(back to preceding text)

    57. These authorities show that there is a clear distinction to be made between the pre-contract duty of disclosure and any duty of disclosure which may exist after the contract has been made. It is not right to reason, as the defendants submitted that your Lordships should, from the existence of an extensive duty pre-contract positively to disclose all material facts to the conclusion that post-contract there is a similarly extensive obligation to disclose all facts which the insurer has an interest in knowing and which might affect his conduct. The courts have consistently set their face against allowing the assured's duty of good faith to be used by the insurer as an instrument for enabling the insurer himself to act in bad faith. An inevitable consequence in the post-contract situation is that the remedy of avoidance of the contract is in practical terms wholly one-sided. It is a remedy of value to the insurer and, if the defendants' argument is accepted, of disproportionate benefit to him; it enables him to escape retrospectively the liability to indemnify which he has previously and (on this hypothesis) validly undertaken. Save possibly for some types of reinsurance treaty, it is hard to think of circumstances where an assured will stand to benefit from the avoidance of the policy for something that has occurred after the contract has been entered into; the hypothesis of continuing dealings with each other will normally postulate some claim having been made by the assured under the policy.

    58. The order for ship's papers was an order made by the common law courts for the disclosure, on affidavit, of all the documentary material which had come into existence in relation to the ship which had suffered the casualty and had any possible relevance to the claim. It was made in actions brought by the assured under contracts of marine assurance and covered wider classes of document than those directly within the possession or power of the plaintiff. The classes of document were set out in the form of order which was by the end of the 19th Century in a standard form and was formalised in an appendix to the Rules of the Supreme Court (latterly O72 r.10). The sanction was the stay of the action until the order had been complied with. Compliance with the order was onerous and the sanction left the assured with little choice but to comply or to abandon his claim. The order never extended to non-marine insurance. In the last century, although still formally permitted by the R.S.C. in all marine insurance actions, the order was as a matter of judicial policy confined to those cases where the underwriter defendants were prepared to state through counsel that they proposed to plead that the vessel had been wilfully cast away with the privity of the assured (ie scuttling): Probatina Shipping v Sun Insurance [1974] QB 635. Within the last 40 years, the order has become obsolete; it has been recognised that it is largely unnecessary even in scuttling cases and had become an instrument of unjust delay (a view expressed by Greer LJ as early as 1932, Leon v Casey [1932] 2 KB 576 at 588-9).

    59. There was throughout a paradox involved in the order. It was an order justified on the basis of the assured's duty of good faith towards the underwriter and accordingly to make full disclosure of all matters which might be material to the claim. But it was never made save in marine insurance cases and the attempt to obtain an order in connection with other types of insurance were rebuffed: Twizell v Allen (1839) 3 M&W 337 (claim in general average, no common law discovery), Henderson v Underwriting Agency Ass [1891] 1 QB 557 (insurance of goods carried by post Cadiz to Syria), Village Main Reef Gold Mining Co Ltd v Stearns (1900) 5 Com Cas 246 (land transit policy). The order was only made by the court in the exercise of its powers and was not as such a contractual right of the insurer. Neither failure to give that discovery without an order nor failure to comply with the order have ever been treated as providing a ground for the insurer to avoid the policy; it merely was the precursor of seeking from the court an order for such discovery or resisting the lifting of the stay. Yet it was repeatedly said by judges that the order was made because of a continuing duty of good faith and disclosure owed by the assured to the insurer: for example, Matthew LJ in Boulton v Houlder Bros Co [1904] 1 KB 784 at 791-792 -

"It is an essential condition of a policy of insurance that the underwriters shall be treated with good faith, not merely in reference to the inception of the risk, but in the steps taken to carry out the contract. That being the meaning of the contract, effect is given to it by means of the order for discovery of ship's papers, and the affidavit with relation to them."

    60. Historically, it seems probable that the original reason for advancing this justification was the need to establish a jurisdiction in the common law courts to make an order for discovery: Goldschmidt v Marryat (1809) 1 Camp 559, Twizell v Allen (sup), Graham Joint Stock Shipping v Motor Union Ins Co [1922] 1 KB 563. But it must be recognised that these statements of justification continued to be repeated by judges (myself included) long after that need had ceased. But it must also be recognised that, whatever the continuing duty was, it was of a different character to that which exists pre-contract. Its extent was different. Its enforcement was in the discretion of the court and required an order from the court. Its breach did not give rise to the right to avoid the contract: so, whatever it was, it was not the obligation referred to in s.17 nor was it the subject matter of Lord Mansfield's judgment in Carter v Boehm. Similarly, it can be taken to support the argument of the owners in the present case that the s.17 obligation does not extend into litigation.

    61. This question arises upon policies which up to the time of the making of the claim are to be assumed to be valid and enforceable. No right to avoid the contract had arisen. On ordinary contractual principles it would be expected that any question as to what are the parties' rights in relation to anything which has occurred since the contract was made would be answered by construing the contract in accordance with its terms, both express and implied by law. Indeed, it is commonplace for insurance contracts to include a clause making express provision for when a fraudulent claim has been made. But it is also possible for principles drawn from the general law to apply to an existing contract - on the better view, frustration is an example of this as is the principle that a party shall not be allowed to take advantage of his own unlawful act. It is such a principle upon which the defendants rely in the present case. As I have previously stated there are contractual remedies for breach of contract and repudiation which act prospectively and upon which the defendants do not rely. The potential is also there for the parties, if they so choose, to provide by their contract for remedies or consequences which would act retrospectively. All this shows that the courts should be cautious before extending to contractual relations principles of law which the parties could themselves have incorporated into their contract if they had so chosen. The courts should likewise be prepared to examine the application of any such principle to the particular class of situation to see to what extent its application would reflect principles of public policy or the over-riding needs of justice. Where the application of the proposed principle would simply serve the interests of one party and do so in a disproportionate fashion, it is right to question whether the principle has been correctly formulated or is being correctly applied and it is right to question whether the codifying statute from which the right contended for is said to be drawn is being correctly construed.

    62. Where an insured is found to have made a fraudulent claim upon the insurers, the insurer is obviously not liable for the fraudulent claim. But often there will have been a lesser claim which could properly have been made and which the insured, when found out, seeks to recover. The law is that the insured who has made a fraudulent claim may not recover the claim which could have been honestly made. The principle is well established and has certainly existed since the early 19th Century (Halsbury's Laws of England, 4th ed reissue vol 25 (1994) p 284 para 492, Welford and Otter-Barry Fire Insurance, 4th ed (1948) p 289 et seq). This result is not dependant upon the inclusion in the contract of a term having that effect or the type of insurance; it is the consequence of a rule of law. Just as the law will not allow an insured to commit a crime and then use it as a basis for recovering an indemnity (Beresford v Royal Insurance Co Ltd [1937] 2 KB 197), so it will not allow an insured who has made a fraudulent claim to recover. The logic is simple. The fraudulent insured must not be allowed to think: if the fraud is successful, then I will gain; if it is unsuccessful, I will lose nothing.

    63. In Goulstone v Royal Ins Co (1858) 1 F&F 276, which concerned a fire policy and a plea that the claim was fraudulently exaggerated, Pollock CB directed the jury that if the claim "was wilfully false in any substantial respect", they should find for the defendant as the plaintiff had in that case "forfeited all benefit under the policy". (p 279) In Britton v Royal Ins Co (1866) 4 F&F 905, also a fire insurance case where it was alleged that the insured took advantage of the fire to make a fraudulent claim, Willes J directed the jury:

"The law upon such a case is in accordance with justice. and also with sound policy. The law is, that a person who has made such a fraudulent claim could not be permitted to recover at all. The contract of insurance is one of perfect good faith on both sides, and it is most important that such good faith should be maintained. It is the common practice to insert in fire policies conditions that they shall be void in the event of a fraudulent claim; and there was such a condition in the present case. Such a condition is only in accord with legal principle and sound policy. It would be most dangerous to permit parties to practise such frauds, and then, notwithstanding their falsehood and fraud, to recover the real value of the goods consumed. And if there is wilful falsehood and fraud in the claim, the insured forfeits all claim whatever upon the policy. This, therefore, was an independent defence; quite distinct from that of arson" (p 909)

Willes J stressed to the jury that it was of the utmost moment that insurances should be enforced fairly and protected from fraud. (p 911)

    64. These authorities link the defence to the observation of good faith but are specifically based upon the actual fraud of the insured in making the claim. These judgments do not use the language of avoidance of the policy ab initio but refer to the forfeiture of "all benefit under the policy" or "all claim" upon it. It seems that the language used at the time in express clauses was similar. The textbooks substantially adopt the same approach: see, for example, most recently Clarke, Insurance Contracts 3rd ed (1997), p 746 et seq.

    65. Modern authorities have not however always adopted this analysis. In Orakpo v Barclays Insurance Services [1995] LRLR 443, the insurance covered damage to a building. The insurance contract was in any event voidable since it had been induced by material misrepresentation but the defendant insurance company had also relied upon the defence that the claim was grossly exaggerated and fraudulent. In the Court of Appeal the defence was apparently argued upon the basis of implied term on the assumption that the continuing duty of good faith should be so analysed. The appellant plaintiff was appearing in person. The Court of Appeal dismissed his appeal holding unanimously that there had been a misrepresentation. But, obiter, there was a difference of opinion on the fraudulent claim defence. Staughton LJ, dissenting, was of the opinion that any breach of an implied term or, the duty of good faith would not have been so fundamental as to entitle the insurer to be discharged from liability. The majority, Hoffmann LJ and Sir Roger Parker, held that the insurer would on that ground as well have had a defence to the whole of the claim. The decision of Hoffmann LJ was arrived at applying contractual principles: he was concerned with an implied term (p 451).

"I think that the insurance company should be able to trust the assured to put forward a claim in good faith. Any fraud in making the claim goes to the root of the contract and entitles the insurer to be discharged. One should naturally not readily infer fraud from the fact that the insured has made a doubtful or even exaggerated claim. In cases where nothing is misrepresented or concealed, and the loss adjuster is in as good a position to form a view of the validity or value of the claim as the insured, it will be a legitimate reason that the assured was merely putting forward a starting figure for negotiation. But in cases in which fraud in the making of the claim has been averred and proved, I think it should discharge the insurer from all liability."

Sir Roger Parker said, at p 452:

"The appellant submits that the law, in the absence of a specific clause, is that an insured may present a claim which is to his knowledge fraudulent to a very substantial extent, but may yet recover in respect of the part of the claim which cannot be so categorised. To accept this proposition involves holding that, although an insurance contract is one of utmost good faith, an assured may present a positively and substantially fraudulent claim without penalty, save that his claim will to that extent be defeated on the facts. ....... I can see .... every reason why he should not recover at all."

Sir Roger also referred to the question whether, in the absence of an express clause providing that the claim and the policy should be avoided, the claim only should be forfeit, and a dictum in a Scottish case (Reid & Co v Employers' Accident and Livestock Ins Co (1899) 1 F 1031) which, contrary to Britton's case, would hold that only the excess should be disallowed in the absence of an express clause. Sir Roger concluded:

"In my judgment this is not so. It appears to me that it is contrary to reason to allow an insurer to avoid a policy for material non-disclosure or misrepresentation on inception, but to say that, if there is subsequently a deliberate attempt by fraud to extract money from the insurer for alleged losses which had never been incurred, it is only the claim which is forfeit."

    66. These dicta do not assist the defendants in the present case on the critical point whether anything less than actual fraud in the making of the claim brings the principle into play. Counsel have assured your Lordships that in the present case nothing turns upon whether the claim is wholly forfeit or the whole policy is treated as forfeit as well. The authority of Britton is that the whole claim is forfeit, which was what was material in the Orakpo case. As regards the question, academic in the Orakpo case and academic in the present case save as a pleading point, whether the making of a fraudulent claim would entitle the insurer to avoid the contract ab initio, that is a point upon which the judgments in Orakpo cannot be treated as fully authoritative in view of the contractual analysis there adopted. The language of Hoffmann LJ is fully justified on that contractual analysis - "goes to the root of the contract and entitles the insurer to be discharged". The fraud is fundamentally inconsistent with the bargain and the continuation of the contractual relationship between the insurer and the assured.

    67. The same subject matter is discussed in two later cases to which I should refer. The first is the decision of the Court of Appeal in Galloway v Guardian Royal Exchange (UK) [1999] Lloyd's RepIR 209, a case similar to Orakpo involving a householder's insurance, a material misrepresentation in the proposal form and a fraudulent claim. The plaintiff's claim under the policy failed on both grounds. As regards the fraudulent claim defence, the Court of Appeal followed and applied what had been said by Willes J in Britton. On the point of difference between Staughton LJ and Hoffmann LJ and Sir Roger Parker in Orakpo, they preferred the view of the latter on the seriousness of any fraud in the making of a claim. Lord Woolf MR referred also to the speech of Viscount Sumner in Lek v Mathews (1927) 29 LlLR 141 at 145 stressing the seriousness of any fraudulent claim unless it could be treated as de minimis. "The policy of the law in this area, it seems to me", said Lord Woolf, at p 213 "must be to discourage the making of fraudulent claims." Millett LJ in a short concurring judgment stressed the seriousness of such fraud and the public interest in discouraging it. In that context he expressed himself in terms similar to those of s.17 - stating that the Court should consider the fraudulent claim itself and then consider whether "the making of that claim by the insured is sufficiently serious to justify stigmatising it as a breach of his duty of good faith so as to avoid the policy". (p 214) Whilst this case puts the principle on the basis of a rule of law not an implied term, it did not need to consider, nor is it clear that they were focussing on, the distinction between something which would defeat any claim under the policy and something which avoided the contract ab initio with all that that would entail. The case does not support the submission that something less than a fraudulent claim will suffice to give the insurer a defence.

    68. The other decision is that of Rix J in Royal Boskalis Westminster NV v Mountain [1997] LRLR 523, reversed (ib) on grounds which do not affect the value of the judgment of Rix J in relation to the principle of good faith at pp 591 et seq. He powerfully questions whether in relation to claims the right of the insurer to repudiate all liability can extend beyond the making of a fraudulent claim to an innocent failure to disclose. He points out the difficulties which would arise in relation to the test of materiality and remedy. Again, the judgment underlines the relevance of fraud.

    69. Other cases contain dicta which support one or other of the arguments before us but otherwise do not add to the discussion. For example, in the House of Lords in the Banque Keyser case [1991] 2 AC 249 at 282, Lord Jauncey said:

"There is, in general, no obligation to disclose supervening facts which come to the knowledge of either party after the conclusion of the contract (Lishman v Northern Maritime Ins Co (1875) LR 10 CP 179), subject always to such exceptional cases as a ship entering a war zone or an insured failing to disclose all facts relevant to a claim."

This puts the obligation in wide terms independent of any question of fraud equivalent to those used in s.18 of the 1906 Act. Britton although cited was not referred to in any of the judgments not were its implications considered. The relevant question was different, whether a failure to make full disclosure at the time of making the relevant contract could give rise to a claim in damages.

    70. In The Michael [1979] 2 Lloyds 1 at 21-2, a barratry case in which the defence was raised of a want of good faith in presenting and persisting in a claim for a loss by perils of the seas, Roskill LJ giving the judgment of the Court of Appeal rejecting the defence said: "The relevant test must be honest belief." The insurers had to prove that a fraudulent claim had been made or maintained by the insured. If it were the law that any non-disclosure would have sufficed to enable the insurers to avoid the contract ab initio, the case would have had to be approached very differently and the result might have been different.

    71. Finally, mention should be made of the judgment of Hirst J in The Litsion Pride [1985] 1 Lloyd's Rep 437 which has been used in a number of cases to support a general view of the post contract duty of good faith. It was an exceptional case in that it involved a war risks policy under which the insured shipowners were entitled to send their ship into a highly dangerous war risk zone in the Persian Gulf against an obligation to pay a heavy additional premium calculated on the length of time spent in the zone. The policy, however did not require the shipowner to declare in advance that the ship was entering the zone but permitted declarations after it had done so. As a result the shipowners had a strong motive only to declare the entry if the vessel suffered a loss and that is what they did. Hirst J held that this practice was not a breach of contract but was done with the fraudulent intent of depriving the insurer of the additional premiums to which it was entitled. He held that the insurer was not liable to pay the claim. There had been a breach of the duty of good faith. The remedy was not confined to electing to avoid the policy; the insurer had elected not to avoid it. The insurer was entitled to rely on the breach as giving it a defence to the claim of the mortgagee of the vessel, the only effective plaintiffs in the action. The particular claim was only fraudulent in so far as the broker had not been truthful in dealing with the insurers at that stage. The reasoning adopted by Hirst J has been criticised both by academic writers and by other judges in later cases. I consider that it should not any longer be treated as a sound statement of the law. In so far as it decouples the obligation of good faith both from s.17 and the remedy of avoidance and from the contractual principles which would apply to a breach of contract it is clearly unsound and cannot survive the Court of Appeal judgment in Banque Keyser, upheld by your Lordships' House. In so far as it is based upon the principle of the irrecoverability of fraudulent claims, the decision is questionable upon the facts since the actual claim made was a valid claim for a loss which had occurred and had been caused by a peril insured against when the vessel was covered by a held covered clause. It is not necessary to examine whether there might or might not have been some other basis upon which the case could be decided in favour of the insurer as one feels it clearly ought to have been. But what is clear is that the judgment of Hirst J is not a sound basis for the arguments advanced by the defendants in the present case.

    72. For the defendants to succeed in their defence under this part of the case the defendants have to show that the claim was made fraudulently. They have failed to obtain a finding of fraud. It is not enough that until part of the way through the trial the owners (without fraudulent intent) failed to disclose to the defendants all the documents and information which the defendants would have wished to see in order to provide them with some, albeit inadequate, evidential support for their alleged defence under s.39(5). The defence under s.17 fails. It must be added that, on the facts found, had the defendants' defence succeeded it would have produced a wholly disproportionate result. The defence under s.39(5) failed after a full disclosure and investigation of all the material evidence. The claim was in fact a good one which the owners were, subject to quantum, entitled to recover under the policy. The defendants were liable to pay it. The policy was valid and enforceable. For the defendants successfully to invoke s.17 so as to avoid the policy ab initio and wholly defeat the claim would be totally out of proportion to the failure of which they were complaining. Fraud has a fundamental impact upon the parties' relationship and raises serious public policy considerations. Remediable mistakes do not have the same character.

    73. The point here is whether the obligation of good faith and disclosure continues to apply unqualified once the parties are engaged in hostile litigation before the courts. There is no authority directly on this point. It was decided in favour of the owners by both courts below. There are however dicta in cases which show that the judges concerned contemplated that the obligation of good faith could continue to apply during litigation. Thus, by way of example, Viscount Sumner in Lek v Mathews (sup) at p 145 said in relation to an express clause that he was inclined to think that it would extend to false statements during the course of the trial. It is therefore right to consider what effect the commencement of legal proceedings has upon the relationship of the parties. Similarly some of the judgments in the ship's papers cases treat the order for ship's papers as an application of the obligation of good faith.

    74. Before the litigation starts the parties' relationship is purely contractual subject to the application of the general law. If one party has a right such as that given by s.17 it derives from the contract itself or from the application of the general law to the contractual relationship. These rights continue unimpaired unless one party has exercised a right of avoidance or termination. The insured has or may have a claim against the insurer. The insurer may have accepted the claim or may have rejected it. The insurer may have done so in a manner which evinces an intention not to be bound by the contract or, more probably, may simply be requiring to be satisfied that there is a valid claim covered by the policy. But the insured will either have or not have a cause of action against the insurer. Indeed, in relation to CTL cases, and the present case is such a case, the English doctrine of ademption makes the date of the issue of the writ the determinative date for deciding upon the validity of the notice of abandonment. (SS Blairmore Co v Macredie [1898] AC 593) That is why it is normal for the assured to ask the underwriter to put him in the same position as if a writ had been issued. (Polurrian SS Co v Young (1913) 19 Com Cas 143)

    75. When a writ is issued the rights of the parties are crystallised. The function of the litigation is to ascertain what those rights are and grant the appropriate remedy. The submission of the defendants in this case is that, notwithstanding this, one party's conduct of the litigation can not only change that party's substantive rights but do so retrospectively avoiding the contract ab initio. It cannot be disputed that there are important changes in the parties' relationship that come about when the litigation starts. There is no longer a community of interest. The parties are in dispute and their interests are opposed. Their relationship and rights are now governed by the rules of procedure and the orders which the court makes on the application of one or other party. The battle lines have been drawn and new remedies are available to the parties. The disclosure of documents and facts are provided for with appropriate sanctions; the orders are discretionary within the parameters laid down by the procedural rules. Certain immunities from disclosure are conferred under the rules of privilege. If a party is not happy with his opponent's response to his requests he can seek an order from the court. If a judgment has been obtained by perjured evidence remedies are available to the aggrieved party. The situation therefore changes significantly. There is no longer the need for the remedy of avoidance under s.17; other more appropriate remedies are available. The same points have been persuasively made by Callahan AJ sitting in the Supreme Court of Connecticut in Rego v Connecticut Ins Placement Facility (1991) 593 A.2d 491 at 497.