agent, the broker, even though, as in the present case, no allegation of actual fault or breach of duty by the assured is alleged.
90. Accordingly, if a special clause is to be inserted into the insurance contract to protect the interests of the assured and curtail what would otherwise be the insurer's rights, consideration needs to be given, and agreement reached, as to how far the clause is to go - whether it is to cover all these matters or only some of them and, if so, in what terms. Such a clause, although it is protective of one party at the expense of the other, serves a genuine commercial purpose and enables insurance business to be done to the benefit of both parties (and of the broker). Whilst still applying the normal canons of construction, there is no reason to give an unduly restrictive construction to such clauses or to fail to respect the commercial mutually beneficial purpose they are intended to serve.
91. Turning to the present case, the facts, both those not in dispute and those which have to be assumed for the purposes of the present appeal, have been sufficiently summarised in the Opinion of my noble and learned friend Lord Hoffmann. They illustrate some of the points to which I have already referred, including the far from passive role of the brokers and their particular interest in procuring this insurance. The preliminary issues which have to be decided likewise raise questions of the construction of a special clause of the type which I have been referring to and to more fundamental questions of the result of fraud on the part of the agent who has effected the contract. I agree with the orders proposed by my noble and learned friend Lord Bingham of Cornhill and the formal answers he would give to the preliminary issues.
92. The insurance with which this appeal is concerned was a specialised class of insurance, 'time variable contingency insurance', an insurance 'product' for the purpose of supporting loans for the financing of film productions. The proposer was a bank which had agreed to provide finance to a company of no significant substance that the group making a film had set up as a vehicle for the money needed to make the film, the money to be repaid to the vehicle by assigning revenues from the exploitation of the film. This assigned revenue was then further assigned by the vehicle to the bank as security for the repayment of its loan. The bank had no particular expertise enabling it to assess the likely profitability of a film nor had it any knowledge of its own as to the basis for or the reliability of the figures put forward by the film company, nor, it seems, of how the relevant revenue would be calculated and what deductions would have been made from it. The commercial purpose of the insurance was to protect the bank against the risk that the assigned revenue would be insufficient to secure the repayment of the loan. This risk the bank (unlike the brokers) was itself no better placed to assess than the underwriters; any facts which the bank provided would have to be obtained from others. The only people who really knew were the persons who devised and were responsible for setting up the complex overall scheme of corporate structures and interrelated contracts of which the bank loan and the insurance policy formed a subsidiary part and those who were responsible for the making and marketing of the film. The bank's lack of knowledge of the material facts lay at the heart of the need for the insurance contract and is a primary source of the risk which it was seeking to insure. An essential part of the certainty of the security thus provided is that the insurance contract should contain an appropriate clause negativing the bank's duty to ascertain and disclose all material facts. By definition the bank is going to be unable to do this and without such a clause, the bank's security will probably be valueless. The courts must recognise this and give effect to the clause the parties have agreed upon in accordance with its terms, properly construed.
93. The relevant insurance contract contained a clause entitled the 'truth of statement' clause which has already been set out in the Opinion of my noble and learned friend Lord Hoffmann. This clause specifically limited the assured's duty to disclose as is illustrated most clearly by section 6 of the clause (using the same sub-divisions as the judge and the Court of Appeal) - "the insured will not have any duty or obligation to make any representation, warranty or disclosure of any nature, express or implied (such duty and obligation being expressly waived by the insurers)". This provision is to be given full effect to. The duty which would otherwise rest upon the assured to disclose fully all material circumstances is negatived. But the duty of the broker is unaffected. The respondent bank has argued that the waiver of the assured's duty must imply the waiver of the brokers' duty as well. This does not follow. First, their roles are different, markedly so in the present transaction. Secondly, waiver by the insurer of information as to certain circumstances will enure for the benefit of both the assured and the broker (eg the opening words of s19 of the 1906 Act) but that is not what the clause provides; it is directed alone to the personal position of the assured not to any material circumstances.
94. The next two sections of the clause say: "the insured shall have no liability of any nature to the insurers for any information provided by any other parties ... including, but not limited to, [the Heath broking company through whom the risk was placed] ... and any such information provided by or non-disclosure by other parties including, but not limited to [the Heath company] ... shall not be a ground or grounds for avoidance of the insurers' obligations under the policy or the cancellation thereof." These sections go further than section 6. They exclude liability of the assured and limit the insurers' right to avoid the policy. What is their scope? They expressly include information provided by and non-disclosure by the brokers and they are stated to apply to others as well. They make no reference to any class of fault or absence of fault; thus the non-disclosure may be by a person who is innocent of any fault, or by a person who has been negligent or by a person who is acting fraudulently.
95. The appellant insurers have argued that these provisions are capable of referring to innocent non-disclosure and innocent misrepresentation and should therefore not be construed as applying to negligent or fraudulent conduct. As regards negligent conduct, they support their argument by reference to such authorities as the Canada Steamship case,  AC 192. However, like your Lordships, I would reject that argument as giving too restricted an interpretation to this clause in its context. I have already referred to the general purpose of the clause, which is the protection of the assured. The liability for the consequences of the non-disclosure or misrepresentation of circumstances material to the acceptance of the risk is in law strict and to make distinctions between misrepresentations with and without negligence, whilst not academic under the Misrepresentation Act 1967, is not part of the purpose of this clause and would disproportionally depreciate the security which the policy is designed to provide to the assured. To make any such distinction for the purposes of bare non-disclosure would likewise be irrational. It is only when the failure to disclose amounts to an implicit misrepresentation that some additional factor may have relevance not to the right to avoid the policy but to some other remedy arising independently of the law of insurance.
96. But negligence is not the only, or even the primary matter relied upon by the insurers in the present case. For present purposes the pleaded allegations made by the insurers are to be assumed to be correct. My noble and learned friend Lord Hoffmann has summarised the relevant allegations and explained their context and relevance to the transactions which led to this litigation. They involve serious allegations of fraud against the brokers, being one or more of the Heath companies acting in conjunction and the individual broker in their employ to whom they delegated the placing of this insurance with the insurers. It is accepted that what is alleged consists of actual fraudulent misrepresentations by Heaths as placing brokers to the insurers on matters of fact material to the risk being placed and its acceptance. This raises a number of questions.
97. The first is the question of construction: whether, as a matter of the correct interpretation of the 'truth of statement' clause, such fraudulent misrepresentations come within the terms of sections 7 and 8. Sections 7 and 8 are expressed in terms wide enough read literally to include any misrepresentation by Heaths: "any ... information provided by [Heaths] ... shall not be a ground or grounds for avoidance of the insurers' obligations under the policy or the cancellation thereof". Should one treat this clause as intended to cover material fraud on the part of the assured's brokers in placing the risk? Like the majority of your Lordships I would answer this question in the negative. Fraud and negligence are different from each other in kind. Commercial men recognise the risk of want of care or skill; they do not contemplate fraud in the making of the contract. Heaths were the insured's brokers. No question of authority arises. They were employed by the insured to place the risk. The fraudulent representations were made in the course of that placement and to enable it to be achieved. Sections 7 and 8 can sensibly be construed as covering honest errors and honest misrepresentations whether negligent or not. But there is no justification to construe them as covering fraudulent misrepresentations and they should not receive that construction without express words which necessitate giving that meaning to them or clearly disclose such an intention. Despite the commercial importance of the 'truth of statement' clause in this transaction which I have earlier emphasised and the need to give it a construction which recognises that importance, it is quite another matter to use it as a means of holding insurers liable on an insurance contract even though that contract has only been procured by means of a fraud practised on them by the proposer's agent. The same conclusion follows for both the remedy of avoidance and the remedy of damages if there should be any. The clause does not make any such distinction.
98. The same conclusion results from the application of more general principles. Where a contract has been procured by the material fraud of one party (or of the agent he has employed to make the contract), the party deceived has not given a true consent to be bound by the contract. He is entitled at common law to avoid the contract when he discovers the deceit. If he elects at that stage not to avoid the contract, he will have chosen to affirm it and consent to it with knowledge of the fact that he had earlier been deceived. He is then bound by the contract. But on the assumed facts of the present case, no such consent was ever given and the assured cannot rely upon a term of a contract to which he has never validly obtained the insurers' agreement. It is true that in some circumstances there may be a collateral agreement, such as a jurisdiction clause or an arbitration clause, which may be capable of taking effect even though the validity of the primary contract is in dispute: eg Heyman v Darwins  AC 356 and Mackender v Feldia AG  2 QB 590. But this is not such a case nor is the 'truth of statement' clause such a collateral agreement. Public policy considerations would also apply to the question whether a principal should be permitted to take advantage of his agent's fraud. Ex hypothesi, the principal would be liable at common law for his agent's fraud committed in the course of carrying out the agency and the principal is only protected if he can set up a valid contractual exemption. But that involves the principal relying upon and seeking to take advantage of the very fraud for which he is liable. If a party wishes to insure against his agent's fraud, he should, independently of that agent and of the contract entered into through that agent, take out cover which specifically insures that risk. Such fidelity type policies exist but the policy in the present case is in no way such a policy. I would add, for the sake of completeness that the present case is not concerned with a situation of the dishonest conduct of a servant or agent in the course of the performance of a wholly valid contract, say, a contract of carriage, and an exemption of, say, the theft of the goods in transit. There questions of construction may well arise but, absent other factors, not the questions discussed in this paragraph - material fraud by the contracting agent which has induced the other party's assent to the contract.
99. It follows that I agree with the orders and answers proposed by Lord Bingham.LORD SCOTT OF FOSCOTE
100. The appeal before the House arises out of the answers given first by Aikens J and then by the Court of Appeal (Aldous and Rix LJJ and Lloyd J) to the preliminary issue that had been directed to be tried by Longmore J. The preliminary issue was formulated as follows:
101. Nothing for present purposes turns on (c). The 2nd and 3rd defendants (Heaths) have taken no part in this appeal. The issues are those arising under (a) and (b). But these issues must be decided on a hypothesis. The hypothesis is that the facts and matters pleaded in the particulars of claim, as amended, are true. Nothing in the conclusions reached by the House on those issues can prevent Chase from undermining them by successfully disputing the pleaded facts on which they are based.
102. I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Hoffmann and gratefully adopt his description of the facts and circumstances that have given rise to this litigation. It is apparent that the issues raised by the preliminary issue turn upon the construction of and the effect to be given to the Truth of Statement clause referred to in paragraph 43 and set out in paragraph 44 of my noble and learned friend's opinion.
103. Issues of construction of contracts, particularly of complex commercial contracts such as the insurance contract containing the Truth of Statement clause with which your Lordships are concerned, cannot be sensibly addressed otherwise than in the context of their factual matrix and commercial purpose, objectively ascertained. As Lord Wilberforce observed in Reardon Smith Line Ltd v Yngvar Hansen-Tangen  1 WLR 989, 995-996:
104. In the paradigm case of insurance arranged by a broker, the broker is acting as agent for the insured. As it is put in Arnould, Law of Marine Insurance and Average, 16th ed (1981), vol 1, p 104, para 161:
105. In the paradigm case, the would-be assured uses the services of the broker to procure insurance against a particular risk, so the relationship of principal and agent is easy to understand. But the present case is not the paradigm case. At least it may emerge after investigation of the facts at trial that it is not.
106. Much of the provenance of the insurance policies within which this case is concerned seems not to be in dispute. In paragraph 29 of Lord Hoffmann's opinion the part played by Mr Bradstreet and his company, Premier Media Ltd ('PML'), is described. Under the agreement of 7 July 1995 between PML and Phoenix Pictures Ltd ('PPI'), arrangements were made for the financing of films which PPI proposed to produce. The financing was to be by bank loan to a limited liability company to be established by PPI for the purpose of being the producer of the film in question. Since the producer company's covenant for repayment of the loan would be likely to have little weight, adequate security would have to be provided to the lending bank. The security was to take the form, first, of an assignment to the lending bank of a share of receipts from the film and, secondly, of the benefit of a policy of time variable contingency ('TVC') insurance. TVC insurance was an insurance product developed in about 1992 for the purpose of supporting loans for the financing of film productions. Heaths had played a part in the development of TVC insurance and had brokered it in the marketplace. So under the 7 July 1995 agreement recoupment by the lending bank of the bank loan to finance each film was to be insured by a TVC insurance policy in respect of which Heaths was to be the broker. The production company and the lending bank were to be co-assured, but the production company was to assign to the bank all its rights under the policy. Paragraph 5.1.2 of the agreement said :
107. Pursuant to this agreement Heaths began "broking the Phoenix insurance programme in the marketplace" (para 21 of the amended particulars of claim). The broking led to the insurance contracts that are in issue in the present case.
108. In paragraph 19 of the amended particulars of claim it is pleaded:
and in paragraph 20, it is pleaded:
109. The allegation in paragraph 19 is denied by Chase (see paragraph 9 of Chase's interim defence), but its truth is to be assumed for the purpose of the preliminary issue. The agency allegation is not, however, one which achieves any obvious credibility from "the premises" referred to and there must be a fair prospect that it will not be sustained at trial. As to Heaths' role as the insurance broker, Heaths was not placed in that position by Chase but by PML and PPI pursuant to the terms of the 7 July 1995 agreement. One view of the role of Heaths is that they and PML were middlemen whose job it was to put together the finance package consisting of a bank willing to lend on the security of a share of film receipts backed by TVC insurance and insurers willing to effect the TVC insurance. On this view it is difficult to see why PML and Heaths, together or individually, were any the more agents for the bank lenders than for the insurers. In broking the TVC insurance Heaths were not placing a risk against which Chase had requested them to obtain cover. They were marketing to Chase a pre-conceived package. This, in my opinion, is the commercial matrix in the context of which the insurance contract, and the Truth of Statement clause in particular, must be construed.
110. In considering the part played by Heaths in bringing into existence the TVC insurance contract of which Chase claim the benefit in this litigation, your Lordships ought, in my respectful opinion, to be on guard against attributing to the brokers, Heaths, a relationship with the assured, Chase, that would necessarily correspond to the normal broker/assured relationship. Heaths were not chosen by Chase to be their brokers. Heaths were appointed brokers by PML/PPI. The evidence at the trial may show that Chase had no knowledge at all of the commercial prospects of the film that they were to finance and no knowledge as to whether their slice of receipts would be likely to suffice to recoup the loan or whether or to what extent it would be likely they would need to claim under the policy. This knowledge would have been held by one or other of PPI, PML and Heaths.
111. Lord Halsbury LC in Blackburn, Low & Co v Vigors  12 App Cas 531, 537 warned against "the somewhat vague use of the word 'agent'" which, he said, "leads to confusion". The case concerned a different problem from that which arises in the present case but the warning is salutary. Heaths, the brokers, were agents of Chase only in form, in that it was through Heaths' brokerage that the insurance was effected. Chase had every reason to want to distance themselves from responsibility for what Heaths, and PML for that matter, had done, or said or omitted to say in bringing the insurance contract into being. As my noble and learned friend Lord Steyn commented in the course of Mr Sumption's submissions, the commercial purpose of the Trust of Statement clause was surely to insulate Chase from the entire broking process. The comment is, in my respectful opinion, an apt one and one that the evidence at trial is likely to endorse.
112. The language used in the Truth of Statement clause was in very wide, all-embracing, terms. Phrase 6 is expressed to absolve Chase from "any duty or obligation to make any representation, warranty or disclosure of any nature "; phrase 7 says that Chase shall have "no liability of any nature to the insurers for any information provided by any other parties"; phrase 8 says that "any such information provided by or nondisclosure by other parties shall not be a ground or grounds for avoidance of the insurers' obligations under the policy " (Emphasis added).
113. It is true that these are general words. They do not specifically refer to negligent or dishonest or fraudulent (if different from dishonest) provision of information or nondisclosure of information. Taken simply as a matter of literal meaning, these words are apt to cover all information, supplied or withheld, as the case may be, for whatever reason. Why should a court of construction give to these words a restricted scope? Only if it is necessary to do so in order to give effect to the commercial purpose of the clause.
114. As to negligence, it is suggested that because the words are general words that would cover information that had been supplied or withheld without negligence, the words should not be allowed to cover information supplied or withheld negligently. Canada Steamship Lines Ltd v The King  AC 192 is cited as authority.
115. The Canada Steamship case, an appeal from the Supreme Court of Canada, concerned a provision in a lease of a freight shed exonerating the lessor from "any claim for damage to goods being in the said shed" and requiring the lessee to indemnify the lessor "from and against all claims ". The negligent use of an oxy-acetylene torch by one of the lessor's employees led to a fire which destroyed the shed and all its contents. The question was whether the lessee could claim against the lessor for the loss of its goods that had been in the shed. Lord Morton of Henryton giving the judgment of the Board, summarised in three paragraphs the duty of a court in construing exemption from liability clauses. The first paragraph said that if there were an express exemption from the consequences of negligence the court must give effect to it. The second paragraph said that in the absence of an express exemption the court should consider whether the words were wide enough to cover negligence and, in the event of doubt, should apply the contra proferentem rule. The third paragraph said that if the words were wide enough to cover negligence the court should consider whether the words might have been directed at a possible head of damage other than negligence and that, if so, the exemption should be construed as not covering negligence.
116. Mr Sumption has submitted that phrases 7 and 8 in the Truth of Statement clause fall within Lord Morton's third paragraph. There is no express reference to negligence; the words are wide enough to cover negligence; but the words would cover also a withholding or supplying of material information that could not in the circumstances be categorised as negligent. So, he submitted, the scope of the words should be limited accordingly. He drew your Lordships' attention to Toomey v Eagle Star Insurance Co Ltd (No 2)  2 Lloyd's Rep 88 where, applying Lord Morton's third paragraph, Colman J held, at p 93:
My Lords, I am unable to agree that this approach can be right. Lord Morton was expressing broad guidelines not prescribing rigid rules. It cannot be right mechanically to apply the guideline incorporated in his third paragraph so as to produce a result inconsistent with the commercial purpose of the contract in question.
117. Given the commercial purpose of the Truth of Statement clause, namely, to insulate Chase from representations or nondisclosures by Heaths and others material to the effecting of the TVC insurance policy, it is impossible to conclude that the parties did not intend negligent representations or nondisclosures to be covered. I agree with my noble and learned friend Lord Hoffmann that that purpose would be substantially undermined if negligence were held to be not covered.
118. The next question is whether the words are wide enough to cover dishonesty on the part of Heaths or others. No charge of dishonesty is levelled at Chase, so phrase 6 is not here engaged. The question is whether a dishonest representation or nondisclosure by Heaths, or by PML, is covered by phrases 7 and 8.
119. Heavy reliance has been placed by Mr Sumption on S Pearson & Son Ltd v Dublin Corporation  AC 351. The action arose out of a building contract under which Pearsons were the building contractors engaged by the corporation to carry out building works. It was alleged that agents of the corporation had made false representations about the extent of the work that had to be done. They sued the corporation in deceit. The corporation relied on provisions in the building contract requiring the contractor to satisfy itself as to all things connected with the contract works and under which the corporation disclaimed responsibility for the accuracy of information supplied to the contractor. There were eight members of the House who took part in the case. Lord Loreburn LC said, at pp 353-354:
However, he reserved his opinion as to whether a person might "guard himself by apt and express clauses from liability for the fraud of his own agents."
120. Lord Halsbury treated the contractual provisions as inapplicable (see p 356). He said, at p 359:
As Lord Hoffmann has observed, it is difficult to identify a clear majority ratio from the Pearson case. But it certainly provides some support for Mr Sumption's submission.
121. On the question whether a contractual clause exonerating a party from liability for misrepresentations or nondisclosures covers fraudulent misrepresentations or dishonest non-disclosures, two lines of argument become relevant and both have been addressed to your Lordships in this appeal. The first line of argument proposes a rule of public policy. A party cannot be allowed to benefit from his own fraud or from the fraud of his alter ago. So if an exclusion clause on its true construction purports to cover such fraud, it cannot, on public policy grounds, be permitted to have that effect.
122. I would, for my part, be content to accept the need for and the existence of such a rule. If the Truth of Statement clause in the present case had contained a phrase expressed to exonerate Chase from any liability for fraudulent representations made by itself, Chase could not have relied on the phrase to bar an action based on its own fraudulent misrepresentation. I can, however, for my part see no reason of public policy why a party should not exclude his contractual liability for fraudulent misrepresentation by his agent. And I can see no reason of public policy why parties should be unable by contract to exclude a right of rescission for misrepresentation by an agent, whether the misrepresentation be innocent, negligent or fraudulent. Public policy would, in my view, come into play only where the agent's principal knew of or was otherwise complicit in the fraud or where the agent was the alter ego of the principal, as an executive director may be of his company.
123. The other line is that of construction. The need for a rule of public policy is because it is possible, as a matter of language, to so draft a contract as to make it clear that the exclusion clause is intended to cover fraud not only of agents of the principal but also of the principal himself.
124. Does phrase 7 of the Truth of Statement clause make it clear that fraudulent misrepresentation by Heaths, by PML or by any other agents of Chase would be covered? Does phrase 8 make it clear that dishonest nondisclosure by Heaths or anyone else with a duty to disclose would be covered? The language is certainly wide enough for the purpose. Why should it not be given its literal meaning? No coherent reason has, in my opinion, been given once the proposed rule of law, barring, on public policy grounds, the efficacy of such contractual provisions, has been discounted.
125. The proposition that fraud unravels all and vitiates all contracts and transactions (see paragraph 15 of the opinion of my noble and learned friend Lord Bingham of Cornhill) expresses not a rule of construction but the rule of public policy to which I have referred. And it begs the question "whose fraud?" If it is accepted that it is open to a contracting party by express language in a contract to exclude his responsibility for fraudulent misrepresentations or non-disclosures made without his authority or knowledge by an agent, then it must be accepted also that the "fraud unravels all" proposition does not necessarily apply where the fraud is that of an agent. And if responsibility for the fraud of an agent can be contractually excluded by express language, then in principle it must be possible for the same result to be reached as a matter of construction of general language in a contract. Accordingly, the issue in the present case, in my opinion, is whether, as a matter of construction, the general words in phrases 7 and 8 should be given the all-inclusive width of their natural meaning or should be construed so as not to cover fraud or dishonesty.
126. It is said that if, at the time of contracting, someone had asked whether phrases 7 and 8 were intended to cover fraudulent misrepresentation or dishonest non-disclosure by Heaths, the insurers would have recoiled in horror and answered "Of course not". They might have done. But, equally, I think Chase would have answered "Of course they do". It has to be kept in mind, in my opinion, that Heaths' relationship with Chase was not the normal relationship of a broker with a would-be insured. Chase had no reason at all to expect to bear the risk of Heaths' dishonesty in dealing with the insurers. On the footing that the commercial purpose of the phrases 6, 7 and 8 was to insulate Chase from the broking process, and the evidence at trial may well confirm that to be so, that purpose is as much undermined by making Chase responsible for Heaths' dishonesty as it would be undermined by making Chase responsible for Heaths' negligence. There is, in my opinion, no logic in the distinction proposed to be drawn between Heaths' dishonesty and Heaths' negligence in the bringing into being of the insurance contract. The contractual words should, as a matter of principle, be given their normal meaning if the normal meaning is consistent with the commercial purpose of the Truth of Statement clause, objectively ascertained. The court has no right, in my opinion, to make a different contract for the parties, allocating the risk of misfeasance or non-feasance by Heaths in a manner different from the allocation of that risk that the clause in its natural meaning envisages.
127. In particular, the answers given to the questions posed by the preliminary issue should not prejudge the conclusion reached at trial by the court of construction as to the commercial purpose of phrases 7 and 8 of the Truth of Statement clause. So, in my opinion, the questions should be answered by stating that:
|128. I would dismiss the appeal and allow the cross-appeal accordingly.|