Insurance Policies II
Cases Contract Issues
General Reinsurance Corpn v Forsakringsaktiebolaget Fennia Patria
(1983) 2 Lloyd’s Rep 287
KERR LJ
The issue, to put it broadly for the moment, can be stated as follows: where insurance–or, as in this case, reinsurance-is placed by a broker on the London market by means of a ‘slip’ which is taken round to various underwriters-whether at Lloyd’s or, as in this case, in the company market-who write ‘lines’ by way of participation towards the 100 per cent cover which the broker and his client seek from the market, what is the contractual position after the slip has been partially subscribed and before it has been subscribed to the extent of 100 per cent? Is there a binding contract as and when, and to the extent that, each participating line is written? Secondly, if each line results in a binding contract pro tanto, does the insured (or reinsured) nevertheless have an option to rescind such contract? Thirdly, if an option of rescission exists, what are the permitted limits of its exercise as against the underwriters? … The orthodox under standing of the position is correct, viz the presentation of the slip by the broker constitutes the offer, and the writing of each line constitutes an acceptance of this offer by the underwriter pro
tanto. The evidence in the present case clearly shows that in the “ insurance market this is the intention of both parties to the transaction, and the legal analysis must accord with their intention. Where an underwriter varies the terms of the slip with the consent of the broker before writing his line, this would accordingly constitute a counter-offer which is accepted by the broker on behalf of his client…. The underwriter is, therefore, bound by his line, subject only to the contingency that it may fall to be written down on ‘closing’ to some extent if the slip turns out to have been over-subscribed. The crucial issue, however, is whether the insured or reinsured is also bound to the same extent, or whether the latter have an option to rescind the contract thereafter, at any rate until the time when the slip is fully subscribed to the extent of 100 per cent or more. The reinsured contend that until that time, and for whatever reason and in whatever circumstances, there remains a continuing option to rescind all the contracts resulting from the lines written on a partially completed slip. This result was said to flow either from the implication of a term, as and when each line is written, which is necessary to give business efficacy to the resulting contract or, alternatively, from a binding usage or practice in the insurance market. I cannot begin to accept that any of this evidence goes anywhere to establish a binding custom entitling an insured or reinsured, as of right and at his unfettered option, to cancel the contract resulting from the writing of a line which-as everyone agreed-is immediately binding on the underwriter. No doubt such situations would in practice be readily resolved by agreement, possibly subject to any ‘time on risk’ premium which may be due, if and when requests for cancellation are made. But this is a long way from proof of a legal right by custom. A fortiori it is clear that there was no evidence whatever to suggest the existence of any such custom in relation to endorsement slips, let alone after the occurrence of a loss which, depending on the terms of the slip, would place the insured or reinsured in the ‘heads I win, tails you lose’ position to which I have referred Onthen comes finally to the alternative basis on which an optional right to cancel was said to rest, viz implication of law. However, given the conclusion that no custom to this effect has been established, it would clearly be impossible to conclude that an unfettered option of cancellation arises by implication of law as a matter of necessary business efficacy. Any such implication would be unnecessary, since it was agreed on all sides that it is always open to a broker wishing to test the market without commitment to do so by circulating a ‘quotation slip’. Moreover, in the case of endorsement slips which, depending on their terms, would entitle the insured or reinsured to cancel or to hold the underwriter to his line in the face of a claim which has meanwhile arisen, the implication of any such option would also be clearly unreasonable, since one party would be at the mercy of the other.
Julien Praet et Cie SA v HG Poland Ltd
[1960] 1 Lloyd’s Rep 420
PEARSON J
Traditionally, the underwriter of a syndicate sits in his box in the underwriting room at Lloyd’s, and a Lloyd’s broker who has prepared the proposed policy presents a slip giving details of the proposed risk to the underwriter, and the underwrit.er, if he finds the risk acceptable, insures it by initialling thwp. The policy is then prepared and issued. The Lloyd’s broker is the agent of the assured. The underwriter deals only with the Lloyd’s broker and not with any outside broker, nor with the assured. This procedure, if it had to be maintained in its full rigour without relaxation or modification, would impede foreign insurance business and would make motor insurance business impossible.
The typical motorist is an impatient person in the sense that, having bought a car, he wishes to take delivery and drive off in it at once, and he would not be willing to wait for the traditional steps to be taken at Lloyd’s before he could obtain cover. Therefore, even in the United Kingdom, there has to be the familiar system of the cover note, which is issued at once on receipt of a proposal, and covers the assured and puts the underwriters on risk for the period while the proposal is being considered and until a policy is either granted or refused.
There are hundreds of motor distributors and dealers and other persons in the United Kingdom who are authorised to issue cover notes on behalf of Mr Poland’s syndicate when proposals for ‘HP’ policies are made. Great care is taken, however, to comply with the requirements of Lloyd’s.The authority to issue cover notes is applied for and granted through a Lloyd’s broker, and the proposals are sent to him and presented by him to the underwriter, and he receives the policy from the underwriter and sends it to the assured as his agent. The underwriter looks to the Lloyd’s broker for the premium, and has his account with the Lloyd’s broker. The main insurance is duly granted at Lloyd’s, and the preliminary cover note, which is”‘-. inevitably granted outside Lloyd’s by a person acting as agent for the underwriter, is regarded as merely an incidental or ancillary matter.
Kumar v Life Insurance Corporation of India
[1974] 1 Lloyd’s Rep 147
KERR J
Mr Kumar alternatively claims the return of the premium paid, which amounts to a little over £100 in relation to Mrs Kumar’s policy. He says that he is entitled to recover this because the defendants have claimed to avoid the policy ab initio and have succeeded in doing so. The defendants resist this by virtue of the words which would make the premium forfeited in the event of incorrect answers being given. It is right to say that they had already offered to return the premium ex gratia in full settlement, but this was refused. They have also undertaken through their Counsel to repay this premium in any event ex gratia, whatever the result of this case, but they want to have the point decided.
I had some doubts, without looking at the books, whether in the absence of any fraud (and there was certainly no fraud in this case), such a term might not be enforceable as being a penalty. But these doubts have been set at rest by a long and clear line of authority to which I have been referred. I need only mention the names of three cases: Duckett v Williams,16 Thomson v Weems,17 in the House of Lords per Lord Blackburn, and, Sparenborg v Edinburgh Life Assurance Co. These cases clearly show that it is settled law that if the provision is clear and explicit and provides for the forfeiture of a premium in the event of a proposal form or similar document being incorrectly answered, such a provision can be enforced by the insurance company even in the absence of fraud.It follows that the claim for return of premium fails and that this action must be dismissed.
Kettlewell v Refuge Assurance Co Ltd
(1908) 97 LT 896
SIR GORELL BARNES P
In this case I think it is quite clear that what the representation amounted to was that, in accordance with the course of business of the company, there would be this free policy forthcoming at the end of five years, and that, therefore, it may be considered as a misrepresentation of fact. Then, that being discovered, the plaintiff elects to treat the policy as void on the ground of misrepresentation, and the only answer that is made to that is that she cannot do so effectively so as to recover her premiums which have been paid on the basis of this false representation, because during the continuance of the time the company has been under liability. I myself do not take the view of the matter as presented by [Counsel] as being correct. It seems to me in all cases where the contract can be declared void-in other words, is voidable-at theoption of one side, the other side is under a liability until that option is exercised; but the mere fact that the liability exists will not prevent the person who has the option from declaring the contract void and suing for what he has paid on the basis of it being a good contract. I think, therefore, that this money can be recovered as money had and received by the defendants.
Harse v Pearl Life Assurance Co
(1904) 90 LT 245
ROMER LJ
It is clear that the plaintiff cannot recover the premiums which he has paid unless he can make out that he was not in pari delicto with the defendant company. Can it be said that he has established that? He relies on the statements alleged to have been made by the defendants’ agent when the policy was effected. Now, as to those statements it is clear, in my opinion, that there was no mis-statement of fact on the part of the agent. Further than that, it is clear that there was no fraud of any kind. The present case is not one of oppressor and oppressed, nor is it a case in which advantage hasbeen taken by a clever man of an ignorant man. In fact, there is here no impropriety of any kind beyond the fact that the agent, like the plaintiff, appears to have forgotten or to have mistaken the law. As to the mistake of law, it is clear, as far as I can see, that they both made it. From the findings of the jury it appears that the agent believed the policies to be valid. So also did the plaintiff. In that respect they were equally guilty; their guilt, such as it was, consisting in their forgetting, or being ignorant of, or mistaking the law. There was no greater impropriety on the part of the agent than there was on the part of the plaintiff.
Langhorn v Cologan
(1812) 4 Taunt 330
MANSFIELD CJ
In this case, as to the main point, I cannot get rid of the impression I had at the trial, that the instrument now is different from what it is stated in the only count on which the plaintiff could have recovered at the trial. The alteration is a very material one. When once a declaration of interest is made, the policy attaches not on any goods the plaintiff might put on board, but on those comprehended in that declaration. The instrument, therefore, as to those who do not assent to that declaration, is gone.
Cases
Superwood Holdings plc v. Sun Alliance & London Insurance plc
Denham J. [1995] 3 IR 303
S.C.
Denham J.
This is an appeal by the plaintiffs against the judgment of O’Hanlon J. delivered on the 13th, 14th and 15th August and the 12th November, 1991, and the order made on the 12th November, 1991, which was perfected on the 18th November, 1991, wherein the plaintiffs’ claim was dismissed with costs.
The case was at hearing for 116 days before the High Court, the judgment runs to 423 pages, and the transcripts alone number in excess of 8,500 pages. The appeal was 16 days before this Court.
The case arises as a result of a fire on the plaintiffs’ premises after which they sought to recover compensation under policies of insurance for indemnity for consequential loss. The defendants repudiated the contracts on the grounds of fraud. Thereafter this case took on an enormous momentum of its own including the not infrequent hallmarks of a “fraud” case involving as it did a lengthy hearing, a mountain of paperwork, and a collection of circumstantial evidence.
Facts
The plaintiffs are a group of companies, the first of which was established in or around 1981 by Richard Bunyan, a production engineer with experience in sales, marketing and market planning, and Desmond Finnegan who had a background in marketing. Mr. Bunyan had been in consultation with the Industrial Development Authority and learned of the possibility of developing products from waste plastics. The Klobbie process had just been invented in Holland. It involved the collection of vast quantities of waste plastics (partly bought in at a low price and partly obtained free of charge). These waste plastics were then sorted according to their content – low density polyethylene, high density polyethylene, and polypropylene. They were also sorted according to their colour: white raw material being needed for white products. The materials were put through a granulation process whereby the waste plastic was converted into flakes. These granules, in specific blends, were then put through the Klobbie process and, when developed, the Superwood process. The product was produced at very high temperatures, it was fed into moulds of the required type, went through a cooling process, and ejected. After that it was finished in the fabrication department, cut where necessary and joined together as required. The resulting product required no maintenance, did not rot, could be washed, and was very tough and durable. It could be used in substitution for timber, steel or concrete. The targeted customers were: (1) local authorities and semi-State bodies; (2) agricultural e.g., fencing, stakes, slatted floors; (3) industrial and, (4) garden furniture and D.I.Y.
The waste products could be stored in the open; however, they were sorted inside, and the granulated material had to be stored under cover. Blending of granules before being fed into the machines was important as, depending on the product required, there had to be the correct percentage of low density polyethylene, high density polyethylene or polypropylene. Thus, it was important to have buffer stocks of each. Absence of the required buffer stock would affect the manufacturing process.
Mr. Bunyan and Mr. Finnegan agreed to establish this new industry in Ireland, the new product was to be called Superwood. Superwood Ltd. commenced operations from premises in Sandyford Industrial Estate. In 1984, the company purchased a site at Corke Abbey, Bray. The raw material and granulation sections moved there in 1985.
Initially, Superwood Ltd. had a licence to use the Klobbie process but it then bought out virtually world-wide rights of the process and began to manufacture the machinery, and to sell it to other countries. By 1986 there were 3 machines in operation in Sandyford.
On the 24th April, 1986, a fire occurred at the Sandyford premises, which started outside the building where the waste plastics were collected, but which spread to the building, and the building and all its contents including the machines were destroyed. The company was insured against damage by fire and against consequential loss. A claim was submitted promptly. Mr. Gus Ballesty of Balcombes, Loss Assessors, was requested to process the claim on behalf of Superwood. Payments on account did not commence quickly, so Mr. Bunyan wrote over the heads of the Dublin office to the chairman of the insurance company in England, and, thereafter payments on account commenced. Payments on account were made in the region of 75% of the amount claimed, together with payments for the building, machinery and stock loss. The company survived. It was decided to start again immediately at the premises in Bray. The main building at Bray could hold the moulding machinery. The other buildings were tin sheds. The company commenced constructing new machines to enable it to start up again. It was at this site in Bray in September, 1986, that the company recommenced the business with a single moulding machine. A second machine was operational in about four months, and a third by March/April, 1987.
Flotation
Superwood and its group of private companies continued to expand and wished to develop overseas markets. This necessitated additional funding, and it was decided to go public. National City Dillon and Waldron (NCB) Stockbrokers acted as financial advisers and sponsors to the Superwood group of companies. They undertook a placing of shares to raise £1 million and undertook to obtain a quotation for the shares on the Smaller Companies Market of the Irish Stock Exchange. Grant Thornton (formerly Kinnear Owens Murray and hereinafter referred to as Kinnears) were appointed joint auditors. Arthur Cox, solicitors, were appointed with sole responsibility to act for the group in the preparation of the prospectus and the implementation of the due diligence process. It was the responsibility of NCB to prepare and publish the prospectus. They appointed Kinnears to assist them and to act as reporting accountants. Kinnears prepared a set of combined accounts for the preceding five years, which were published in the prospectus, together with their accountants’ report, dated the 15th October, 1987, the date when the prospectus was released to the public. The closing date for the acceptance of subscriptions for shares was noon on the 27th October, 1987. The prospectus contained sales and profit projections for the year to end the 31st May, 1988. The provisions of the prospectus were consistent with the upward trend provisions in the Sun Alliance policy.
Fire
On Monday, the 26th October, 1987, at approximately 9.20 p.m., a security guard discovered that a fire had started in a storage building which contained waste and granulated materials at Superwood’s premises in Bray. It proved impossible to stop the fire which destroyed the entire building and its contents.
By policy of insurance from the 1st June, 1987, the plaintiffs were insured against consequential loss arising, inter alia, by fire. The plaintiffs notified the defendants immediately of the said fire. Indeed, there were on-site meetings the day after the fire.
The plaintiffs engaged Mr. Ballesty of Balcombes as loss assessor to represent their interests. Mr. Davies, a partner in Kinnears, advised the plaintiffs. The defendants retained Thornton and Co., loss adjusters, to act for them. Mr. Begg, managing partner in Thornton and Co., was responsible for dealing with the consequential loss claim. Later Scully Tyrrell, loss adjusters, in which Mr. Tyrrell and Mr. Sleater were partners, acted for the defendants.
During the balance of 1987 and into 1988 the plaintiffs sought payments on account on foot of the consequential loss policy. The defendants refused to make such payments and sought information. The plaintiffs provided the defendants with some information but antagonism arose in relationships.
On the 26th October, 1988, Mr. O’Sullivan, property claims manager of the first defendant, pointed out to the plaintiffs that the claim had to be made within 30 days of the expiry of the indemnity period. On the 24th November, 1988 the plaintiffs submitted a claim in writing to the defendants. On the 20th March, 1989, the defendants repudiated the agreement and policy of insurance and denied that they were bound any longer. The defendants refused to refer the differences which had arisen between the parties to arbitration.
The plaintiffs brought these proceedings seeking a sum for consequential loss arising as a direct result of the fire and also a claim for damages in respect of breach of contract of the defendants in failing to discharge their obligations under the consequential loss policy.
Insurance contract
‘Policy of Insurance Consequential Loss’ being Policy No. 990F641234 is at issue. By this policy it was agreed that, in consideration of the payment by the plaintiffs of the premium, if after that payment any building at the premises of the plaintiffs was destroyed or damaged by fire then the defendants would pay to the plaintiffs the amount of loss resulting from such interruption or interference in accordance with the provisions. (There has been no issue in this case as to the locus standi of any party to this or any other policy).
The specification of the consequential loss (as amended to take effect from the 7th October, 1987) was:
“Item No.
1. On gross profit
Estimated Gross Profit
£1,500,000”
The specification at Item No. 1 stated:
“The insurance under this item is limited to loss of gross profit due to (a) reduction in turnover and (b) increase in cost of working and the amount payable as indemnity thereunder shall be: ”
(a) In respect of reduction in turnover: the sum produced by applying the rate of gross profit to the amount by which the turnover during the indemnity periods shall, in consequence of the damage, fall short of the standard turnover
(b) In respect of increase in cost of working: the additional expenditure (subject to the provisions of the uninsured standing charges clause) necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the reduction in turnover which but for that expenditure would have taken place during the indemnity period in consequence of the damage, but not exceeding the sum produced by applying the rate of gross profit to the amount of the reduction thereby avoided
less any sum saved during the indemnity period in respect of the charges and expenses of the business payable out of gross profit as may cease or be reduced in consequence of the damage.
Notwithstanding proviso (2) on the face of this policy the liability of the Insurer shall in no case exceed, in respect of gross profit 133 1/3% of the estimated Gross Profit stated herein, . . .” (Emphasis added)
Thus, the insurance policy itself recognised the trend of the company as it stated the liability of the Insurer to be not in excess of 133 1/3% of the estimated gross profit which was asserted to be £1,500,000. Thus, it envisaged a possible claim of in or about £2m.
The policy defined:
“Turnover: The money paid or payable to the insured for goods sold and delivered and for services rendered in course of the business at the premises.
Gross Profit: The amount by which
(i) the sum of the amount of the turnover and the amounts of the closing stock and work in progress shall exceed
(ii) the sum of the amounts of the opening stock and work in progress and the amount of the specified working expenses.
Note: the amounts of the opening and closing stocks and work in progress shall be arrived at in accordance with the Insured’s normal accountancy methods, due provisions being made for depreciation . . .
Estimated gross profit: The amount declared by the Insured to the Insurer as representing not less than the gross profit which it is anticipated will be earned by the business during the financial year most nearly concurrent with the period of insurance (or a proportionately increased multiple thereof where the maximum indemnity period exceeds twelve months).
Rate of gross profit: The rate of gross profit earned on me turnover during the financial year immediately before the date of the damage, and Standard turnover: The turnover during that period in twelve months immediately before the date of the damage which corresponds with the indemnity period, to which such adjustments shall be made as may be necessary to provide for the trend of the business and for variations in or other circumstances affecting the business either before or after the damage or which would have affected the business had the damage not occurred, so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the results which but for the damage would have been obtained during the relative period after the damage.”
Memo 3 to the said Policy stated:
“In the event of loss payments on account will be made monthly to the Insured if desired.”
The two conditions of the contract at issue in these proceedings are Condition 4 and 5 which state:
“4. On the happening of any damage in consequence of which a claim is or may be made under this policy the Insured shall forthwith give notice thereof in writing to the first named of the Insurers, and shall with due diligence do and concur in doing and permit to be done all things which may be reasonably practicable to minimise or check any interruption of or interference with the business or to avoid or diminish the loss and in the event of a claim being made under this policy shall not later than 30 days after the expiry of the indemnity period or within such further time as the Insurers may in writing allow, at his own expense deliver to the Insurers in writing a statement setting forth particulars of his claim together with details of all other insurances covering the damage or any part of it or consequential loss of any kind resulting therefrom. The Insured shall at his own expense also produce and furnish to the Insurers such books of account and other business books, vouchers, invoices, balance sheets and other documents, proofs, information, explanation and other evidence as may reasonably be required by the Insurers for the purpose of investigating or verifying the claim together with (if demanded) a statutory declaration of the truth of the claim and of any matters connected therewith. No claim under this policy shall be payable unless the terms of this condition have been complied with and in the event of non-compliance therewith in any respect, any payment on account of the claim already made shall be repaid to the Insurers forthwith.
5. If the claim be in any respect fraudulent or if any fraudulent means or devices be used by the Insured or anyone acting on his behalf to obtain any benefit under this policy or if any damage be occasioned by the wilful act or with the connivance of the Insured, all benefit under this policy shall be forfeited.”
There was a professional accountants clause in the contract which stated:
“Any particulars or details contained in the Insured’s books of account or other business books or documents which may be required by the Insurers under Condition 4 of this policy for the purpose of investigating or verifying any claim hereunder may be produced by professional accountants if at the time they are regularly acting as such for the Insured and their report shall be prima facie evidence of the particulars and details to which such report relates.
The Insurers will pay to the Insured the reasonable charges payable by the Insured to their professional accountants for producing such particulars or details or any other proofs, information or evidence as may be required by the Insurers under the terms of Condition 4 of this policy and reporting that such particulars or details are in accordance with the Insured’s books of account or other business books or documents.
Provided that the sum of the amount payable under this clause and the amount otherwise payable under the Policy shall in no case exceed the Limit of Liability.”
The premium of over £10,000 was paid by the plaintiffs. Consequently, it is a matter of determining whether the policy can be availed of by the plaintiffs in the situation created by the fire.
Essence of the case
The essence of this case is the issue of fraud and the repudiation of the contract of insurance by the defendants on the grounds of fraud. All else flowed from that – including the refusal of the defendants to arbitrate.
The ground upon which the contract of insurance was repudiated was that of fraud or a claim exaggerated so excessively as to lead to the inference that it could not have been made honestly. In relation to the claim of fraud it is appropriate to consider the entire pattern of behaviour of the parties between the fire and the letters of repudiation. However, this behaviour is relevant only as to whether or not there was an exaggerated claim – not to any other issue.
Consequently, while the learned trial judge wrote his judgment largely on condition 4, that condition is of secondary importance, and the issue of fraud is the essential matter for determination in the case, and should be decided first.
The claim of fraud
On the 26th October, 1988, Mr. O’Sullivan of Sun Alliance wrote to Balcombes, who were acting on behalf of the plaintiffs, pointing out the requirement that the claim be made within 30 days of the expiry of the indemnity period. On the 24th November, 1988, the secretary of Superwood Holdings plc wrote to Sun Alliance stating, inter alia:
“A statement of claim has been prepared by our professional accountants in accordance with the provisions of the professional accountants clause . . . Our accountants will also provide details, proofs, particulars, information and other evidence as may be required by you under the terms of the insurance policy condition number 4.”
Thereafter, there was a period of activity relating to the statement of claim. There were written and oral exchanges and negotiations. I shall return to these activities in a later portion of the judgment.
By letter dated the 20th March, 1989, Sun Alliance wrote to Superwood Holdings plc stating:
“We are of the opinion that the Insured’s claim made the 24th November, 1988, on foot of the Consequential Loss Policy No. 990F641234 is totally unfounded in that it grossly overstates and exaggerates the true value of loss of profits resulting from reduced turnover and increased cost of working of the business of the Insured during the indemnity period.
In the circumstances the Insurers must repudiate liability under the contract of insurance referred to hereinbefore.”
A similar letter was written from Lloyds to Superwood Holdings plc.
On the 11th April, 1989, the solicitors for the defendants wrote to the solicitors for the plaintiffs stating, inter alia:
“For the avoidance of doubt our clients repudiated liability under Policy No. 990F641234 on the grounds that the claim is fraudulent.
In the circumstances, our clients will rely on the provisions contained in s. 39 of the Arbitration Act, 1954 and will if necessary apply to the High Court for the necessary order.”
The matter was further clarified by a letter on the 13th April, 1989, which stated:
“We refer to our letter of the 11th April. That letter should be read in conjunction with our client’s letter to your client, dated the 20th March, 1989, wherein they repudiated liability for your client’s claim on the grounds specified in the second paragraph thereof.
It is our clients’ opinion that your clients’ claim is fraudulent.”
The plaintiffs sought arbitration, to which the reply was:
“We acknowledge receipt of your letter of the 5th May enclosing Notice pursuant to s. 18 of the Arbitration Act, 1954.
By letters dated the 20th March, 1989, our clients repudiated liability in respect of your client’s claim on the grounds set out therein. For the avoidance of doubt, our clients repudiated liability under the said policies on the grounds that in their opinion your client’s claim is fraudulent.
In the circumstances, our clients will rely on the provisions contained in s. 39 of the Arbitration Act, 1954 and will if necessary apply to the High Court for the necessary order.”
Thereafter, these proceedings advanced wherein the defendants pleaded in their defence, inter alia:
“3. It was a condition express or implied of the said policies that if the first, second, third and fourth plaintiffs should make and deliver to the defendants a fraudulent claim or if any fraudulent means or devices be used by the said plaintiffs their servants or agents to obtain any benefits under the said policies the said policies should become void, or alternatively voidable, and all claims and benefits thereunder should be forfeited.
4. The first, second, third and fourth plaintiffs, their servants or agents did make and deliver to the defendants on the 24th November, 1988, a fraudulent claim or a claim exaggerated so excessively as to lead to the inference that it could not have been made honestly, and thereby represented that the said plaintiffs’ loss was £2,090,979 (two million and ninety thousand nine hundred and seventy nine pounds) where it was not so as the plaintiffs their servants or agents well knew.
5. In the premises, the policies became, and are, void and all claims and benefit thereunder were and are forfeited. In the alternative, the said policies became voidable and the defendants validly and lawfully avoided the same by letters dated the 20th March, 1989, from the defendants to the plaintiffs and received by the plaintiffs. As a result thereof, all benefit and claims thereunder became and are forfeited.”
Issue of fraud
At issue before the learned trial judge was whether the claim by the plaintiffs for compensation so grossly overstated and exaggerated the true value of the loss of profits, resulting from the reduced turnover, and increased cost of working of the business of the plaintiffs, during the indemnity period, as to be fraudulent.
The High Court decision
In the High Court it was held, and I now set out chronologically the key findings of fact as found by the learned trial judge, that:
(1) The destruction of the building gave rise to a valid claim under the consequential loss policy for loss of gross profit on turnover, and increased cost of working attributable to the disruption of the business of the company brought about by the loss of the building and the stores of raw waste plastic and granulated material contained therein.
(2) In 1987/88 the plaintiffs did not make the profits projected in the prospectus, but rather showed a loss.
(3) The task of the court is to assess the extent to which the fire damage contributed to the overall loss.
(4) The plaintiffs did their utmost to prevent the loss adjusters from uncovering the multiple weaknesses and deficiencies in the group operation which made the projections for 1987/88 unrealistic and unattainable even had the fire never occurred.
(5) There was a deliberate policy of non-cooperation adopted by the plaintiffs and everything was done to prevent Mr. Begg, Mr. Tyrrell and Mr. Sleater from learning the truth about the plaintiffs’ companies and their operations.
(6) The plaintiffs did suffer a significant disruption in their manufacturing process by reason of the fire and did incur substantial costs on a temporary basis in the purchase of granulated materials to minimise the loss of turnover.
(7) The effort by the plaintiffs to attribute the down turn which took place in sales and profits for the financial year 1987/1988 to the fire and its consequences was wholly without foundation.
(8) There were many reasons for the poor performance of the plaintiffs in 1987/88.
(9) An expansion was planned, but the company was unprepared to carry it out.
(10) The projected production for 1987/88 could never have been achieved.
(11) The management and organisation of the company was not geared to a huge expansion.
(12) Mr. Davies trusted implicitly in the ability of Mr. Bunyan and Mr. Finnegan, but his confidence was ill-founded.
(13) The plaintiffs completely under-estimated the working capital they would require if they were to have success on the U.K. market.
(14) More preparatory work was needed before a large scale sales drive in the U.K. could be attempted.
(15) The inability of Superwood to trade profitably during 1987/88 was brought about by a multiplicity of causes – one of the contributory causes being the destruction by fire of the building in Bray on the 26th October, 1987.
(16) Access to books and records was refused on occasion by the plaintiffs.
(17) The plaintiffs did their utmost to prevent the loss adjusters from uncovering the weaknesses inherent in the plaintiffs’ management, organisation and accounting systems; from obtaining a true picture of the sales potential; or of the production capacity; or of sources of supply of raw material; or the truth of the measures taken to offset the damage.
(18) Mr. Bunyan was unreliable as a witness.
(19) There was deception in relation (a) to deletion from the production records of columns giving particulars of down-time, and, (b) in relation to the use made of Johnston’s warehouse, and the withholding of information about it.
(20) Thornton and Partners, Scully Tyrrell & Co., and Mr. Noel Cooke representing Stokes Kennedy Crowley, at all times acted in a highly professional and impressive manner.
(21) The Sun Alliance is a highly reputable company.
The conclusions on law by the High Court were:
(1) There were clear and serious breaches by the plaintiffs of their obligations under condition 4 of the consequential loss policy.
(2) By reason of these breaches the plaintiffs have disqualified themselves from claiming any payment whatever under the policy and their claim should be dismissed.
(3) The findings of fact made in the judgment lead on inexorably to a finding of fraud against the plaintiffs. The claim for compensation was far in excess of the real loss sustained by the plaintiffs for which they were entitled to claim under the consequential loss policies. The plaintiffs did everything in their power to prevent the defendants from carrying out a proper investigation of the loss. They deliberately concealed information and deliberately misrepresented the position on a number of matters.
(4) The firms of Kinnears and Co., Grant Thornton, and Balcombe and Co., were not implicated in the findings of deliberate withholding of information and fraud which were made against the plaintiffs.
(5) Numerous breaches of condition 5 of the policies were committed by the plaintiffs in putting forward a claim which was fraudulent and the action must be dismissed on this ground also, in addition to the ground of the breaches of condition 4.
The appeal
The plaintiffs appealed from the said decision on 56 grounds of appeal. However, these grounds were not pursued individually but rather the appeal moved on two fronts:
(a) Whether the learned trial judge erred in law and fact in finding that the plaintiffs submitted a fraudulent claim and so breached condition 5 of the contract of insurance; and
(b) Whether the learned trial judge erred in law and fact in finding that the plaintiffs did not furnish information reasonably requested by the defendants and in so doing breached condition 4 of the contract of insurance.
Submissions of the appellants
Mr. Salafia, on behalf of the plaintiffs, submitted on the two matters at issue:
First, regarding condition 5:
(a) That there was no evidence of fraud or a fraudulent intent in the submitted claim of the 24th November, 1988.
(b) That the claim was based on the plaintiffs’ projections for their business which were held reasonably.
(c) That there was no evidence of a lack of honest belief.
(d) That Mr. Davies believed honestly in the projections.
(e) That as the learned trial judge had found Mr. Davies and the other personnel honest, it was not open to him to find Mr. Bunyan dishonest: they were either all in it or all out.
(f) That Mr. Tyrrell had a contrary opinion, but a conflict of opinion of experts is not a ground for fraud.
(g) That apart from the question of the projections in the prospectus the area of dispute was as to the length of the disruption of the business, with a difference of between 3 to 5 weeks as submitted by the defendants and 52 weeks as submitted by the plaintiffs. This was a difference of expert opinion and not evidence of fraud.
(h) That there was no finding of breaches of condition 5 by the learned trial judge.
Secondly, regarding condition 4:
(i) That liability of the plaintiffs under condition 4 arose only after the claim in writing dated the 24th November, 1988.
(j) That all reasonable requirements under condition 4 were met by the plaintiffs.
(k) That all information sought reasonably by the defendants regarding the claim were satisfied in writing or at meetings held largely in January, 1989.
(l) That there was no breach of condition 4 by the plaintiffs.
(m) Further counsel argued that there were no credible grounds upon which the learned trial judge could have made the findings he did.
Submissions of the defendants
Mr. Condon, on behalf of the defendants, submitted that the judgment of the High Court should be upheld. He presented a dual basis to his argument. First, that the defendants were not liable under the contract in view of the plaintiffs’ breach of condition 4, which breach occurred in a pattern from the time of the fire and that the learned trial judge was correct to take into account the whole investigation from the date of the fire.
Secondly, that the contract was repudiated by the defendants on the grounds of fraud of the plaintiffs by reason of gross exaggeration of their claim. In determining the issue of fraud, the matters and evidence relating to the breach of condition 4 were relevant. In the High Court the case was run on these two issues in tandem, they were intermingled which had been a correct process.
He submitted that in a case which had lasted 116 days, where all the witnesses had been personally heard and considered by the learned trial judge, and where there was a meticulous judgment of 423 pages, that this Court should give careful consideration to the conclusions drawn and should not disregard them lightly, that there would have to be very compelling reasons to overturn the judgment of the High Court.
Jurisdiction of appellate court
This is an appeal from the decision of a judge sitting without a jury. The jurisdiction in such cases is well settled. In a case such as this where fraud is in issue, and the evidence is circumstantial, the role of the court is very specific. McCarthy J. stated in Hay v. O’Grady [1992] 1 I.R. 210 at p. 217:
“1. An appellate court does not enjoy the opportunity of seeing and hearing the witnesses as does the trial judge who hears the substance of the evidence but, also, observes the manner in which it is given and the demeanour of those giving it. The arid pages of a transcript seldom reflect the atmosphere of a trial.
2. If the findings of fact made by the trial judge are supported by credible evidence, this Court is bound by those findings, however voluminous and, apparently, weighty the testimony against them. The truth is not the monopoly of any majority.
3. Inferences of fact are drawn in most trials; it is said that an appellate court is in as good a position as the trial judge to draw inferences of fact. (See the judgment of Holmes L.J. in The SS Gairloch [1899] 2 I.R. 1, 18, cited by O’Higgins C.J. in The People (Director of Public Prosecutions) v. Madden [1977] I.R. 336 at 339). I do not accept that this is always necessarily so. It may be that the demeanour of a witness in giving evidence will, itself, lead to an appropriate inference which an appellate court would not draw. In my judgment, an appellate court should be slow to substitute its own inference of fact where such depends upon oral evidence of recollection of fact and a different inference has been drawn by the trial judge. In the drawing of inferences from circumstantial evidence, an appellate tribunal is in as good a position as the trial judge.
4. A further issue arises as to the conclusion of law to be drawn from the combination of primary fact and proper inference – in a case of this kind, was there negligence? I leave aside the question of any special circumstance applying as a test of negligence in the particular case. If, on the facts found and either on the inferences drawn by the trial judge or on the inferences drawn by the appellate court in accordance with the principles set out above, it is established to the satisfaction of the appellate court that the conclusion of the trial judge as to whether or not there was negligence on the part of the individual charged was erroneous, the order will be varied accordingly.
5. These views emphasise the importance of a clear statement, as was made in this case, by the trial judge of his findings of primary fact, the inferences to be drawn, and the conclusion that follows.”
It is the above principles which must be applied to the judgment of the learned trial judge. Mr. Foley, for the defendants, emphasised paragraph No. 3 above, and its relevance to this case. He stressed that the very duration of this case in the High Court (116 days) and the length of time Mr. Bunyan was in the witness box (35 days), made this case exceptional as the learned trial judge had a considerable time in which to consider the demeanour of the witness. He submitted that this Court should be slow to interfere with the learned trial judge’s findings of fact based on Mr. Bunyan’s evidence.
Fraud
In a claim of fraud, the specific fraud must be pleaded. Thus, in Kerr on Fraud and Mistake (7th Ed.) it is stated at p. 644:
“When an action is brought for the purpose of impeaching transactions on the ground of fraud, it is essential that the nature of the case should be distinctly and accurately stated. The facts must be so stated as to show distinctly that fraud is charged. Any charge of fraud or misrepresentation must be pleaded with the utmost particularity; it will not be inferred from the circumstances pleaded, at all events if those circumstances be consistent with innocence. A general charge of fraud, however strong, without alleging specific facts, is not sufficient to sustain the action. It must be shown in what the fraud consists and how it has been effected. The fraud alleged must be set forth specifically in particular and in detail, so that the person against whom it is charged may have the opportunity of knowing what he has to meet, and of shaping his defence accordingly. A charge of fraud must be proved as laid, and where one kind of fraud has been charged, another kind of fraud cannot be substituted for it.”
The fraud pleaded by the defendants in this case was precise, that the plaintiffs, their servants or agents made and delivered on the 24th November, 1988, a fraudulent claim or a claim exaggerated so excessively as to lead to the inference that it could not have been made honestly, and wherein they represented that the plaintiffs’ loss was £2,090,979 where it was not and the plaintiffs, their servants or agents well knew. This is the sole ground of fraud in issue.
Intent
To prove fraud it is necessary to prove the required intent. As stated in Birds, Modern Insurance Law (2nd Ed.) at p. 78:
“A proposer is guilty of fraudulent misrepresentation if he makes a statement which is false knowingly without belief in its truth or recklessly as to whether it is true or false.”
The foundation case is Derry v. Peek (1889) 14 App. Cas. 337. In that case an Act incorporating a tramway company provided that the carriages might be moved by animal power, and, with the consent of the Board of Trade, by steam power. The directors of the company issued a prospectus wherein it was stated that by their Act the company had the right to use steam power instead of horses. The plaintiff bought shares on the faith of that statement in the prospectus. Later the Board of Trade refused consent to the use of steam power and the company was wound up. The plaintiff brought an action of deceit against the directors founded upon the false statement, and was unsuccessful. The House of Lords held that there was no fraud, Lord Herschell stating, at p. 374:
“First, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth. And this probably covers the whole ground, for one who knowingly alleges that which is false, has obviously no such honest belief. Thirdly, if fraud be proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or injure the person to whom the statement was made.”
That analysis of the law remains true today, and is applicable to this case.
Directing mind and will
The company itself has no mind or will. However, a company can be vicariously liable for fraud. In El Ajou v. Dollar Land Holdings plc [1994] 2 All E.R. 685, the Court of Appeal held that the directing mind and will of a company was not necessarily that of the person or persons who had general management and control of the company since the directing mind and will could be found in different persons in respect of different activities. It was necessary to identify the person who had management and control in relation to the act or omission in point.
Hoffmann L.J. stated at p. 705:
“The ‘directing mind and will’ theory.
The phrase ‘directing mind and will’ comes from a well-known passage in the judgment of Viscount Haldane L.C. in Lennards Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd. [1915] A.C. 705, [1914-15] All E.R. 280 which distinguishes between someone who is ‘merely a servant or agent’ and someone whose action (or knowledge) is that of the company itself. Despite their familiarity, it is worth quoting the terms in which Viscount Haldane L.C. said that the directing mind could be identified ([1915] A.C. 705 at 713, [1914-15] All E.R. 280 at 282):
‘That person may be under the direction of the shareholders in general meeting; that person may be the board of directors itself, or it may be, and in some companies it is so, that that person has an authority co-ordinate with the board of directors given to him under the articles of association, and is appointed by the general meeting of the company, and can only be removed by the general meeting of the company. My Lords, whatever is not known about Mr. Lennard’s position, this is known for certain, Mr. Lennard took the active part in the management of this ship on behalf of the owners, and Mr. Lennard, as I have said, was registered as the person designated for this purpose in the ship’s register.’
Viscount Haldane L.C. therefore regarded the identification of the directing mind as primarily a constitutional question, depending in the first instance upon the powers entrusted to a person by the articles of association. The last sentence about Mr. Lennard’s position shows that the position as reflected in the articles may have to be supplemented by looking at the actual exercise of the company’s powers. A person held out by the company as having plenary authority or in whose exercise of such authority the company acquiesces, may be treated as its directing mind.
It is well known that Viscount Haldane LC derived the concept of the ‘directing mind’ from German law (see Gower Principles of Modern Company Law (5th ed. 1992) p. 194, n. 36) which distinguishes between the agents and organs of the company. A German company with limited liability (GmbH) is required by law to appoint one or more directors (Geschaftsfuhrer). They are the company’s organs and for legal purposes represent the company. The knowledge of any one director, however obtained, is the knowledge of the company (see Scholz Commentary on the GmbH Law (7th ed. 1986), s. 35). English law has never taken the view that the knowledge of a director ipso facto imputed to the company: see Powles v. Page (1846) 3 C.B. 15, 136 ER 7 and Re Carew’s Estate Act (No. 2) (1862) 31 Beav. 39, 54 ER 1054. Unlike the German Geschaftsfuhrer, an English director may, as an individual, have no powers whatever. But English law shares the view of German law that whether a person is an organ or not depends upon the extent of the powers which in law he has express or implied authority to exercise on behalf of the company.”
The above quoted statement of Viscount Haldane L.C. was quoted with approval by McCarthy J. in Taylor v. Smith [1991] 1 I.R. 142 at p. 166 and is a useful precedent. However, there is a danger in applying the principle in a strictly anthropomorphic manner. As stated in Ussher, Company Law in Ireland, (1986) at p. 38, in reference to Lord Haldane’s theory:
“Although in Lennard’s Case in 1915 this theory provided a rational answer to the question whether a corporation could be guilty of fault at all, its utility as an analytical tool now that that victory has been won may be questioned, chiefly because it displays an undesirable tendency towards anthropomorphism. To ask who is the very ego and centre of personality of the corporation with a view to attributing fault to it is no more than to ask in two stages rather than one who within the company was lawfully in control of that situation. Attempts to relate parts of an organisation to corresponding parts of the human body was a medieval pastime . . .
Such anthropomorphic conceits may seem innocent, but there is an artificiality in seeking to force complex and varying corporate structures into a uniform human mould; in particular a search for Lord Haldane’s very ego and centre of personality of the corporation may prove fruitless where power is diffused throughout a company. Irish company law recognises that the functions of the various ‘organs’ may be interdependent and differ from company to company”.
I am satisfied that the appropriate test is to apply the essential principle expounded by Lord Haldane to an Irish company in a practical manner and to determine who was in control of the relevant issue.
Onus of proof
The onus of proof is on the party who alleges fraud. There is a presumption that an insured making a claim is acting honestly. Lord Herschell in Derry v. Peek (1889) 14 App. Cas. 337 stated at p. 380:
“I quite admit that the statements of witnesses as to their belief are by no means to be accepted blindfold. The probabilities must be considered. Whenever it is necessary to arrive at a conclusion as to the state of mind of another person, and to determine whether his belief under given circumstances was such as he alleges, we can only do so by applying the standard of conduct which our own experience of the ways of men has enabled us to form; by asking ourselves whether a reasonable man would be likely under the circumstances so to believe. I have applied this test, with the result that I have a strong conviction that a reasonable man situated as the defendants were, with their knowledge and means of knowledge, might well believe what they state they did believe, and consider that the representation made was substantially true.”
In Banco Ambrosiano s.p.a v. Ansbacher & Co. [1987] I.L.R.M. 669 at p. 691, Finlay C.J. stated:
“. . . the onus is to prove the matters necessary to establish fraud as a matter of probability, and that where, as in the present case, such proof is largely a matter of inference, that the inference must not be ‘drawn lightly or without due regard to all the relevant circumstances, including the consequences of a finding of fraud’.”
Thus, the onus is on the defendants to prove the fraud on the balance of probabilities. However, here, as in the Banco Ambrosiano case, the proof is largely a matter of inference and so it must not be drawn lightly or without due regard to all the circumstances including the consequences of a finding of fraud.
High Court judgment on fraud
The decision as to fraud by the learned trial judge was given in a supplemental judgment of the 12th November, 1991, where he stated:
“I indicated that as I had already decided in the defendants’ favour by reasons of the provisions of condition 4 of the policies, it might not be necessary for me to deal further with the plea under condition 5 but as one of the parties requires me to deal with this issue also, I now propose to do so.
In my judgment, the findings of fact which I have already made lead on inexorably to a finding of fraud against the plaintiffs. A claim for compensation under the relevant policies was put forward which was, in my opinion, far in excess of the real loss sustained by the plaintiffs for which they were entitled to claim under their consequential loss policies. In support of this claim the plaintiffs did everything in their power to prevent the defendants from carrying out a proper investigation of the loss. They deliberately concealed from the defendants information which was in their possession or procurement which was relevant to the claim and which was repeatedly sought by the defendants’ representatives, notably in relation to the trading history of the plaintiff, the research carried out with regard to the potential market for their products in Ireland and the United Kingdom; the production capacity of the plaintiffs; their books of account and other trading records; the arrangements made for alternative storage while the premises destroyed by fire were being rebuilt. They also deliberately misrepresented the true position in relation to a number of these matters.
As the firms of Kinnear & Co./Grant Thornton, Auditors and Accountants, and Balcombe and Co., Loss Assessors, were actively engaged in the presentation of the claim on behalf of the plaintiffs, I think I should make it clear that, in my opinion, neither firm was implicated in the findings of deliberate withholding of information and fraud which I have made against the plaintiffs.
I find that numerous breaches of condition 5 of the policies were committed by the plaintiffs in putting forward a claim which was fraudulent in many respects, as outlined already in the findings of fact which I have made in relation to the claim, and the action must be dismissed on this ground also, in addition to the ground already referred to in the judgment delivered on the 13th, 14th and 15th August, 1991.”
The sixty-nine extracts
At the request of this Court, counsel for the defendants drew up a list of findings of fact of the learned trial judge which they submitted led inexorably to a finding of fraud against the plaintiffs. For ease of reference I have numbered each quotation (or series of quotations, from, in general, a particular page) of the judgment. There were 69 such references and they are to be found in Appendix A to this judgment.
The first of these references states:
“In the circumstances, I find the refusal to give the authorization (to the Fire Officer) requested (by Mr. Dunne) was wholly unreasonable”.
This does not lead inexorably to a finding of fraud on the consequential loss claim for three reasons.
(1) This is a reference relevant to the material claim, not the consequential loss claim.
(2) The refusal to give the authorization was explained by the plaintiffs as occurring at a time when there were planning difficulties with the local authority and the plaintiffs were fearful of exacerbating such difficulties; this is a reasonable explanation.
(3) However, even if there were credible grounds upon which the learned trial judge could come to a conclusion that the refusal was “unreasonable” (and thus in law this appellate court could not interfere then with such a finding), it is quite clear that in drawing the inference that such a conclusion of “unreasonable” behaviour led on inexorably to fraud in regard to the consequential loss claim the learned trial judge erred in law and fact.
I have considered each and every one of the said 69 alleged extracts carefully and the submissions on all of them. Many of the extracts relate to the building claim and the stock loss claim and not to the consequential loss claim. Many relate to condition 4 of the contract and not condition 5. Detailed analysis by the learned trial judge of events and meetings in the immediate aftermath of the fire was clearly done from the view point of condition 4 and further are clouded by the learned trial judge’s construction of condition 4.
Absence of records and guesswork are not fraud. Attempts to seek settlement are not, per se, evidence of fraud. It is not the claim that the prospectus was fraudulent – but rather it is the use of the projections from the prospectus in November, 1988, which is challenged. A finding that the projected sales in the U.K. were unrealistic and unattainable does not lead inexorably to fraud. Time and again an extract when analysed shows that it does not touch the claim of fraud, the issue of exaggeration, and is not relevant. Findings of haphazard work, optimism, underestimation, are not findings of fraud.
Neither does a finding that the projections were far beyond the capacity of the plaintiffs establish fraud. Even if the learned trial judge was right in his findings, even if the finding is founded on credible evidence, it does not lead on inexorably to a finding of fraud.
The first extract which individually raised a possible connotation of fraud was number 43 which stated:
“That even as late as 1989 Superwood were apparently concentrating their energies on maintaining turnover at the highest level they could achieve (regardless of continuing in a loss making situation) and that they were doing so to bolster up their insurance claim i.e., to be able to produce figures to support their claim and that the turnover they projected for the 1987/1988 and 1988/1989 financial years were realistic and could have been achieved.”
The claim of fraud in this case is that of exaggeration, not that of the plaintiffs deliberately bolstering turnover regardless of whether they were making a profit. Further this extract must be read in the light of the obligation on the plaintiffs under the policy to mitigate loss. If there was a failure to mitigate, the plaintiffs would have been in breach of the contract. The court found there was no failure to mitigate. This action in mitigation by the plaintiffs was one of the reasons for that finding. Quite apart from the duty to mitigate loss there may be sound commercial reasons to retain a customer base, which would result in a decision to keep turnover high.
In the absence of this specific fraud being pleaded, or argued, and in light of the many legitimate reasons why turnover in the circumstances might have been kept up, it is not a fact, even if based on credible evidence, from which the inference may be made that it leads inexorably to a finding of the fraud of exaggeration pleaded in this case.
The next extract, extract number 44, was from p. 163 of the judgment, wherein the learned trial judge held:
“Superwood in 1987 was not geared up in its organisation and management to embark on the huge expansion of its operations, particularly in the U.K. which was planned for the financial year 1987/1988; nor for the preparation and formulation of reliable projections as to the sales they could reasonably hope to achieve on the home market and by way of exports during the year in question.”
This is, to me, a typical extract drawn out by the defendants and it has a common theme. The theme is of optimism, illusion, and a commonality of view by Mr. Bunyan, Mr. Ballesty and Mr. Davies. There is no finding of misrepresentation. There is no finding of dishonesty.
The next extracts are also irrelevant to the issue of fraud. They do not touch on the issue of honesty. Many offer a type of hindsight view and relate to mitigation. On the issue of mitigation, where the steps were taken with the agreement and the knowledge of the defendants, who made no attempt to alter them, who let the plaintiffs do as best they could, it is not then open to the defendants to go in after the indemnity period and criticise the steps taken.
There are also inconsistencies, for example, at p. 3 of the judgment (Book 3), the extract cited is:
“I find, however, that the effort to attribute the down-turn which took place in sales and profits for the financial year 1987/88 to the fire and its consequences is wholly without foundation.”
Yet, at p. 7 of the same Book 3 of the judgment, and not cited by the defendants, the learned trial judge held:
“To conclude this part of my judgment, I find that the inability of Superwood to trade profitably during the financial year 1987/88 was brought about by a multiplicity of causes – one of the contributory causes being the unfortunate destruction of the storage building at Bray with the contents therein on the 26th October, 1987.”
These findings are clearly inconsistent.
Once again, there is reference to the production capacity of the company. Yet there is no finding of the necessary intent to prove fraud. Extract 62 recites in relation to the production capacity:
“. . . the hoped-for production of . . .”
Such a finding clearly does not lead inexorably to fraud.
The finding of “actual deception” in the production records relating to down-time is considered later in this judgment. In view of my findings thereon, I am satisfied that the learned trial judge erred in concluding that the down-time particulars were deliberately deleted.
Further, as set out elsewhere, even if the learned trial judge had credible evidence to find the facts he does in relation to the use of Johnston’s warehouse, it is incorrect and inconsistent to infer therefrom that there was a deliberate withholding of evidence as the High Court found that the use of Johnston’s warehouse was a mitigating factor and criticised only that it could have been utilized in a more organised fashion.
Mr. Salafia, on behalf of the plaintiffs, made submissions on each and every of the 69 extracts, which I accept. In general, the extracts were not relevant to the issue of fraud, dealt with mitigation with an improper hindsight view, pointed to the “hoped for” or optimistic figures of the plaintiffs, but were not grounds expressly or by implication proving the fraud pleaded by the plaintiffs.
Further, even if there was credible evidence for the 69 findings, they are not findings that lead on inexorably to fraud. The learned trial judge erred in law in so holding.
Counsel for the defendants argued that the said 69 extracts from the judgment were not to be assessed as individual items but rather as establishing a pattern of fraud. That they were not to be considered in isolation but to be considered together. However, it is necessary to analyse the particularity of the findings to establish the facts found to see if there are general grounds for the inference of fraud. Taking the items individually they do not so infer, nor when putting them together do they prove or infer a pattern of fraud. They show a mosaic of optimism, hope, shambles, illusion, chaos, growth – not deception.
The learned trial judge held that a claim for compensation was put forward which was far in excess of the real loss sustained by the plaintiffs. Yet, he never assessed the real loss of the plaintiffs. The absence of such a determination by the High Court creates difficulties.
The only figures before the court are those of the parties. The plaintiffs claim approximately £2 million while the defendants deny any liability on the ground of fraud by way of exaggeration on their figure which was £131,465.00. It is the large discrepancy between these two figures that gave rise to the claim of exaggeration. In considering the figures of the plaintiffs and defendants there are two apparent reasons for the divergence on quantum.
Reasons for divergence on quantum
In analysing the claim two matters lie at the heart of the discrepancy between the figures posed by the plaintiffs and those of the defendants. First, there is the question of the length of the disruption to the business caused by the fire. Secondly, there is the question of the projections in the prospectus.
(a) The length of the disruption
The plaintiffs claimed that the disruption ran for the year of the indemnity. The defendants claimed the business was disrupted because of the fire for only 3 to 5 weeks.
The High Court made no express finding as to the length of disruption that existed due to the fire and its effect on the consequential loss claim. While a finding was made that there was loss, and that the fire was a contributory cause, the exact length of time of the disruption due to the fire was not determined. Yet it is a critical fact. On the question of the length of the disruption, if the length of time in which the plaintiffs’ suffered disruption was not in dispute and one extrapolated the figures of both sides, the difference in the sums would not be excessive.
In considering the length of disruption caused by the fire, it can be assessed in two areas very clearly. The two major ways in which the plaintiffs mitigated loss after the fire and following discussion with the defendants, were:
(a) rebuilding the burned out building in the same location, and,
(b) importing granulated material.
Both of these features continued longer than 3 to 5 weeks. The importing of the granulated material continued until May, 1988, and the building was not completed within the 52 week indemnity period. Further, utilization of the company’s capital to buy granulated material continued for approximately six months. This had an effect on the company. No quantum was placed on this consequential diversion of finance. Also, the additional burden on management and the production process caused by the fire so as to enable them to meet orders while at the same time deal with the problems caused by the fire continued for some time. No decision was made on these issues either. Therefore, there was prima facie evidence, which was not controverted, of loss continuing after the period of 3 to 5 weeks.
Further, the discrepancy as to the duration of the disruption was as between experts on behalf of the plaintiffs and the defendants. Mr. Davies, on behalf of the plaintiffs, stated on day 51 of the trial in answer to question 87 in relation to the 3 to 5 week cut-off:
“It is beyond comprehension how it could possibly finish on the 31st December, 1987, There is no rhyme, reason or otherwise to that contention of Mr. Tyrrell, in my opinion.”
He continued, in answer to question 88:
“There was no building erected to do the sorting after that date, the sales were affected, mixing affected, and I think evidence has been given right throughout this case the fact that the indemnity period did not finish at 31st December, 1987, it could not possibly have with all the problems in March/April/May/June – there was no building available and towards the end of the indemnity period there was no money available so how one could draw the line at that date in my opinion is just beyond comprehension.”
Without evidence of a lack of honest belief, and in the absence of a determination on the issue of honest belief, this difference of opinion between experts is not a matter upon which to ground fraud.
In addition, in this case, there was a professional accountants clause. The claim for the plaintiffs was drawn up by Mr. Davies, who believed in it, and who was held to be an honest man by the learned trial judge. If Mr. Davies was the “mind” of the company on this issue he was not fraudulent. Thus, the figures of the plaintiffs on the length of the disruption areprima facie valid. The burden was then on the defendants to discharge the onus of proof of their allegation of fraud.
(b) Projections in the Prospectus
The second major reason for the substantial difference between the figures of the plaintiffs and those of the plaintiffs was the projections in the prospectus.
The plaintiffs’ case was that these figures, which were created for the prospectus in 1987, and were the basis of the insurance claim in 1988, were correct. The defendants, on the other hand, submitted that while they may have been honestly believed in when the prospectus was launched in 1987 that was not so in November, 1988 and it was fraudulent to have them as the basis for the claim in November, 1988.
The learned trial judge accepted that the plaintiffs suffered loss during the year, and that one of the causes for the loss was the fire; he never determined what the loss was, nor decided by what degree the loss in the year in question was attributable to the fire. Having found that there was a loss, and that it continued during the year, and that it was in part caused by the fire, the matter was left.
The learned trial judge found that the projections in the prospectus for the home market were valid. Thus, the figures, the basis for the fraud claimed, were solely the projections in the prospectus for the U.K. market. Those figures were found by the same methodology as for the home market projections. They were compiled by personnel who believed in them. While they represented a large increase in projected business it was from a very small base. It was, thus, the U.K. figures alone which, rendered the quantum fraudulent according to this analysis. There is no specific finding that the plaintiffs believed in the figures for the Irish market and not for the U.K. market. A single U.K. local authority contract could have fulfilled all the U.K. market projections. Indeed, all the evidence is that the experts believed in the entire figures, and the learned trial judge specifically held that they were honest men and thus inferred that they honestly believed in the figures.
There was no credible evidence to support a case that the plaintiffs had an honest belief in the projections for Ireland, but did not believe in the projections for the U.K. market. No finding was made as to when the belief in the projected figures as a whole or for the U.K. in particular became dishonest. The finding was, and the submissions on behalf of the defendants were, that the entire claim was fraudulent.
There is no claim or finding that the prospectus was not an honest document when published. The submission is that by the time the plaintiffs made this claim, and the manner in which they made it, was such as to make it fraudulent to rely on the projections in the prospectus.
The learned trial judge does not find when the plaintiffs’ state of mind as to the projections in the prospectus were such as to ground a finding of fraud. There is, thus, an absence of findings of fact necessary in law. It not having been determined that the prospectus was fraudulent per se, it was necessary to determine when reliance on those figures, as a basis for the claim, was fraudulent, and by whom this dishonest belief was held. This was not done.
Deceit
As regards “intent” the learned trial judge found deceit in two main areas:
(a) in relation to the renting of storage space at Johnston’s warehouse, and
(b) in relation to the photocopying of certain documents relating to “down-time”.
(a) There was conflicting evidence as to the use of, and the information given as to the use of, Johnston’s warehouse by the plaintiffs. This conflict runs throughout the judgment. On the one hand, the Court finds an absence of information being given to the defendants on this issue in the indemnity period. Yet, the High Court found that in relation to the claim submitted on the 24th November, 1988, wherein there was a claim for just over £10,000 for the renting of the said warehouse, such step was held to be a good action to mitigate loss. The High Court’s criticism was that it should have been managed more efficiently. That bundle of facts is not a finding from which an inference of fraud may be drawn.
(b) The second specific area of deceit found was in relation to the photocopying of the work sheets with the down-time omitted. There was no evidence that this was done by Mr. Bunyan or on his express orders. There was no identification of the “mind” behind these acts. The probability is that it was Mr. Lyons. There was no evidence that he had any dishonest intent.
These two findings on their own are not sufficient evidence from which to infer “fraud” by the plaintiffs.
Mind of Mr. Bunyan
The learned trial judge did not specify the personnel who was or were the mind of the company for the fraud alleged. However, I am satisfied from reading the judgment that it is reasonable to infer that the learned trial judge considered the relevant person to be Mr. Bunyan. This raises the problem that the finding by the learned trial judge specifically on Mr. Bunyan was that he was “unreliable as a witness”. Even if there was credible evidence for such a finding it does not lead inexorably to fraud.
It was the plaintiffs’ case that they, and so Mr. Bunyan, believed in the projections at the time they were launched in the prospectus and that the sole reason for their not being attained was the fire. This, they submitted, was the honest belief of Mr. Bunyan. However, Mr. Bunyan was never asked as to his honest belief in the projections. It was never put to him directly, and he was not challenged on it. The entire issue was dealt with on circumstantial evidence despite the fact that Mr. Bunyan was in the witness box for 35 days.
Mr. Davies stated that the cause of the loss was the fire. He was specifically found by the learned trial judge to be an honest man. Even if, as argued by the counsel for the defendants, he had not seen certain relevant documents, he was a professional person acting on behalf of the plaintiffs, who had made his own inquiries and who was found to be an honest man by the learned trial judge. Thus, his honest belief cannot be in issue. If he was the relevant directing mind, there was no fraud.
Taking this evidence alongside the absence of any cross-examination of Mr. Bunyan on his belief, and the finding of the learned trial judge that Mr. Bunyan was unreliable, and the absence of any specific finding that Mr. Bunyan had a fraudulent intent, I am satisfied that the evidence does not lead to an inexorable or indeed any conclusion of fraudulent intent by Mr. Bunyan. A reasonable man in the position of Mr. Bunyan might well believe what he stated he believed, and consider the representation true. If Mr. Bunyan was the “mind” of the company on this issue, as he did not have the necessary intent, there was no credible evidence upon which to find the vital proof for the determination of fraud.
There was, in fact, uncontroverted evidence of genuine belief in Superwood by Mr. Bunyan, Mr. Davies, Mr. Lyons in his area of control (Production Director, Superwood Ltd.), Mr. Doran in his area of control (Sales Manager, Superwood Ltd.), Mr. Morris (Operations Director, Superwood (U.K.) Ltd.), Mr. Williams (Sales Manager, Superwood (U.K.) Ltd. to June 1988) and Mr. Gordon (Sales Manager, Superwood (U.K.) Ltd. from June 1988).
Format of High Court judgment
The fact that the judgment on fraud was in a 2 page addendum judgment given by reference to the judgment on condition 4, and with an absence of specific analysis of the fraud involved, causes difficulty. Neither the real loss nor the degree of exaggeration is specified. While it may be that in certain cases the real loss and the disparity between that and the loss claimed need not be precisely determined the parameters of the true loss should be established.
As the claim is based on the projections in the prospectus and the High Court finds that the loss is exaggerated fraudulently a kernel issue is the mens rea. The judgment determines that the findings of fact as to condition 4 lead on inexorably to a finding of fraud. I am not satisfied that this is so – especially when neither the real loss, nor the level of the exaggerated loss, nor the intent of the plaintiffs, are specifically determined.
It is not necessary for this Court to determine whether there was credible evidence upon which the learned High Court Judge could infer that there was a dishonest belief by Mr. Bunyan, or any other person, as that determination was not made by the High Court. That being the case, the absence of a specific finding of the intent required by law, then the findings of fact would not lead inexorably to a finding of fraud.
The specific ground of fraud at issue in this case is whether there was exaggeration of the claim – other issues not specifically pleaded may not be grounds for a finding of fraud. Thus, obstruction, absence of provision of information, are not grounds upon which to base fraud in this case. Circumstances can be such as to infer support for the basic fraud pleaded but they cannot be a new ground of fraud. The learned trial judge held in support of the exaggeration claim that:
“. . . the plaintiffs did everything in their power to prevent the defendants from carrying out a proper investigation of the loss. They deliberately concealed from the defendants information which was in their possession or procurement which was relevant to the claim and which was repeatedly sought by the defendants’ representatives, notably in relation to the trading history of the plaintiff, the research carried out with regard to the potential market for their products in Ireland, and the United Kingdom; the production capacity of the plaintiffs; their books of account and other trading records; the arrangements made for alternative storage while the premises destroyed by fire were being rebuilt. They also deliberately misrepresented the true position in relation to a number of these matters.”
These findings are not directly on the issue of exaggeration. While inferences may be drawn, the basic claim must be proved. Reasonable inferences from the above without other specific findings on intent and quantum do not inexorably lead to a finding of fraud.
Information not furnished
In reality, the defendants founded their claim of fraud by way of exaggeration on the generalised claim that the plaintiffs would not furnish information reasonably sought by the defendants and that that proved the fraud. Counsel for the defendants furnished the court with a careful list of the information reasonably sought of the plaintiffs and withheld by them. I have considered this list, and the other evidence, in the light of the claim of fraud. None of it leads inexorably to prove fraud.
This generalised approach is also found at the end of the judgment where it is stated:
“I find that numerous breaches of condition 5 of the policies were committed by the plaintiffs in putting forward a claim which was fraudulent in many respects, as outlined already in the findings of fact which I have made in relation to the claim, and the action must be dismissed on this ground also, in addition to the ground already referred to in the judgment delivered on the 13th, 14th and 15th August, 1991.”
In fact, the learned trial judge found no breaches of condition 5. He erred in deciding first the issue of condition 4. He further erred in making a generalised conclusion that his findings on condition 4 led on inexorably to a finding of fraud. The issues in relation to both conditions are entirely different. The proofs required are different. And, further, there is the fact that the defendants had repudiated the contract on the sole ground of fraud by way of exaggeration, which repudiation has a consequence.
Void ab initio
The effect of repudiation of the contract by the defendants on the grounds of fraud was to render it void. The contract ceased to exist. The specific claim of fraud also meant that the issues in contention could not be arbitrated: see s. 39 of the Arbitration Act, 1954.
A void contract may not be enforced. Thus, if fraud was proved, the plaintiffs would have no rights under the contract. Having pleaded a void contract, the defendants could not then rely on a clause of the contract which they had repudiated.
Conclusion on fraud
(1) The High Court made no express finding of fraudulent intent.
(2) The High Court identified no person in the plaintiff companies expressly as having made a false misrepresentation in the statement of claim to the defendants.
(3) The High Court inferred fraud from circumstantial evidence. The nature of fraud is such that it is very difficult to prove dishonest intent directly, proof by way of circumstantial evidence in fraud cases is not uncommon. However, here this Court is asked to make a double inference. First, to find that it was reasonable to infer a fraudulent intent from the circumstantial evidence; and secondly, such intent not being expressly found, then to infer that the necessary intent was found in the judgment of the High Court. This double inference is contrary to the fundamental rule of particularity necessary in fraud cases.
(4) The learned trial judge did not expressly identify any person or persons as being the relevant directing mind or minds of the plaintiffs.
(5) It is reasonable to infer that Mr. Bunyan was the relevant directing mind, person in control, of many of the specific matters in issue.
(6) There was no express finding that Mr. Bunyan had a fraudulent intent. There was no finding that he acted fraudulently either knowingly or recklessly or without a belief in the truth of the claim.
(7) Mr Bunyan was not cross-examined as to his honest belief in the claim.
(8) The express finding as to Mr. Bunyan’s standing was that he was unreliable as a witness.
(9) The learned trial judge made express findings of honesty of the professional advisers to the plaintiffs. Most importantly Mr Davies when examined expressly stated his belief that the losses were due to the fire.
(10) The learned trial judge stated in his conclusions that it was the task of the court to assess the extent to which the fire damage contributed to the overall loss. However, he did not do this.
(11) The learned trial judge did not assess the overall loss nor did he assess the extent to which the fire contributed to that loss, other than concluding that it was a contributing factor.
(12) Specific findings of deceit by the learned trial judge were:
(a) the absence of the third column in the sheets relating to down time (a matter not under Mr. Bunyan’s control), and
(b) the Johnstons’ warehouse situation, which was determined to be a good mitigating factor by the plaintiffs.
Fraud does not flow inexorably on those findings of fact.
(13) I have already dealt with the 69 extracts from the judgment upon which the defendants submitted a conclusion of fraud flows inexorably and have found that not to be the case.
(14) The learned trial judge found no specific breach of condition 5.
(15) Thus, the appeal succeeds on the issue of condition 5.
(16) That being so, the repudiation was invalid and the contract is not void.
(17) That being so the policy is extant.
(18) That being so the appeal must succeed on this ground.
Condition 4
Even though:
(a) no letter was sent to the plaintiffs putting them on notice of breaches of condition 4,
(b) a breach of condition 4 was not pleaded by the defendants,
(c) there was no application to amend the pleadings by the defendants,
in the circumstances of this case, and to prevent further possibly lengthy litigation, I consider it is appropriate to make a determination on condition 4.
Paragraph 2 of the defence states:
“It was a condition precedent of the said policies that the first, second, third and fourth plaintiffs shall give all such information as may be reasonably required by the defendants for the purpose of investigating and verifying the claim of the said plaintiffs.”
However, breach of condition 4 was not pleaded, nor was there any attempt to amend the pleadings. That being so, I am satisfied that the plaintiffs’ case would succeed on this pleading ground alone. However, in the circumstances and for the reasons set out previously herein, it is appropriate to make a determination on the issue of condition 4.
Election/waiver
The defendants having repudiated the contract and thus declared it to be void, could they at the same time maintain a case grounded on the agreement i.e. condition 4? Must they under law elect either to repudiate the contract or to rely on the contract? Does their decision to repudiate the contract waive their right to rely on the contract?
I am satisfied that the defendants having elected to repudiate the contract and thus refused to the plaintiffs the benefit of the contract, and further the fact that the ground of the repudiation was fraud and that this claim in this way denied the plaintiffs the right to arbitration on the issue, it would be, and was, entirely unfair to the plaintiffs to enable the defendants at the same time to rely on the agreement i.e., condition 4. They had a right to elect, and having made that election, and not pleaded otherwise, must stand or fall on the issue of fraud.
However, in this case, because of the success of the plaintiffs on the issue of fraud, and in the circumstances, it is appropriate to make a decision on condition 4.
Estoppel
Halsbury, (4th Ed.), Vol. 16, para. 955 states:
“Where a person has by words or conduct made to another a clear and unequivocal representation of fact, either with knowledge of its falsehood or with the intention that it should be acted upon, or has so conducted himself that another would, as a reasonable person, understand that a certain representation of fact was intended to be acted upon, and the other person has acted upon such representation and thereby altered his position to his prejudice, an estoppel arises against the party who made the representation, and he is not allowed to aver that the fact is otherwise than he represented it to be.”
Applying that concept to the absence of notice of the alleged breach of condition 4, the absence of a pleading of a breach of condition 4, the absence of any application to amend the pleadings, and the fact that by pleading the fraud the defendants had denied to the plaintiffs the arbitration process, I am satisfied that the defendants are estopped from pleading condition 4. This approach is fundamentally a matter of fair procedures – constitutional justice. However, for the reasons stated previously, I am satisfied that it is appropriate to give a decision on the issue of condition 4.
Interpretation of condition 4
The plaintiffs contend that condition 4 does not apply until a written claim has been made under the policy; i.e., in this case on the 24th November, 1988. The defendants, on the other hand, contend that its terms apply earlier, either from the event i.e., the fire on the 26th October, 1987, or from when there was any claim for loss, even if it was an interim claim.
The initial words of the condition are:
“On the happening of any damage in consequence of which a claim is or may be made under this policy the Insured shall forthwith give notice thereof in writing to the first named of the Insurers . . .”
Thus, the insured were required on the happening of the fire to give appropriate notice immediately. This was done. There is no contest on this issue. In fact meetings were held on site the next day.
The condition continues:
“. . . and shall with due diligence do and concur in doing and permit to be done all things which may be reasonably practicable to minimise or check any interruption of or interference with the business or to avoid or diminish the loss . . .”
Thus, there must be mitigation of loss by the insured. The plaintiffs took two major and expensive decisions to mitigate loss, which were taken with the knowledge of the insurers, and were (a) to rebuild the building lost by fire, on site, as fast as possible; and (b) to import granulated material to enable the manufacturing process to be sustained.
The condition continues:
“. . . and in the event of a claim being made under this policy shall not later than thirty days after the expiry of the indemnity period or within such further time as the Insurers may in writing allow, at his own expense deliver to the Insurers in writing a statement setting forth particulars of his claim together with details of all other insurances covering the damage or any part of it or consequential loss of any kind resulting therefrom.”
This means that if there is a claim under the policy, then not later than 30 days after the expiry of the indemnity period (which in this case was 52 weeks), or such other time as the insurers allow, the insured at his own expense must deliver to the insurers a statement of claim in writing setting forth the particulars of his claim including consequential loss. In this case the plaintiffs submitted a statement of claim in writing on the 24th November, 1988, i.e., within the permitted time.
The condition then continues to a sentence critical to this case, which states:
“The Insured shall at his own expense also produce and furnish to the Insurers such books of account and other business books, vouchers, invoices, balance sheets and other documents, proofs, information, explanation and other evidence as may reasonably be required by the Insurers for the purpose of investigating or verifying the claimtogether with (if demanded) a statutory declaration of the truth of the claim and of any matters connected therewith.” (Emphasis added)
I am satisfied that this sentence, coming where it does in the condition and giving to it the ordinary meaning of words, is clear. The insured must, at his own expense, as well as providing the statement of claim in writing, also provide books of account, and other matters as set out in the condition reasonably required by the insurers. These items are to be furnished relative to the written statement of claim and thus they occur either with the statement of claim or thereafter. They are ancillary to the statement of claim and, therefore, either accompany or follow that claim.
The word “also” italicized in the above quoted sentence makes the listed items an addendum to the statement of claim required in the previous sentence. They are not items required prior to the statement of claim but also with or after the statement of claim. The claim cannot be made by the insured until he knows the damage and assesses it. In the instance of a consequential loss claim with an indemnity period of 52 weeks where the plaintiffs make the case that the consequential loss runs throughout the 52 weeks they could not, and did not, in this case, make their full formal statement of claim until the 52 weeks had run. At that stage they can, and did here, make the statement of claim.
The condition requires, that the insured must provide to the insurer all books of account, etc., as are reasonably required by the insurer for the purpose of investigating or verifying the claim. The insurer is entitled to make reasonable requests for documents supporting the claim so as to investigate or verify the claim after the statement of claim. In this case, after the statement of claim was sent by the plaintiffs, the defendants requested information, which I shall refer to as “the 44 points”. There were written and oral requests for information, exchanges of documents, and meetings, which were held largely in January, 1989.
There was no reference to condition 4 in correspondence by the defendants. There were requests for information, etc. The bad feeling which had developed between the parties was in evidence. The animosity was not one-sided. However, the defendants did not write to the plaintiffs at any stage declaring the contract void on the grounds of non-compliance with condition 4.
The final sentence in condition 4 states:
“No claim under this policy shall be payable unless the terms of this condition have been complied with and in the event of noncompliance therewith in any respect any payment on account of the claim already made shall be repaid to the insurers forthwith.”
This sentence contemplates that there will be payments on account when the terms of the condition have not yet been met. It provides that if such payments are made they must be repaid if condition 4 is not complied with. Consequently it envisages interim payments prior to compliance with condition 4.
Application of condition 4 to this case
Applying the above interpretation to the facts of this case, I conclude as follows. The plaintiffs gave immediate notice of the damage. They took steps to mitigate loss, which steps were known to the defendants. They made a written statement of claim within the time required. The defendants sought information. The plaintiffs furnished information to the defendants. There were no interim payments. The plaintiffs were given no warning that it was alleged that they were in breach of condition 4, nor of the consequences that would follow such a breach.
The issue is whether the plaintiffs breached the condition between the 24th November, 1988 and the 20th March, 1989, when the defendants repudiated the contract on the ground of fraud by reason of exaggeration of the claim. It is necessary to consider the facts during that time.
The learned trial judge erred in his interpretation of condition 4. This had an effect on his analysis of the facts. He did not address the claim as and from the making of the written claim on the 24th November, 1988 but rather stated at p. 122 of his judgment given on the 13th August, 1991:
“The claim under the consequential loss policy gradually emerged in disjointed bits and pieces of information.”
Further at p. 124, he stated:
“I find it very hard to determine, from reading the transcript and the correspondence, when exactly a claim for consequential loss was put forward in any manner which demanded a response from the loss adjusters or the insurers.”
This error, in seeking a completed claim early after the fire, rather than considering the statement of claim of the 24th November, 1988, clouded his analysis.
Interim payments
In this case, the issue of interim payments is not a relevant factor, except to note that they were not paid by the defendants to the plaintiffs. However, they were a critical matter for the plaintiffs during the 52 weeks of indemnity, when no interim payments were made by the defendants.
Statement of claim
As previously stated, and for the legal reasons set out, I am satisfied that condition 4 arises on the written claim of 24th November, 1988, and thus, the analysis in depth of meetings such as that of the 14th, 21st, 28th and 30th June, 1988, by the learned High Court Judge are in error and only of peripheral relevance to condition 4 and the consequential loss claim as a whole, although these meetings and both earlier and later ones were and are relevant to the issue of interim payments and losses.
In relation to the statement of claim of the plaintiffs to the defendants the learned trial judge held at p. 175:
“On the 24th November, 1988, a formal statement of claim prepared on behalf of the insured by Kinnear Owens Murray was submitted by them to the insurers under cover of a letter of that date from Kinnears and a further letter signed by Michael Flanagan as secretary for Superwood Holdings Plc.
The statement of claim was very much in line with the claim as it had been advanced by the insured and their loss assessors during the previous months – that is to say, it confined itself to putting forward the projected turnover figures for the indemnity period and the figures actually attained and claiming a rate of gross profit measured at 94.45% on the differential between the two figures, giving rise to a claimed consequential loss under paragraph (a) item (1) of the policy, of IR£1,446,139.
Under the heading of “increased cost of working” several details were given which had not been formulated previously, and the total amount claimed under that heading came to £644,840 including an estimated sum of £45,600 for additional wages.
One significant change in the consequential loss claim was the adoption of a figure of £5,225 as the claimed loss of turnover in respect of the period October 27-31, instead of the figure of £44,500 (being the differential for the entire month) which had previously been claimed. The figure claimed for November, however, had not been diminished but rather had increased from the figure of £116,971 found in Mr. Ballesty’s Interim Claim Data to the figure of £119,922.”
These then were the initial findings of the learned trial judge as to the statement of claim submitted by the plaintiffs. The statement of claim varied from the interim claims. He then stated:
“The parties were now more or less back to square one in the negotiation process, and Scully Tyrrell commenced by addressing a request for further information about the Statement of Claim to Kinnear Owens Murray on the 29th November, 1988.”
This illustrates the error of the learned trial judge. In fact, the negotiations as to the consequential loss claim now began – it was no longer simply a matter of investigation for the purpose of interim payments.
Events from November, 1988
The learned trial judge made no finding as to whether the events between the 24th November, 1988, and May, 1989, constituted a breach of condition 4. The judgment sets out the events between November, 1988, and May, 1989. There is reference to, inter alia:
(1) The correspondence from Scully Tyrrell to Kinnear Owens Murray on the 29th November, 1988, requesting information outstanding and then listing 14 further matters to be dealt with.
(2) Kinnear’s clear reply on the 9th December, 1988, refers to documents which could be inspected in their office.
(3) Scully Tyrrell’s letter on the 15th December, 1988, objects to being required to avail merely of a right of inspection, and comments on the replies given to their 14 queries.
(4) A long memo from Mr. Ballesty was not sent in reply, instead a short letter dated the 22nd December, 1988, stated:
“In view of the apparent refusal of the insurers to make an interim payment available to Superwood Ltd. and also the fact that it had been decided by the insured to submit a final statement of the full claim as soon as the auditors had completed the accounts for the year ended the 31st May, you will understand it was pointless continuing correspondence on information that had been produced on a provisional and frequently ad hoc basis.”
(5) Mr. Ballesty telephoned Mr. Tyrrell to arrange a meeting but it was left over until after Christmas.
(6) Mr. Burke, solicitor for Superwood, telephoned Mr. Tyrrell on the 22nd December to inform him that he wanted to serve a writ on him, and he did so that day, and on his partner. It was a claim at the suit of Superwood Ltd. and was for damages for professional negligence.
(7) Mr. Ballesty, for the plaintiffs, again asked Mr. Tyrrell to spell out the outstanding requirements for information which remained unanswered, Mr. Tyrrell responded by letter of the 29th December, 1988, enumerating 42 points to be dealt with. He indicated that he and Mr. Sleater would attend at Kinnears’ offices and meetings.
(8) There were disagreements, Mr. Tyrrell originally requiring the information to be furnished to them, which was not acceptable to Mr. Bunyan. In fact, Mr. Tyrrell relented and did not require physical possession of the information. This involved Mr. Tyrrell and Mr. Sleater spending lengthy times at Mr. Davies’ office in January, 1989 and as the learned trial judge found:
“. . . laboriously writing out or dictating information gleaned by them from the massive amount of documentation which had to be analysed.”
(9) The first meeting of 1989 took place in Kinnears’ offices on the 4th January, 1989, and was attended by Mr. Davies, Mr. Britton and Mr. Cashell of Kinnears; Mr. Ballesty and Mr. McNulty of Balcombes; Mr. Governey and Mr. O’Doherty of Coyle Hamilton; Mr. Tyrrell and Mr. Sleater of Scully Tyrrell.
(10) At that meeting on the 4th January, 1989, Mr. Ballesty referred to the professional accountants clause in the policy, and its relevance. Mr. Tyrrell contended that the information emanating from the accountants was prima facie evidence only and did not preclude the insurers and their loss adjusters from seeking further substantiation. Mr. Davies appears to have agreed with the latter interpretation. Mr. Ballesty took a different view referring to text book opinion which said that:
“There will generally be little necessity for the insurers or the adjuster appointed by them to carry out a detailed investigation of the insured’s books and records.”
(11) Thus there were disagreements at the meeting on the 4th January, 1989, but it did examine the 42 points which had been put forward in Mr. Tyrrell’s letter of the 29th December, 1988.
(12) Scully Tyrrell were given copies of the audited accounts and balance sheets of the three companies in the group covered by the insurance policies, with a stipulation that all other documentation was to be perused at Kinnears’ office.
(13) After inquiries by the loss adjusters of the figure of £45,600 for wages in the claim under “increased cost of working” the entire claim was withdrawn and in lieu thereof a credit of £25,000 was allowed being a savings in wages.
(14) As regards the (by now) 44 points from the defendants seeking information, Mr. Sleater was asked on Day 101, p. 10a:
“Q. Ultimately, isn’t it the position that all the market and budget information was in fact made available to you and Mr. Tyrrell at Kinnears in January, 1989?”
A. I don’t believe so – I don’t recall. In Kinnears’ office we were given information as far as they could produce it in relation to the 44 or so queries that were raised, but that didn’t include any additional information in relation to the projections or in relation to the computer print-outs.
We were given some details – another computer print-out in relation to the 1989 projections but no supporting documents to verify that information. We were still looking for the same information as on Day 1, something more substantial – market research, orders, indications from prospective customers that they were interested in the product, something more substantial than the total absence of information we had. I don’t know what existed – I’m not sure even now what exists . . . when we issued our report of the 10th February (1989) we had nothing more than sight of computer print-outs in relation to the projections . . .
During our meeting with Grant Thornton [Kinnear Owens Murray] after the claim was finally submitted they cooperated as fully as they could and provided us with information where they could provide it to answer the questions, but one of the points they couldn’t lend any more help on was the computer projections.”
(15) Mr. Cooke of Stokes Kennedy Crowley stated that in order to give a report to the insurers as to the reasonableness of the claim which was being put forward by the plaintiffs he would have to put a team into Superwood for about 3 weeks with full access to their records and books.
(16) Mr. Bunyan indicated that it could not proceed until there was a payment on account.
Correspondence
There was a lengthy correspondence between the parties on the information issue during December, 1988, and January, 1989. In a letter dated the 29th December, 1988, from Scully Tyrrell and Co. to Mr. P.A. Ballesty of Balcombes it is stated, inter alia:
“We were convinced that we had made our requirements quite clear in the previous correspondence with you and are surprised that we should now be asked ‘to add to the 14 itemised any further information which you require under the provisions of the policy claims condition No. 4′. Nevertheless, we have re-examined our files of papers and set out hereunder a statement of the information required in addition to the 14 points listed in our letters of the 29th November and the 15th December to Kinnear Owens Murray.”
The letter listed items number 15 to 42 inclusive, seeking information, and thereafter stated:
“We will not be able to complete our evaluation of the claim until we receive full and detailed replies to our requests for information as set out herein and in our correspondence with Kinnears. Indeed, our requirements may not be limited to those which we have specified and we reserve on behalf of our principals the right to make further requests for information as may be considered necessary to complete our appraisal of the claim.”
The said letter confirms in conclusion:
“In conclusion, we confirm that Mr. Tyrrell and Mr. Sleater would be prepared to attend at Kinnears’ offices for the purpose of discussing our requirements, clarifying any points which may arise in connection therewith and perusing/noting any documentation which may be produced.”
On the 9th January, 1989, Balcombes wrote to J.M. Tyrrell of Scully Tyrrell stating:
“We thank you for attending at the offices of Kinnear Owens Murray and confirm the following based upon your letters dated the 15th December and the 29th December by reference to the paragraphs as identified by the numbering system used by you.”
The 42 items were then dealt with chronologically.
On the 10th January, 1989, Scully Tyrrell wrote to Mr. Ballesty of Balcombes acknowledging the letter of the 9th January and stated:
“We will write to you in detail when we have completed our perusal of the documentation available at Kinnear Owens Murray and have had time to analyse it in detail. Meanwhile we would like to place it on record that there are a number of statements in your letter with which we are not in agreement.”
The letter then went on to deal with the involvement of Mr. Noel Cooke of Stokes Kennedy Crowley.
By letter dated the 10th January, 1989, Mr. Ballesty wrote to Mr. Tyrrell stating, inter alia:
“Thank you for your letter dated the 10th January.
Please advise us immediately the statements with which you are not in agreement and let us have your views so that we can reconcile any disagreements that you feel exist.”
The letter then considered the position of Mr. Cooke of Stokes Kennedy Crowley and the professional accountants clause. It stated:
“So far as the professional accountants clause is concerned we confirm that we agreed that we would anticipate that loss adjusters acting on behalf of insurers might seek further information that would be reasonable. This of course must take account of the purpose of the professional accountants clause as outlined on page 9 of our letter dated the 9th January.
In conclusion we confirm that the insured have no objection to Mr. Cooke’s presence on the 12th January and/or his becoming involved in subsequent meetings on the understanding that your principal’s instructions are that he will report to them.
In the meantime we take it that the meeting arranged with Mr. Sleater on both his and your behalf will take place tomorrow morning at 10.00 a.m. (11th).”
On the 12th January, 1989, Scully Tyrrell wrote to Mr. Ballesty (further to their letter of the 29th December, 1988, and the meeting on the 11th) stating:
“. . . we shall be obliged if you will add the following to our list of requirements:
43. Sight of all purchase invoices in respect of materials used in the manufacturing process for the financial year the 1st June, 1987, to the 31st May, 1988, and a certified list of such purchases drawn up by Kinnear Owens Murray and reconciled against the purchases shown in the audited accounts for the year ended the 31st May, 1988.
44. Sight of all purchase invoices (as above) for the period the 1st June, 1988, to the 30th November, 1988, and a certified list of such purchases drawn up by Kinnear Owens Murray, i.e. a list which will reconcile in due course with the purchases in the interim accounts for the same period.
Please let us have this information as soon as possible.”
On the 24th January, 1989, Mr. Ballesty wrote to Scully Tyrrell asking if the insurers were prepared to make available a payment on account following Mr. Cooke’s preliminary report to Sun Alliance.
On the 25th January, Scully Tyrrell wrote back to Mr. Ballesty:
“We are in receipt of your letter of the 24th January with enclosures.
As you have already been advised, we need additional information as stated in our letter of the 12th January (items 43 and 44, as slightly modified at the meeting in Kinnears on the 12th January) before we will be in a position to complete our appraisal of the claim. We will not be in a position to make any recommendation to our principals until this information has been received and we have had an opportunity to analyse it. It is now almost two weeks since we requested the information.”
The letter of the 26th January, 1989, from Balcombes to Scully Tyrrell followed and stated, inter alia:
“We have been in touch with Kinnear Owens Murray regarding the information you requested in your letter of the 12th January items 43 and 44 following upon your earlier letters in December. We confirm that these additional requests by you as of the 12th January are being attended to by the auditors. You will of course appreciate that the auditors were committed to meetings with you during that week and also with Mr. Cooke of Stokes Kennedy Crowley during the following week.
We are extremely concerned to find that the lack of this further information belatedly requested by you should give rise to a delay on your part in submitting a report to underwriters.
We also confirm having requested from you at the close of the meeting on the 12th January a copy of a data sheet which you stated you had prepared which was comparable to a data sheet prepared by Mr. Cooke, which the writer understands showed that the insured had substantial volumes of finished stock in the order of £400,000 to £600,000. We were anxious to clarify what was clearly an erroneous assumption on your part particularly when we pointed out to you that the value of finished stocks at the time of the audit at the 31st May, 1988, was in the order of £20,000. As we explained to you we required a copy of your data sheet so that we could clarify and rectify the matter if there was an error so that it would not hold up the claim negotiation as between the principals but you will recall your vehement refusal to let the writer have a copy of the document when, as you put it, did the writer require your entire file? The writer most certainly does not require your entire file but was simply at pains to ensure that if there were any errors that they would be rectified.
We understand following the meetings with Mr. Cooke at Kinnear Owens Murray last week that Mr. Cooke would be providing a report to the Sun Alliance and Mr. Cooke was requested to communicate to the Sun Alliance a request for a payment on account pending completion of Mr. Cooke’s appraisal. You will understand that a policy holder cannot survive without the necessary cash flow for which insurance protection was arranged under his consequential loss policy and it would be unreasonable to expect the Insured to incur yet a further delay pending completion of Mr. Cooke’s appraisal without a commitment on the part of the Insurers.”
This letter shows the steps being taken by the insured to respond to inquiries No. 43 and No. 44; the correction of an error on a sheet comparable to a data sheet prepared by Mr. Cooke, and reference to a request for payment on account as such interim payment was the reason for the consequential loss policy in the first place.
On the 27th January, 1989, Scully Tyrrell replied, inter alia:
“We await the outstanding information and will not be in a position to prepare our definitive report until we have seen it and have had a chance to analyse it. Meanwhile, we have been keeping our principals abreast of developments.”
and
“It is now two weeks since we made our additional requests 43 and 44, which were really a re-statement of requests for information which we made at an earlier stage but omitted to repeat in our detailed letter to you dated the 29th December.”
On the 27th January, 1989, Kinnear Owens Murray wrote to Mr. Tyrrell of Scully Tyrrell:
“We confirm that the enclosed two schedules represent the purchases as requested as follows by you in your letter of the 12th January last.
(a) Summary of foreign raw material purchases from the 1st June, 1987, to the 25th October, 1987; and
(b) Summary of all raw material purchases from the 1st June, 1988, to the 25th October, 1988.”
Attached thereto were the two schedules.
On the 31st January, 1989, Balcombes wrote to Scully Tyrrell:
“We refer to our letter dated the 26th January regarding items 43 and 44, the two outstanding questions, we confirm that the relevant data was hand delivered to you on the following day Friday the 27th. Furthermore we confirm that an immediate meeting was arranged in the offices of Kinnear Owens Murray for yesterday Monday morning at 10.00 when the back up to the auditors report was made available to you.
Additionally in order to expedite your report to insurers facilities were provided for your inspection on the site at Bray and immediately with Mr. Albert Johnston of Johnston Haulage.
Reverting to your letter of the 27th January when you made a point about the unusual procedure of Mr. Cooke and the question of payment on account being discussed with the insurer we must advise that it appeared to us that Mr. Cooke appreciated that the lack of cash flow was a major problem for the insured and that a substantial payment on account would at least go some way towards alleviating the Insured’s current difficulties due to lack of cash flow for which insurance was effected in the first place.”
On the 7th February, 1989, Scully Tyrrell inform Mr. Ballesty of Balcombes:
“We are in receipt of your letter of the 2nd February and have noted your comments.
Our report has not yet been submitted and is in course of preparation.We informed your clients’ brokers on the 31st January that it would take us about ten days to prepare our detailed report. We are making good progress and would hope to have completed our reportby Friday next, the 10th February, or, at the latest, the Monday or Tuesday of next week. We would assure you that the report is engaging the writer’s almost undivided attention and would like to point out that it took you more than two weeks to provide information on the two additional points set out in our letter of 12th January.
We are not in a position to recommend a payment on account.” (Emphasis added).
Thus, there was no suggestion that a report could not be written nor that the plaintiffs were in breach of condition 4 so as to make a report impossible. There then followed the report of the 10th February, 1989. This report is critical to the whole issue between the parties. At p. 2 it is stated:
“This very detailed report, coupled with the earlier reports to which references are made, provides a comprehensive statement of our findings and would form an important point of reference in any legal proceedings which may ensue. Accordingly, we have tried to be as thorough and careful as possible in its preparation. We propose to deal in order with the 44 queries and to conclude with a brief summary of our findings.”
The 44 points were then considered chronologically. The document is a lengthy and thorough document. It concludes at p. 71 of the report:
“46.3 The whole loss under the Consequential Loss Policy would therefore have been £131,465 as follows:
IR£
(a) In respect of reduction in turnover
40,059
(b) In respect of increase in cost of working
91,406
131,465
46.4 It follows that we are of the opinion that the claim for over IR£2m. is exaggerated so excessively as to lead to the inference that it cannot have been made honestly but must have been intended to defraud insurers. In addition, we believe that there have been many false statements of fact, and concealment of information which we have identified in this report either directly or by reference to earlier reports and correspondence.”
The correspondence establishes clearly:
(a) Detailed exchanges between the parties in December, 1988, and January and February, 1989;
(b) Requests for information by the defendants;
(c) The furnishing of some information in detail by the plaintiffs;
(d) The request of the plaintiffs for interim payments;
(e) The refusal by the defendants of interim payments;
(f) The request that the report be completed;
(g) The statement by the defendants that the report was being compiled and would be completed speedily;
(h) The lack of any notice of a breach of condition 4;
(i) The lack of any indication that the report could not be completed because of absence of information;
(j) The absence of notice that if specific information was not furnished the contract would be repudiated.
Repudiation
On the 20th March, 1989, Sun Alliance wrote to Superwood Holdings plc repudiating liability under the contract of insurance on the grounds:
“We are of the opinion that the insured’s claim made the 24th November, 1988, on foot of the consequential loss policy No. 990F641234 is totally unfounded in that it grossly overstates and exaggerates the true value of loss of profits resulting from reduced turnover and increased cost of working of the business of the insured during the indemnity period.
In the circumstances the insurers must repudiate liability under the contract of insurance referred to hereinbefore.”
There was no reference to condition 4, or to a breach of condition 4, or to an inability to appraise the worth of the claim, which had been assessed on their behalf at £131,465.
Notice
At no stage were the plaintiffs put on notice of breach of condition 4. The clear tone of the letters is that the 44 points were addressed and a report written as a result thereof. There were determinations detrimental to the plaintiffs, for example,
(i) that the prospectus was misleading;
(ii) that the fire gave rise to some shortfall in production but that the period of interruption did not exceed three, perhaps four, weeks;
(iii) that the loss of gross profit was £40,059.
At no time were the plaintiffs warned that the contract would be unenforceable as a result of a breach of condition 4. None of the letters repudiating the contract do so on the grounds of condition 4.
The critical factors are:
(1) No indication in the letters that the claim will fail because of a breach by the plaintiffs of condition 4.
(2) No formal notice calling attention to condition 4.
(3) No letter setting out the information required and pointing out that if it is not produced or furnished that the insurers will treat the contract as unenforceable.
It is true that the contract of insurance does not formally require that such notice be given. However, it is a fundamental tenet of constitutional law and fair procedures that if a person’s position is to be detrimentally affected he should be placed on notice. Consequently, the plaintiffs would succeed on this ground alone in the absence of such notice.
Conclusion on condition 4
(1) I am satisfied that the case of the defendants relying on condition 4 was an afterthought, and not the kernel of their case. The kernel of the case is the question of fraud.
(2) The learned trial judge addressed the major part of his judgment to condition 4, responding to the confused and intertwined fashion whereby the case proceeded.
(3) The learned trial judge erred in law in construing condition 4 as applying prior to the statement of claim of the 24th November, 1988.
(4) The learned trial judge erred in law and in fact in holding that there had been a breach of condition 4.
(5) The learned trial judge did not address the question whether the plaintiffs had been in breach of condition 4 between the 24th November, 1988, and the repudiation of the contract.
(6) On the evidence of the events between the 24th November, 1988, and the repudiation of the contract (on the ground of fraud) it could not be inferred reasonably that condition 4 had been breached during that period. The last letters on behalf of the defendants are written in a tone of preparation for a definitive report – that good progress was being made toward that end.
(7) The plaintiffs were given no formal notice of any breach of condition 4. This is a requirement as a matter of fair procedures.
(8) Further, it was not open to the learned trial judge to adjudicate on a breach of condition 4 as that had not been pleaded, and there was no application to amend the pleadings by the defendants.
(9) Further, it was not open to the learned trial judge to adjudicate on condition 4 as the defendants had repudiated the contract. The defendants having repudiated the contract in the circumstances, they could not, thus, rely on a clause of that contract.
(10) There being no breach of condition 4, the defendants cannot deny liability on this ground. Thus, on the defendants’ report from Scully Tyrrell of the 10th February, 1989, alone, the plaintiffs are entitled to £131,465, being the determined consequential loss occurring in the immediate aftermath of the fire.
Therefore the appeal must succeed on the ground of condition 4 also. My determination on condition 4 being contrary to that of the learned High Court Judge, means that the basis of his finding on the facts regarding condition 4 “leading on inexorably to a finding of fraud” as against the plaintiffs, is swept aside for the purpose of the issue of fraud, even before the specific concept of fraud is considered.
Conclusions on the appeal
I am in agreement with the judgment of Blayney J. In accordance with that judgment and for the reasons set out in this judgment, I am satisfied that the plaintiffs’ appeal succeeds both on the grounds relating to condition 5 and to condition 4. I remit the case to the High Court to determine what the losses were arising after the fire and what percentage of those losses were attributable to the fire; and such other matters as are relevant and in issue.
Blayney J. 374
S.C.
The facts of the case have been set out in great detail in the judgment of Denham J. and it is not necessary for me to repeat them. I propose to confine my judgment to expressing my reasons for agreeing with Denham J. on the conclusions she reached in regard to both conditions.
Condition No. 5
This condition is in the following terms.
“If the claim be in any respect fraudulent or if any fraudulent means or devices be used by the insured or anyone acting on his behalf to obtain any benefit under this policy or if any damage be occasioned by the wilful act or with the connivance of the insured, all benefit under this policy shall be forfeited.”
In the light of how matters developed, the only part of this condition which is relevant is the first phrase – “If the claim be in any respect fraudulent”, and the final phrase, “all benefits under this policy shall be forfeited.”
On the 20th March, 1989, the Sun Alliance wrote to the first appellant stating that the insurance companies must repudiate liability under the policy on the ground that the plaintiffs’ claim made on the 24th November, 1988, was totally unfounded “in that it grossly overstates and exaggerates the true value of loss of profits resulting from reduced turnover and increased cost of working of the business of the insured during the indemnity period.”
This was followed by two letters from the defendants’ solicitors of the 11th and 13th April, 1989, in which they stated that for the avoidance of doubt their clients repudiated liability on the grounds that the claim was fraudulent.
The plaintiffs then instituted the present proceedings and the defendants, in their defence, pleaded that the plaintiffs did make and deliver on the 24th November, 1988 “a fraudulent claim or a claim exaggerated so excessively as to lead to the inference that it could not have been made honestly.” The defendants pleaded in addition that in the premises the policies became and were void or alternatively became voidable and had been avoided by the defendants by their letters dated the 20th March 1989.
The learned trial judge’s finding in favour of the defendants on this issue was expressed as follows:
“In my judgment the findings of fact which I have already made lead on inexorably to a finding of fraud against the plaintiffs. A claim for compensation under the relevant policies was put forward which was, in my opinion, far in excess of the real loss sustained by the plaintiffs for which they were entitled to claim under their consequential loss policies.”
His finding in effect was that the amount claimed by the plaintiffs was so exaggerated that this, coupled with the other findings of fact he had made, entitled him to draw the inference that the claim was fraudulent.
But exaggeration is not conclusive evidence of fraud. In London Assurance Co. v. Clare (1937) 57 Lloyds L.R. 254, Goddard J., in his charge to the jury, said:
“Mere exaggeration was not conclusive evidence of fraud for a man might honestly have an exaggerated idea of the value of the stock, or suggest a high figure as a bargaining price.”
Similarly, in the present case, there could have been a genuine belief on the part of the plaintiffs that the entire of the loss which they had sustained during the indemnity period had been caused by the fire.
In their submissions to the Court, the defendants recognised that this question of whether the plaintiffs believed that the entire loss had been caused by the fire was the core issue on the question of fraud. They submitted that the essential fraud on the part of the plaintiffs was that they claimed that all the loss that they had sustained during the indemnity period was due to the fire. In other words, they submitted that the plaintiffs had been guilty of fraud because they submitted a claim in which they had no honest belief.
In my opinion the defendants were correct in putting this forward as a possible ground on which a finding of fraud might have been made – I say a possible ground because there must remain a doubt as to whether the making of a claim amounts to a representation of fact and so, if false to the knowledge of the maker, can constitute a fraud – but the submission must be rejected as the learned trial judge did not make the findings of fact which would have been necessary to support a finding of fraud on this ground. His finding of fraud was against the plaintiffs, which are six companies, and which, accordingly, could only have been guilty of fraud through some individual who was the directing mind and will of the company, or a servant or agent acting within the scope of his authority. The omission to make a finding against any individual might be considered of no importance as it seems clear from the rest of the judgment that all the decisions relating to the plaintiffs were taken by Mr. Richard Bunyan, and accordingly, a finding against the plaintiffs could be treated as a finding against Mr. Bunyan, but in my opinion the absence of any finding that Mr. Bunyan had no honest belief in the claim that the entire of the loss during the indemnity period was due to the fire means that the finding of fraud made by the learned trial judge cannot be allowed to stand.
There was no dispute as to the mathematical accuracy of the claim which had been prepared by Mr. Davies of Messrs. Grant Thornton, the plaintiffs’ auditors. It was based on the difference between the actual sales achieved during the indemnity period and the sales projections for the same period. The case made by the defendants was that the loss sustained was not caused by the fire but was due to other causes such as lack of production capacity, and an inadequate sales force, sales resistance to the product, problems with the machines etc. They submitted that the plaintiffs’ claim was based on the contention that their failure to achieve the projected sales was due to the fire. This again demonstrated that the basic issue between the parties was whether the entire of the loss during the indemnity period was caused by the fire. The claim put forward by the plaintiffs was on the basis that it was, and the only way in which that claim might have been fraudulent was if the defendants established that Mr. Bunyan had no honest belief in it. The absence of any finding to this effect means that they failed to discharge the necessary onus of proof.
That they should have failed to do so is not, perhaps, surprising. A finding that Mr. Bunyan had no honest belief in the claim would have been inconsistent with the express finding made by the learned trial judge that Messrs. Grant Thornton, the plaintiffs’ auditors, who were “actively engaged in the presentation of the claim” on behalf of the plaintiffs were not implicated in the finding of fraud which he had made against the plaintiffs. It followed from this finding that the learned trial judge accepted the evidence of Mr. Davies, who had prepared the claim, and who had stated that in his opinion the entire of the loss was due to the fire. Having accepted that Mr. Davies had an honest belief in the claim it would have been very unlikely that the learned trial judge could have come to the conclusion that Mr. Bunyan did not have a similar belief.
For these reasons I am satisfied that the finding of fraud made by the learned trial judge against the plaintiffs must be set aside.
Condition No. 4
I am in complete agreement with the manner in which this condition is construed by Denham J. in her judgment and with her conclusion that the learned trial judge’s finding that the defendants were relieved from liability by reason of breaches of the condition must be set aside. All I propose to do is to add an additional reason for coming to the same conclusion.
The main provision of condition 4 is that it requires the insured to furnish to the insurer at their own expense such books of account and other business books etc. as might reasonably be required by the insurer for the purpose of investigating or verifying the claim being made by the insured under the policy. The condition then concludes with the following provision:
“No claim under this policy shall be payable unless the terms of this condition have been complied with and in the event of non-compliance therewith in any respect, any payment on account of the claim already made shall be repaid to the insurers forthwith.”
The learned trial judge held that the condition had not been complied with and accordingly that there was no liability to pay the plaintiffs’ claim. In coming to this conclusion the learned trial judge necessarily held that the defendants were entitled to rely on condition 4 notwithstanding the fact that they had expressly avoided the policy in which the condition was contained. In my opinion he was wrong in taking this view. The authorities to which I propose to refer are all concerned with insurance companies seeking to rely on the arbitration clause in a policy after they have repudiated or avoided it. In Ballasty v. Army, Navy and General Assurance Association Ltd. (1916) 50 I.L.T.R. 114, the plaintiff brought proceedings to recover monies due to him under a policy of motor insurance. Prior to his instituting the proceedings, the insurance company had repudiated the claim on the ground that the plaintiff had committed a breach of condition which rendered the policy void. A motion to stay the proceedings was brought by the insurance company on the ground that the policy contained an arbitration clause and that it was a condition precedent to any liability under the policy that the claim be referred to arbitration.
Madden and Pim JJ. refused to grant a stay. Pim J. said in his judgment at p. 116: “Where one party says that the contract is gone and the premium forfeited, he cannot insist on going to arbitration under a contract which he says does not exist.”
Furey v. Eagle Star and British Dominions Insurance Company Ltd. (1922) 56 I.L.T.R. 23 was a similar case. The insurance company repudiated a claim under a policy on the ground that non-disclosure had rendered it null and void. The insured sued and the insurance company sought to have the action stayed on the ground that the policy contained an arbitration clause. The motion was dismissed.
Pim J. said in his judgment at p. 24:
“As I said in Ballasty’s case, where one party says that the contract is gone, he cannot then insist on going to arbitration under a contract which he says does not exist.”
Both these cases were followed by Budd J. in Coen v. The Employers Liability Assurance Corporation Ltd. [1962] I.R. 314. The facts were that the insurance company denied the existence of the motor policy under which the plaintiff claimed. In addition the company claimed to rely on a clause in the policy which debarred the plaintiff from recovering if his claim was not referred to arbitration within twelve months of the insurance company’s repudiating the policy. In his reply to the insurance company’s defence, the plaintiff dealt with this contention as follows:
“The defendants, having denied the existence of any contract of insurance between the parties, and, in particular, the existence of the contract of insurance relied on by the plaintiff in this action, are not entitled to rely upon the arbitration clause contained in the said condition.”
Budd J. said in his judgment at p. 336:
“The defendants in their first letter of disclaimer say that the policy, which is that of the 31st August 1956 (No. 26507), does not indemnify the insured in respect of any person being carried in the vehicle referred to in the policy, which is the plaintiff’s Hillman car. That is a reliance upon a contract which I have held did not exist between them and that, it seems to me, impliedly involves a repudiation of the contract that I have held did exist which would cover passenger liability. The pleadings – and the first issue stated by the defendants at the trial to arise on them – likewise amount to a denial of the existence of the type of contract which the plaintiff says existed between the parties. The pleadings, indeed, go further and deny the existence of any cover for insurance at all and thus deny the existence of any contract. The defendants further by their contentions at the trial took the attitude of denying the existence of the contract which I have held to have existed. While it might be said that a dispute as to which type of contract exists between the parties is not quite the same thing as saying that no contract exists, I think that where that dispute involves in fact the repudiation of the existence of that type of contract which one of the parties relies on, as it does here, the same principle applies and the repudiating party cannot be allowed to approbate and reprobate. He cannot thus be allowed to say:
‘I deny the existence of the contract which you say exists between us, but I also rely on a term of that contract which contains a provision which bars you from bringing proceedings on foot of any claim not arbitrated upon within twelve months of the date of disclaimer’.”
In this case the defendants were approbating and reprobating. They were claiming that the policy was void on the ground that the plaintiffs had made a fraudulent claim, and at the same time they were claiming that the plaintiffs could not recover unless they satisfied the requirements of condition 4. In my opinion the decision of Budd J. makes it clear that the defendants, having avoided the policy could not at the same time rely on a condition contained in it.
In the Ballasty and Furey cases the High Court followed the decision of the House of Lords in Jureidini v. National British and Irish Millers Insurance Co. Ltd. [1915] A.C. 499. This was a case in which the issue in dispute was very similar to the issue in the present case.
The plaintiff had taken out a policy of insurance against fire in respect of certain textiles and hardware which were in a store at Port Limon in Costa Rica. There was a loss occasioned by fire; the plaintiffs made a claim and the defendants repudiated liability under clause 12 the relevant part of which was as follows:
“If the claim be in any respect fraudulent . . . or if the loss or damage be occasioned by the wilful act, or with the connivance of the insured . . . all benefit under this policy shall be forfeited.”
The action was heard before a jury which rejected the defendants’ contention and the judge entered judgment for the plaintiff for £543.2s. which was the amount of the defendants’ proportion of the loss.
The defendant appealed and on the appeal raised a preliminary issue that as there was an arbitration clause in the policy – clause 17 – the judge was wrong in holding that the action was maintainable. The Court of Appeal agreed with this contention and on the plaintiff’s appeal to the House of Lords it was held that the repudiation of the claim on a ground going to the root of the contract precluded the company from pleading the arbitration clause as a bar to an action to enforce the claim.
In the course of his judgment, Viscount Haldane L.C. said at p. 505:
“Now, My Lords, speaking for myself, when there is a repudiation which goes to the substance of the whole contract I do not see how the person setting up that repudiation can be entitled to insist on a subordinate term of the contract still being enforced.”
And Lord Dunedin said at p. 507:
“It seems to me that when the attitude taken up by these parties, which was taken up in the letters which have been read to us which the Lord Chancellor has referred to, in England, – that they repudiated the claim altogether and said that there was no liability under the policy – that necessarily cut out the effect of clause 17 as creating a condition precedent against all forms of action.”
It seems to me that the only distinction between that case and the present one is that there what was in issue was the applicability of an arbitration clause and here it is the applicability of condition 4. But the reason the arbitration clause could not be relied upon by the insurance company was because they had purported to avoid the entire policy and, having done this, they could not at the same time rely on any term in the policy. And this continued to be the position even though it was held that they had not been entitled to avoid the policy. So, similarly, in the present case, the setting aside of the finding of fraud does not entitle the defendants to rely on condition 4.
I am satisfied that the authorities establish that where an insurance company avoids a policy of insurance, as the defendants clearly did in their defence in this case, they cannot at the same time seek to rely on a term contained in that policy. Accordingly, the defendants, having avoided the policy on the ground that the claim being made was fraudulent could not at the same time dispute the claim on the ground that the requirements of condition 4 had not been complied with.
In contending that the plaintiffs were precluded from recovering under the policies by reason of a breach of condition 4, counsel for the defendants relied very strongly on the decision of the Court of Appeal in England in Welch v. Royal Exchange Assurance [1939] 1 K.B. 294. In my opinion, however, this case is clearly distinguishable.
The facts were that the plaintiff had a policy of fire insurance with the defendant. A fire occurred and the plaintiff made a claim which was disputed by the defendant. There was an arbitration clause in the policy and the parties agreed that the matters in dispute should be referred to arbitration. Points of claim were delivered by the plaintiff and, in their points of defence, the defendant alleged that there had been fraud on the part of the plaintiff.
The arbitrator made his award in the form of a special case. He determined that the defence of fraud failed. The policy contained a condition 4, somewhat similar to the condition 4 in the present case, the relevant part of which provided as follows:
“The insured shall also give to the Corporation all such proofs and information with respect to the claim as may reasonably be required together with (if demanded) a statutory declaration of the truth of the claim and of any matters connected therewith. No claim under this policy shall be payable unless the terms of this condition have been complied with.”
The arbitrator found that there had been a breach of this condition and allowed the defendant to amend their points of defence to as to plead it, and he held that the effect of the breach was to deprive the plaintiff of any right to be paid under the policy. The Court of Appeal affirmed the arbitrator’s findings.
The principal way in which this case is distinguishable from the present appeal is that the defendant company never avoided the policy. While they disputed the plaintiff’s claim, they affirmed the policy by having the matters in dispute referred to arbitration under the arbitration clause contained in the policy. So all the clauses and conditions in the policy, including condition 4, remained operative throughout the arbitration. Such was not the position in the present case as the defendants, by expressly avoiding the policy in their defence, precluded themselves from relying thereafter on anything contained in the policy.
Apart from this, while the defendants pleaded condition 4 in their defence, they did not plead that there had been any breach of the condition, and they did not at any stage apply to amend their defence in order to include such a plea. In Welch v. Royal Exchange Assurance [1939] 1 K.B. 294 the defendant had applied for and was granted the necessary amendment.
For these reasons I am satisfied that the decision in Welch v. Royal Exchange Assurance [1939] 1 K.B. 294 does not assist the defendants, and that the finding of the learned trial judge that the plaintiffs were precluded from recovering under the policy by reason of a breach of condition 4 must be set aside.
Amey Properties v Cornhill Insurance plc
[1996] LRLR 259
Queen’s Bench Division
TUCKER J
There is no doubt that the offending tractor was defective in a number of re Hpects, as found by Hobhouse J There were faults in the clutch and in the handbrake. In these circumstances I very much doubt whether it could be described as being maintained in an efficient and roadworthy condition. The question is whether that entitles the defendants to repudiate liability under the policy and to refuse to indemnify the plaintiffs against their liability to the United States of America for damage caused to their aeroplane, assessed at $2 million.
The plaintiff’s argument, skilfully advanced by Mr Schaff, is that the de fence is based on the allegation that the lack of road-worthiness of the tractor was due to negligence and that there is no allegation of recklessness on the part of the plaintiffs. The plaintiffs contend that before the defendants can avoid liability they have to show more than negligence, they have to go on to prove that the plaintiffs themselves were reckless. Accordingly, casual acts or omissions of the plaintiffs’ employees are irrelevant. The defendants’ case, as advanced with equal skill by Mr Ter Haar, QC, is that although there are cases where it has been held that recklessness has to be established, this is not one of them. There does not appear to be any dispute that the fault, of whatsoever degree, has to be shown to be that of the insured rather than a casual act on the part of an employee. However, this does not mean that the defendants have to show the existence of fault at boardroom level …
In my judgment the cases show that the courts have adopted different ap proaches to the construction of the words of exclusion clauses depending upon the nature of the policies in which they appear and in particular whether to give a wide construction would be repugnant to the whole purpose for which the policy was taken out. Thus in employers’ liability policies, the courts have applied the standard of recklessness (see Wool/all and Fraser). The same test has been applied in property policies (see Lane, Devco and Sofi). In motor policies, on the other hand, the courts have applied the test of negligence. It has not been held necessary for the insurers to establish that
the insured was reckless before liability could be excluded (see NFU, Brown, Liverpool Corporation, Conn and Lefevre).
In my view this distinction can be explained and justified by the fact that motor policies impose a positive obligation to maintain the vehicle in good repair, or, as in the present case, in an efficient and roadworthy condition. That is a clear, specific and sensible obligation to impose and one with which it ought not to be difficult to comply. To hold that if the policyholder, by his negligence, fails to comply with such a condition and thereby loses the pro tection of the policy is not, in my opinion, repugnant to the commercial object of the contract. The insurer is not covering and does not intend to cover the insured for liability arising out of negligent maintenance of the vehicle, but there is cover for liability arising out of the negligent use of a vehicle which is properly maintained. The words of condition 11 of the present policy are plain. There is no need to put any gloss on them or to restrict their meaning in order to give proper effect to the terms of the policy.
I have devoted most of this judgment to consideration of the second limb of the issue. That is because, as I understand it, there is little or nothing be tween the parties as to the first limb. I think I have made it plain that in my opinion it would not be sufficient to establish a casual act of negligence on the part of an employee. The contract of insurance is made with the employer
– the plaintiffs. What has to be shown is that the relevant officer or officers of the plaintiffs was or were negligent in failing to ensure that the tractor was maintained in an efficient and roadworthy condition. This is how the
defendants plead their case. It is made plain in para. 8 that they do not rely on the failure of the employee himself.
As to the second part of the issue, I hold that it would be sufficient for the defendants to establish that the plaintiffs were negligent. It is not necessary for the defendants to establish that the plaintiffs were reckless