England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION (Mr Justice Aikens)

		Royal Courts of Justice Strand, London, WC2A 2LL Tuesday 31st July 2001

LORD JUSTICE LONGMORE:

Introduction

1. In this appeal from Aikens J. the court is concerned with the ambit of section 17 of the Marine Insurance Act 1906 which provides:-

"A contract of marine insurance is a contract based upon the utmost good faith and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party."

The extent to which this section applies once a contract of insurance has been concluded has never been authoritatively determined, but it has recently been considered by the House of Lords in Manifest Shipping Co Ltd v. Uni-Polaris Insurance Co (The Star Sea) [2001] 2 WLR 170 in the context of a hull and machinery policy where the allegation was one of culpable non-disclosure during the currency of the contract. The House held that culpable non-disclosure was insufficient to attract the drastic consequence of avoidance provided by section 17. The result was that the insured shipowner could recover under the insurance policy despite such culpable non-disclosure and a consequent purported avoidance by the insurers.

2. The present case differs from The Star Sea in two important respects. In the first place, the contract was not a property insurance contract but a liability insurance contract. The assured were ship repairers in Trinidad and have been found liable to the claimant shipowners under the ship repair contract. The assured have subsequently gone into liquidation and the claim is thus brought by the claimant shipowners as statutory transferees pursuant to the provisions of the Third Parties (Rights against Insurers) Act 1930 under which the insurers can avail themselves of any defence which was available against their assured. As is common with liability policies, there were express conditions of the policy set out under the heading of General Conditions including in particular

"In the event of any occurrence which may result in a claim . . . the assured shall give prompt written notice . . . and shall keep underwriters fully advised"

and

"Underwriters shall be entitled (but not obliged) . . . to control or take over the conduct of the investigation defence and settlement of any claim . . ."

Clause 7 of the standard form ship repairers liability clauses also provided that the limit of liability set out in the policy included

"liability for costs . . . incurred with the written consent of the underwriters".

The assured in this case did give notice to the underwriters that a claim had been made against them; the underwriters, moreover, did take over the conduct of the defence of the claim and appointed solicitors for that purpose. This was a recognition by the insurers of the fact that, if the insured were liable to the shipowners, the insurers would themselves be liable to indemnify the insured. The solicitors, Elborne Mitchell & Co ("Elbornes"), although appointed by underwriters, were solicitors on the record on behalf of the assured and, on the principles set out in Groom v. Crocker [1938] K.B. 194, owed the assured all the duties that a solicitor owes to his client. Thus the assured, not the underwriters, were the clients of Elbornes but for the purposes of the policy they began incurring costs with the consent of the underwriters.

3. The second respect in which the present case importantly differs from The Star Sea is that the conduct of the assured about which the underwriters complain was fraudulent instead of merely culpable.
4. The facts, on which the finding of fraud was based are fully set out in the judgment of Aikens J reported at [2000] 2 Lloyds Rep 357. For present purposes a brief recapitulation is all that is necessary. In September 1990 Mr Nicholas Bourke of Elbornes decided to ask a Trinidadian lawyer whether the statutory limitation available to ship repairers in Trinidad was still that enacted by the Imperial Merchant Shipping Act of 1894. The Trinidadian lawyer (wrongly as it turned out) advised that it was. On that basis it became advantageous to both the assured and to the underwriters to try to ensure that the action was fought in Trinidad rather than in England where (from a Claimant's point of view) there were more generous provisions as contained (for the purposes of this case) in the Merchant Shipping Act 1979. The shipowners were, however, able to obtain an order of an English judge on 17 January 1992 for service of English proceedings on the insured shipowners in Trinidad by relying on an agreement, apparently made in May 1989 between the shipowners and a Mr Thor Torressen, the assured's assistant general manager, agreeing that the dispute should be referred to the jurisdiction of the High Court of London and be determined according to English law. Mr Bourke, in his capacity as the assured's solicitor, opposed English jurisdiction by asserting in general terms Mr Torressen's want of authority in an affidavit and asked his clients in March 1992 for disclosure of documentation on the question whether Mr Torressen had authority to make the jurisdiction agreement. The result of that request was that Mr Kayan Baboolal or his brother Dr R Baboolal, the Managing Director and Chairman of the insured respectively, concocted a letter (purportedly dated 1st July 1988) which they claimed had been sent by Mr Kayan Baboolal to the shipowners' technical director Mr Allen Hansen stating that only Mr K Baboolal or his brother had authority to discuss the claim. The insured alleged that Mr Hansen had countersigned the letter and returned it to them. That countersignature was, in fact, a forgery. Once the letter was produced it did not take very long to establish that the letter was a concoction and the signature a forgery and the application to set aside the service of the writ, which had been issued for service out of the jurisdiction, was not pursued and ultimately abandoned. Meanwhile the underwriters had decided that an issue about cover under the policy had arisen, withdrew their consent for incurring further costs and instructed Clyde & Co ("Clydes") to look after their interests. Ironically, it soon also became apparent that the advice of the Trinidadian lawyer was wrong and Trinidad had exactly the same limitation provisions, applicable to ship repairers, as had England, so that there was not in truth any advantage for the assured to litigate in Trinidad over and above that advantage which any litigant might feel in defending a claim against him in his own domestic courts. Soon after this, Clydes (on 6th July 1993) wrote to Elbornes who were still acting for the assured saying that the underwriters avoided the policy for the relevant (1987) year. The claim proceeded slowly. It appeared that the case of the insured shiprepairers was that the damage to the engine of which the shipowners complained had been caused by a failure to tighten the bolts to the required tension. According to the shiprepairers that was not a failure by their employees but a failure on the part of the employees of the shipowners. In due course Elbornes came off the record for the assured ship repairers shortly before the trial, which took place, in their absence, on 14th January 1997 before Colman J. He gave judgment in favour of the shipowners. On 17th September 1997 the insured were wound up and the claimant shipowners then launched the current action against underwriters.

The course of the case below

5. Before Aikens J. the underwriters argued that the duty of the utmost good faith applied after the insurance contract had been made (1) when the assured was making and pursuing a claim on the policy and (2) when there was an express or implied contractual duty to supply information to enable the insurers to make a decision. The judge, however, held that the duty of utmost good faith did not apply post-contract unless (a) the insurer was being invited to renew or vary his "speculation" or "risque" or (b) the assured was prosecuting or pursuing a claim on the policy. He held that neither of these two situations had occurred in the present case. No occasion requiring "good faith" had therefore arisen and the insurers could not rely on section 17 of the 1906 Act to avoid the policy. He also decided that the fraud perpetrated by the insured was not material to underwriters' liability. He further held that, although there was a breach of the express obligation to keep the underwriters fully advised, the underwriters had suffered no serious consequence as a result of the breach; the result of that was that they were not entitled to reject the claim.

The argument before this Court

6. Mr Jonathan Hirst QC presented the case for the insurers on a wider front than it appears to have been presented below. He submitted:-

(1) that it was inappropriate and wrong for the judge to have identified post-contract "good faith occasions" and then to have decided that the events of this case did not constitute such an occasion; the duty of utmost good faith was expressed as a general concept in section 17 of the 1906 Act and applied in general terms throughout the contract; breach of good faith and, certainly, any fraudulent conduct entitled insurers to avoid; there was never an occasion when the insured could act in bad faith without risking avoidance.

(2) that if section 17 only applied to some good faith occasions after the contract had begun, the events of this case constituted such an occasion, since the giving of information to underwriters must be the kind of occasion envisaged by the statute;

(3) that the breach of the obligation to keep the underwriters advised was so serious that they were justified in refusing to pay the claim.

7. Mr Simon Rainey QC submitted that proposition (1) was far wider than was justified either in principle or by the relevant case-law and supported the judge's conclusions on the second and third submissions which the judge had, for good reason, rejected.
8. I shall refer to the first two submissions compendiously as the good faith (or extra-contractual) defence and the third defence as the contractual defence.

Approach

9. The scope of good faith obligations, once the contract has been concluded, has been the matter of some controversy, especially in recent years. Insurers' enthusiasm for the doctrine appears to have begun in Piermay Shipping v. Chester (The Michael) [1979] 2 Lloyds Rep 1 and the doctrine itself reached a high point in Black Sea Shipping v. Massie (the Litsion Pride) [1985] 1 Lloyds Rep 437, since when there has been something of a retreat. In these circumstances it seems to me that an argument which, like Mr Hirst's argument in the present case, seeks to start from some extra-contractual principle and only, secondly, to consider the contractual position is in danger of starting the wrong way round. One can readily understand that in the more usual case of pre-contract lack of good faith, the contract subsequently made between the parties cannot be a satisfactory starting-point; where, however, a contract has been made, it is somewhat perverse to apply to it principles of good faith which are traditionally applicable mainly in pre-contract situations. It is much more natural to start with the relevant contractual provisions and I shall, therefore, consider the contractual defence first.

The contractual defence

10. I have already set out the principal relevant terms of the ship repairers' liability insurance provisions. There is one other important term of the policy which expressly adverts to fraud in the context of the making of a fraudulent claim. That is the provision commonly found in property policies, (perhaps somewhat less often) in liability policies, and always to be found on the very first page of the familiar Lloyd's J Form, as used in this case, in the following terms:-

"If the assured shall make any claim knowing the same to be false and fraudulent, as regards amount or otherwise, the policy shall become void and all claims hereunder shall be forfeited."

It is well recognised that, even if the policy did not have such an express term, the term expresses what would, in any event, be the law. I mention the clause now, in order to dismiss it from further consideration in the contractual context because the underwriters accept that they cannot rely on it in the present case. That is because no question of making a claim under a liability policy arises until the liability of the assured is established (whether by agreement, judgment or arbitration award) see Post Office v. Norwich Union [1967] 2 Q.B. 363 and Bradley v. Eagle Star Insurance [1989] A.C. 957. The liability of the insured in this case was not established until the judgment of Colman J given on 14th January 1997, while the fraud relied on by underwriters occurred 4½ years earlier in June 1992. There can thus be no suggestion that the assured has made a fraudulent claim or in any way forfeited the claim under the provisions of this express clause.

11. The presence of the clause is, however, of some significance since it is often said that one of the accepted instances of the operation of the doctrine of good faith after the contract is made is that the whole policy will be avoided in the event of a fraudulent claim. This has been said to be a necessary and beneficial discipline in order to ensure that insurers are not exposed to wilfully exaggerated claims. Although some judges have said that, in the absence of any express terms, such a term would be implied into the policy, see Britton v. Royal Insurance Co (1866) 4 F.&F. 905, 906 per Willes J and Orakpo v. Barclays Insurance Services [1995] LRLR 443 per Hoffmann L.J., the better view now seems to be that both the obligation not to make a fraudulent claim and the inability to recover if a fraudulent claim is, in fact, made stem from a rule of law rather than any implied term, see The Star Sea paras. 62 and 66 at [2001] 2 WLR 170, 191G-H and 193H per Lord Hobhouse. This rule of law may itself stem from the good faith obligation that exists between underwriters and their assured and thus be a compelling example of the post-contract application of section 17 of the Marine Insurance Act, see para. 102 at 205A per Lord Scott of Foscote. Even this is, however, not entirely clear since the judgments on which the rule of law is founded do not use the language of avoidance (as does section 17) but the phrase "all benefit under the policy" or "all claim" on the policy, see para 64 at page 192E per Lord Hobhouse. No doubt, even if the obligation not to make fraudulent claims stems from good faith, the parties can, by contract, provide expressly for consequences other than avoidance of the contract.
12. The relevant clause on which underwriters seek to rely, albeit only as a fall-back argument if their primary argument on good faith fails, is the clause providing that, in the event of any occurrence which may result in a claim, the assured is to give prompt written notice and shall keep underwriters fully advised. This is, of course, a perfectly ordinary clause in a liability policy and shows that underwriters are perfectly able to make provision for the common situation where a claim may arise against the assured and the assured may then wish to make a claim on their liability underwriters. It is to be noted that the clause is of general application and, if the assured is in breach of it, it does not matter if the breach is fraudulent, deliberate, culpable or innocent. No complaint has been made that there was no prompt written notice; what underwriters maintain, and this argument the judge has upheld, is that the assured did not keep the underwriters fully advised. The judge held that the clause obliged the assured to keep underwriters fully advised in relation to all aspects of the occurrence that might give rise to a claim, including matters concerning the jurisdiction where a claim might be brought and the facts relating to any issues about jurisdiction. The assured were thus obliged to keep underwriters fully advised in relation to the agreement made for English jurisdiction and any facts relating to the validity (or otherwise) of the agreement. Giving of false information in relation to the jurisdiction issue could not be said to be keeping underwriters fully advised. Mr Rainey did not take issue with this conclusion and it seems to me to be plainly right.
13. What then is the consequence of the breach of this term? The observance of the term is not expressed to be a condition precedent to insurers' liability. Terms which are not conditions precedent to the insurance policy's liability under the contract are traditionally assigned to one of 3 categories in English law: (1) a term any breach of which, no matter how inconsequential, entitles the innocent party to bring the contact to an end and treat himself as discharged from all liability as from that time; (2) a term no breach of which entitles the innocent party to bring the contract to an end so that the innocent party only has a remedy in damages (such terms being known, confusingly in an insurance law context, as conditions and warranties respectively); and (3) innominate terms, in respect of which the consequence of the breach depends on the nature and gravity of the breach. If the breach is sufficiently serious or the consequences of the breach are so grave that the innocent party is seriously prejudiced, he can accept the breach as repudiatory and terminate the contract, see Hong Kong Fir Shipping Co Ltd v. Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 and Chitty, Contracts, 28th ed Vol 1 paras. 12-019 to 12-034. An analysis of this kind does not always protect underwriters since (1) a claim for damages may be difficult to quantify or (as in this case) not worth pursuing; and (2) treating the breach as repudiatory and bringing the contract to an end only operates prospectively and does not affect accrued rights. This second difficulty would not, however, have been a problem for underwriters in the present case since no rights accrued to the assured before their liability to the shipowners had been established. If, therefore, insurers had thought that the assured's fraudulent conduct had been seriously prejudicial to them, they could have brought the entire contact of insurance to an end; and since, the assured had at that stage no accrued rights against them, underwriters would, if they were entitled to terminate the contract, have had no liability under the contract.
14. This was not the course taken by underwriters; the judge's supposition in note 23 of his judgment was that underwriters did not wish to accept the assured's conduct as repudiatory as that would be to acknowledge the contract's existence and that supposition may well be correct. Additionally, underwriters in 1992 may not have considered the conduct of the assured sufficiently prejudicial to their interests in defending the shipowner's claim to justify bringing the contract to an end. Their contractual case at trial relied on the decision of this court in Alfred McAlpine Plc v. BAI (Run-Off) Ltd [2000] 1 Lloyds Rep 437. In that case this court decided that, at any rate in insurance cases, there was a further category of term in addition to the 3 categories identified above, namely a term a breach of which was so serious for underwriters that it would give them a right to reject the claim without having to accept the breach of contract as being a repudiation of the contract as a whole.
15. The judge rejected underwriters' contractual defence even when put on the narrower basis of entitlement to defend the claim rather than a right to bring the entire contract to an end. He held that underwriters suffered no serious consequence in fact as a result of the assured's fraudulent conduct either in relation to the jurisdiction issue or in relation to the issue of the assured's liability to the shipowners. He held that if the forged letter had never been produced, English jurisdiction would have been maintained as it was in fact; he held further that, even if underwriters had continued to defend the claim, their defence could not have been prejudiced, depending as it did on the evidence of the employees of the shiprepairers on the issue whether it was they or the employees of the shipowners who had been responsible for the failure to tighten the bolts of the repaired engine to the required tension. He did not accept the suggestion that the evidence of the employees of the insured would have been tainted by the dishonesty of the Baboolal brothers.
16. Mr Hirst attacked these conclusions as being unreasonable but I, for my part, would agree with them, quite apart from my natural reluctance to disagree with the first instance judge on a matter of fact. Perhaps inspired by footnote 22 of the judgment, Mr Hirst sought to rely on the witness statement of Mr Baboolal's secretary Miss Ramjohn in which she said that she had actually seen Mr Hansen countersign the 1st July letter. He said the letter was false and intended to deceive, Miss Ramjohn had been persuaded to give false evidence about it and, if the Baboolal brothers could produce false evidence from one employee, they would no doubt do so from others. This is merely speculative and, in any event, irrelevant since the fourth category of term requires the position to be looked at as at the time when the court gives judgment as to the defence relied on. As at the date of trial, before Aikens J, it was clear that underwriters had suffered no prejudice in fact; the trial of the shipowners' liability had been held and the assured had, in fact, been held liable by Colman J. It is true that the defendant insured was not present or represented at the trial but that was partly the result of a decision by underwriters in withdrawing support from that defence and partly, no doubt, a recognition by the shiprepairers of the difficulties of their defence.
17. It follows that I agree with the judge that insurers' contractual defence must fail. The question then arises whether insurers can achieve by statute what they cannot achieve by contract.

Good faith defence

18. It is instructive to consider underwriters' reliance on section 17 (the good faith and their main defence) against the contractual background and the failure of the contractual defence. They have stipulated that they must be kept fully advised; the status of that term enables them to treat a breach of that term as (1) a repudiation of the contract if the consequences of the breach are so serious as to show that their assured no longer intends to be bound or (2) as a defence to the claim if, as it appears at trial, the consequence for insurers are sufficiently serious in fact.
19. Neither of these results is, however, sufficient for underwriters to succeed in defeating the claim so they wish to rely on what Mr Hirst called the 'over-arching principle of good faith' to enable them to avoid the entire contract and seek to be restored to the position they were in before any contract had been made. If one asks the question why, in general, underwriters should wish to avoid the contract rather than treat it as discharged (or use the breach as a defence to the claim) there can, as I see it, be only two answers; first that since the entire contract is to be unwound, they would be able to avoid liability for all other claims that may have accrued during the policy year. That, so far as I am aware, is not a consideration in the present case. The second answer is that, in order to prove that the contract has been discharged (or that there is a defence to the claim), they must show that the breach was sufficiently serious in itself or had such serious consequences that the parties can no longer be bound to each other (or that they have been seriously prejudiced in fact). According to Mr Hirst, none of this is necessary because, pursuant to section 17, underwriters can avoid the contract for bad faith, however trivial the act of bad faith may be and however unimportant the consequences to insurers. This is a proposition of great width and unsupported by authority (save, perhaps, by analogy, by the fraudulent claims cases of which this case is not one). Mr Hirst, however, takes his stand on the wording of the statute. Adapting the words of Lord Phillimore in one of the fraudulent claims cases, Lek v. Matthews (1927) 29 Lloyds Rep 141, 164 he submits it may be a dura lex, sed ita scripta est.
20. It thus becomes necessary to consider section 17 of the Marine Insurance Act 1906, how it came to be enacted and how it has subsequently been interpreted.
21. The Marine Insurance Act 1906 was and is a codification of the law of marine insurance. The law as there stated is, in general, no different from that for other forms of insurance in so far as the duties in relation to good faith, disclosure and representations are concerned. Generally speaking again, the duties to disclose material matters and not to make material misrepresentations apply before the contract is concluded and do not continue after the contract is concluded. An insurer is not able to require disclosure of matters which show he has made a bad bargain. One question that has arisen is whether there is a continuing duty to disclose material matters, if the insurer is entitled to cancel the policy by serving a notice of cancellation. This court held in New Hampshire Insurance v. MGN Ltd [1997] L.R.L.R. 24 that there was not. Staughton LJ gave the judgment of the court; he set out section 17 of the Act and the requirement in section 18(1) that the assured must disclose, before the contract is concluded, every material circumstance known to the assured. He then proceeded:-

"A novice could be forgiven for thinking that the only duty of disclosure is by the insured and that it only applies before the contract is concluded (which would no doubt include the new contract which is made upon renewal). But the maxim that mention of one of two things excludes the other must be applied with caution when considering the draftsmanship of Sir Mackenzie Chalmers. His method of codification was, at any rate at times, to state the effect of rules decided by the Courts and not to pronounce upon points which had not been decided."

Staughton LJ then recorded a submission that section 18(1) was merely one example of the general duty that was placed upon both parties at all times by section 17 and said

"We can see force in that argument. But it is questionable whether in practice the law has been treated in that way."

I would respectfully echo that sentiment. In the light of this remark and the judge's conclusion that the duty of good faith only applies post-contract if the insurer is invited to renew or vary his speculation or risk or if the insured is pursuing a claim under the policy, it is necessary to trace the development of this area of the law in a little detail. I do not intend a comprehensive survey and use the phrase "pre-contract good faith" in its usual sense and "post-contract good faith" to indicate the requirement of good faith (as and when it exists) once the contract has been made and while it lasts.

22. Development of the law of post-contract good faith

(1) Fraudulent claims

The law about the making of fraudulent claims originally developed in fire insurance cases, see Levy v. Baillie (1831) 7 Bing. 349; Goulstone v. Royal Insurance Co (1858) 1 F.&F. 276; Britton v. Royal Insurance Co (1866) 4 F.&F. 905. The inclusion of some such clause as is now in Lloyd's J Form has always been common; the same principle will apply as a matter of law, even in the absence of an express term. I have already observed that there is some debate whether the relevant principle of law is an example of the application of the good faith principle giving rise only to a right of avoidance or a separate development of law. There is no evidence that Sir Mackenzie Chalmers had this line of authority in fire insurance cases in mind when he drafted section 17 of his marine insurance code. The concept, would in any event, be alien in a field, such as marine insurance, where most, if not all, policies, were "valued" policies. One of the important conclusions of the Star Sea was that when it came to making a claim, the duty of the insured was one of honesty only. In any event the present case is not a case where the insured has made a claim at all, let alone a fraudulent claim.

(2) Variations to the risk

A duty of good faith arises when the assured (or indeed the insurer) seeks to vary the contractual risk. The right of avoidance only applies to the variation not to the original risk, Lishman v. Northern Maritime Insurance Co (1875) L.R. 10 C.P. 179 and Iron Trades Mutual v. Cie de Seguros [1991] 1 Re. L.R. 213, 224 and The Star Sea para. 54 page 188D-F. There is no authority for a proposition that a fraudulent misrepresentation leading to a variation will avoid the original contract as well as the variation.

(3) Renewals

A duty of good faith exists when the insured seeks to renew the contract of insurance. That is a prospective right and if it is not observed by each party, the other party can avoid the contract. It is never suggested that, although the breach takes place during the currency of the earlier contract, the earlier contract is avoided as well as the renewal.

(4) "Held covered" cases

The requirement that an insurer hold the insured covered in certain circumstances has been held to require the exercise of good faith by the insured. To the extent that the result is a variation of the contract, eg because an addition premium has to be assessed, these cases are examples of (2) above; to the extent that they are only an exercise by the insured of rights which he has under the original contract they are somewhat puzzling; but, although it is settled that good faith must be observed, it is never suggested that lack of good faith in relation to a matter held covered by the policy avoids the whole contract of insurance.

(5) Insurer having right of cancellation

I have already said that the existence of such a right has been held not to give rise to the duty of good faith, New Hampshire v. MGN [1997] L.R.L.R, 24, 58-62, Issue K.

(6) Insurer asking for information during the policy

If the insurer has a right to information by virtue of an express or an implied term, there may be a duty of good faith in the giving of such information. Typically such requirements will be in liability policies and reinsurance contracts (which are, of course, only one form of liability insurance), see eg Phoenix General Insurance Co v. Halvanon Insurance Co Ltd [1985] 2 Lloyds Rep 599. It is not usually suggested that breach of any such term gives rise to a right to avoid the contract rather than a claim to damages. To the extent that Alfred McAlpine v. BAI Insurance [2000] 1 Lloyds Rep 437 accepts that giving of information attracts obligations of good faith, it does not support any concept of avoidance in the absence of prejudice to underwriters in connection with their ultimate liability for the claim. If there is no right in the insurer to be given information but he asks for information, no duty of good faith arises as such. The only duty of the insured will be not materially to misrepresent the facts in anything he does say to insurers. If he does make any such misrepresentation, the insurer will have ordinary common law remedies for any loss he has suffered, Iron Trades Mutual v. Cie de Seguros [1991] 1 Re L.R. 213, 224.

(7) Other situations where good faith may be implied

Such other situations may arise under liability policies, particularly if the insurers decide to take over the insured's defence to a claim. Interests of the insured and the insurers may not be the same but they will be required to act in good faith towards each other. If for example the limit of indemnity includes sums awarded by way of damages, interest and costs, insurers may be tempted to run up costs and exceed the policy limit to the detriment of the insured. The insured's protection lies in the duty which the law imposes on the insurer to exercise his power to conduct the defence in good faith. In such circumstances Sir Thomas Bingham M.R. could not "for one instant accept . . . [the] suggestion that a breach of this duty, by an insurer, once a policy is in force, gives the assured no right other than rescission", see Cox v. Bankside [1995] 2 Lloyds Rep 437, 462.

(8) Litigation

An important matter decided by the Star Sea is that the duty of good faith (whatever its precise context) is superseded, once the parties become engaged in litigation, by the rules of court contained in the Civil Procedure Rules. There had over the years arisen a view that the ancient rights of a marine insurer to obtain pre-defence discovery stemmed from the post-contract obligation of good faith, but failure to comply with an order for ship's papers never gave rise to a right to avoid the policy; so as Lord Hobhouse observed, in para. 60 of his speech, in relation to an insured's obligation to submit to an order for ship's papers:-

"whatever it was, it was not the obligation referred to in section 17".

There is a certain irony about this conclusion. When Sir Mackenzie Chalmers published the second and last edition of his Digest of the Law of the Marine Insurance (1903), on which the Act as ultimately passed was to be based, he included what is now section 17 without any explanation of how (if at all) he envisaged any post-contract requirement of good faith would work in practice. When he published the first edition of his work "The Marine Insurance Act 1906" (1907) he added a note in relation to post-contract good faith, instancing the order of the court for ship's papers as the example of the operation of post-contract good faith. Thus does the whirligig of time exercise its reversals.

23. It appears from this account of the development of post-contract good faith principles that it is by no means in every case of non-observance of good faith by the insured that the insurer can avoid the contract. It is necessary to find some principle by which it is possible to decide whether, in the event of good faith not being observed by either party, the result is that the contract can be avoided.

Application to Fraud

24. Mr Hirst correctly emphasised that none of the examples of post-contract good faith considered in the above resumé of the law were cases of dishonesty save for the fraudulent claims cases. They were not, therefore, in any way, inconsistent with his over-arching principle that any dishonesty on the part of the insured entitled the insurer to avoid the contract. His submission on the present state of the law was that, in the light of the Star Sea, the only application of section 17 post contract was to cases of dishonesty but that in such cases the full apparent rigour of section 17 should be applied. This submission could be said in itself to be a considerable gloss upon the statute but, Mr Hirst said, it is the position at which the law has arrived.
25. Before deciding whether Mr Hirst's submission is correct, it is helpful to consider Lord Hobhouse's initial approach to the law on fraudulent claims in para. 61 of his speech.

". . . On ordinary contractual principles it would be expected that any question as to what are the parties' rights in relation to anything which has occurred since the contract was made would be answered by construing the contract in accordance with its terms, both express and implied by law. . . . . But it is also possible for principles drawn from the general law to apply to an existing contract – on the better view, frustration is an example of this as is the principle that a party should not be allowed to take advantage of his own unlawful act. It is such a principle upon which the [insurers] rely in the present case. As I have previously stated there are contractual remedies for breach of contract and repudiation which act prospectively and upon which the [insurers] do not rely. The potential is also there for the parties, if they so choose, to provide by their contract for remedies or consequences which would act retrospectively. All this shows that the courts should be cautious before extending to contractual relations principles of law which the parties could have themselves have incorporated into their contract if they had so chosen. The courts should likewise be prepared to examine the application of any such principle to the particular class of situation to see to what extent its application would reflect principles of public policy or the over-riding needs of justice. Where the application of the proposed principle would simply serve the interests of one party and do so in a disproportionate fashion, it is right to question whether the principle has been correctly formulated or is being correctly applied and it is right to question whether the codifying statute from which the right contended for is said to be drawn is being correctly construed."

26. With this admonition in mind, I return to section 17. It is the precursor of a number of sections which deal in terms with pre-contract non-disclosure of material facts and pre-contract misrepresentations. It must have been intended by Parliament that avoidance by reason of post-contract matters should be subject at least to the same requirements as avoidance by reason of matters pre-contract. It is well recognised that, before a contract can be avoided for pre-contract non-disclosure or misrepresentation, the fact not disclosed or misrepresented must have been material for a prudent underwriter to know when he was assessing the risk and must have induced the actual underwriter to write the risk. The requirement of materiality is emphasised in all three of the following sections of the 1906 Act and the requirement of inducement is part of the general law which, though not adverted to specifically in the Act, is understood to apply to insurance law generally and marine insurance in particular, see Pan-Atlantic v. Pine Top Insurance [1995] 1 A.C. 501. In my judgment these requirements which must exist before an underwriter can avoid for lack of good faith pre-contract must also apply, making due allowance for the change of context, where an underwriter seeks to avoid for lack of good faith or fraud in relation to post-contractual matters. In particular the requirement of inducement which exists for pre-contract lack of good faith must exist in an appropriate form before an underwriter can avoid the entire contract for post-contract lack of good faith. It is in this context that Lord Hobhouse's admonition is particularly relevant because, as he points out, the insurer already has his contractual remedies for breach of contract and repudiation. The insurer can treat the insured as being in repudiation of what will normally be an innominate term of the contract if there is a serious breach or there is a breach with serious consequences for the insurer. Avoidance ab initio is an even more extreme form of contractual termination than an acceptance of repudiatory conduct and, for the extreme remedy of avoidance to be available, there must, in my view, be at least the same quality of conduct as would justify the insurer in accepting the insured's conduct as a repudiation of the contract. It is only in this way that the requirement of inducement for pre-contract conduct resulting in avoidance can be made to tally with post-contract conduct said to entitle the insurer to avoid the contract. It would not be just to the insured to enable the insurer to by-pass the rights and duties imposed on the parties by the contract in order to enable him to claim the disproportionate remedy of avoidance, with the result that he can avoid liability for all other claims under the policy as well as the instant claim, without requiring that the conduct relied on be as serious as conduct which would be viewed as repudiatory. In this way the operation of section 17 post-contract has the appropriate symmetry to the operation of the section pre-contract.
27. Support for this approach can be obtained from the resumé of the post-contract situations of the operation of good faith particularly instances (6) and (7) which are probably the only true examples of good faith being required post-contract. (Instances (2) – (4), at any rate, are, as I say in paragraph 31 below, more accurately examples of pre-contract good faith). It is in instances (6) and (7) that the requirements of good faith are equated to ordinary remedies for breach of contract.
28. Mr Rainey submitted that another way of reaching a similar result had been anticipated by Rix J (as he then was) in Royal Boskalis Westminster N.V. v. Mountain [1997] LRLR 523 on which Aikens J placed some reliance. In that case the insured shipowners had deliberately concealed from insurers the details of a "finalisation agreement" particularly the fact that clandestine payments had been made thereunder to the Iraqi government in breach of United Nations sanctions; the assured also deliberately misled insurers by saying that they had not been permitted to retain a copy of the "finalisation agreement". The shipowners had been compelled to waive all their claims against the Iraqi Government and sued the insurers to recover the value of the waived claims pursuant to the sue and labour provisions of the 1906 Act. Rix J held that there was deliberate and culpable misrepresentation and non-disclosure by the shipowners but stopped short of saying that the shipowners had been fraudulent. He also held (page 592) that the insured were not making a fraudulent claim so that the fraudulent claim line of authority did not apply. He next doubted whether the duty of good faith was statutorily intended in the claims context to extend outside the context of fraudulent claims (page 597) but held that, if it did, the non-disclosure and misrepresentation must be ultimately legally relevant to a defence which insurers had under the policy and that insurers must have been induced to change their position. For my part, I do not, on the facts of this case, derive direct assistance from Rix J's cogent analysis on the facts of the case before him, because he deliberately abstained from any finding of fraud. I would nevertheless gratefully borrow the concept that the conduct of the assured which is relied on by underwriters must be causally relevant to underwriters' ultimate liability or, at least, to some defence of underwriters before it can be permitted to avoid the policy. This is, I think, the same concept as that underwriters must be seriously prejudiced by the fraud complained of before the policy can be avoided.
29. I should lastly refer to what has been called the much-discussed decision in The Litsion Pride [1985] 1 Lloyds Rep. 437 where the assured did not inform underwriters that their vessel was about to go into an exclusion zone but concocted a letter to their brokers two days after a casualty in that exclusion zone had occurred; this letter was falsely dated the day that the vessel entered the exclusion zone and informed the brokers and the underwriters that that was what the vessel was about to do. Owners' brokers also wrote later false statements in support of the claim. Hirst J held that the false letter was a fraud clearly connected to the claim and the later statements were made in the direct context of the claim. It is thus a case of making a fraudulent claim and to that extent was, with respect, good law but irrelevant to the present case. To the extent, however, that the case enunciates any wider obligations of post contract good faith in relation to merely culpable non-disclosure or misrepresentation, it has been finally and authoritatively disapproved in The Star Sea (see para. 71) and in the present case Mr Hirst rightly felt unable to place any specific reliance on the decision of Hirst J in that case.

Conclusions on the law of post-contract good faith

30. I have already recorded Mr Hirst's submission that, in spite of the restriction imposed by the decided cases on the operation of section 17 of the Act in cases where the assured has not acted fraudulently, section 17 still applies to all cases of fraudulent conduct on the part of the assured. Mr Rainey, by contrast, submitted that the duty of post-contract good faith (justifying avoidance if not observed) should be confined (1) to cases (analogous to the pre-contract context) in which there was some subsequent change to the contractual position and (2) to cases of fraudulent claims. He did not enumerate the categories of case which would fall within (1) but they would at any rate include categories no (2) – (4) set out in paragraph 22 of this judgment and, perhaps, be confined to them. One further possible category of case, at any rate in liability insurance cases, might be constituted by those cases in which the insurers have to decide whether to be responsible for defending a claim and do, in fact, agree to do so. In such a case a fraudulent misrepresentation which induces an insurer to defend a claim (by appointing solicitors and agreeing to bear the expense of fighting the claim) might well avoid the agreement that the claim be defended. There is, however, no obvious reason why the assured's conduct should entitle the insurer to avoid the whole contract.
31. This submission was, in principle, accepted by Aikens J but there are, as it seems to me, two difficulties with it. The first is that the examples Mr Rainey gives of cases of bad faith leading to avoidance of the contract are not really examples of that at all; they are rather examples of pre-contract lack of good faith because they arise before variation, renewal or application of the "held covered" provision in the policy and avoid the variation, renewal or the application of the "held covered" provision, as the case may be, not the entire contract. As I have said in paragraph 11 it is by no means obvious that even the law of fraudulent claims either derives from or is truly to be treated as an example of post-contract lack of good faith leading to retrospective avoidance of the contract, as opposed to the "forfeiture of the benefit of the policy".
32. The second difficulty with Mr Rainey's submission is that it is not easy to fit within it those cases in which there is lack of good faith post-contract but in respect of which it seems to be accepted that no question of avoidance arises but only damages, whether or not accompanied by an acceptance of the insured's conduct as repudiatory (para 22, categories (6) and (7)).
33. The difficulties inherent in this area of the law can be seen in successive editions of Professor Malcolm Clarke's book the Law of Insurance Contracts. If I may respectfully say so, his book, ever since its first publication, has been much the most perceptive and authoritative text book on the continuing duty of good faith. Chapter 27-1 is called 'The Continuing Duty of Good Faith' and in paragraph 27-1A of his second edition ('The Nature of the Duty') he stated

"As regards insurance contracts, the duty of good faith continues throughout the contractual relationship. In particular the duty of disclosure, most prominent prior to contract formation, revives whenever the insured has an express or implied duty to supply information to enable insurers to make a decision. Hence it applies if cover is extended or renewed. It also applies when the insured claims insurance money; he must make "full disclosure of the circumstances of the case"

The degree of disclosure, however, varies according to the phase in the relationship. It seems that the level of disclosure appropriate to a claim is different from that at the time of contract; a innocent misrepresentation or non-disclosure in the claim does not defeat a claim; there must be fraud . . ."

This passage was approved by the Court of Appeal in The Star Sea [1997] 1 Lloyds Rep 360, 372. In his 3rd edition, Professor Clarke felt it necessary to expand para. 27-1A considerably and introduce two new paragraphs 27-1A1 relating to "The Time of Duty" and 27-1A2 relating to "The Level of Duty". In the current loose-leaf edition of his work, he retains the two new sub-paragraphs but considerably amplifies the body of the main paragraph ("The Nature of the Duty"). In the course of this modification he cites with approval Aikens J's conclusion in the present case that the English cases have gone no further than saying that good faith operates post-contract only (a) when the insurer has been invited to renew or vary his speculation or risk or (b) where the insured is presenting or pursuing a claim on the policy. He then records without express approval what he calls the judge's preferred view that the acts of the insured in the present case did not fall into the accepted category of 'post contract' good faith and that therefore the duty of good faith did not attach at all. This passage was, of course, written before the speeches of the House of Lords in The Star Sea became available.

34. Some authorities have concluded that the law is (or ought to be) that the duty of utmost good faith is only applicable pre-contract and has no application once the contract is concluded outside the context of fraudulent claims. That seems to have been the tentative view of Rix J in Royal Boskalis [1997] LRLR 523, 587 (col. 1) and is certainly the view of Mr Howard Bennett of Nottingham University in his article entitled Mapping the doctrine of Utmost Good Faith in Insurance Contract Law [1999] L.M.C.L.Q. 165. Lord Hobhouse (in paragraph 42 of his speech) in The Star Sea called this article valuable and penetrating but (I think) stopped short of endorsing this particular conclusion. Mr Hirst was able to point to Lord Hobhouse's dismissal of underwriters' defence in that case on the basis that they had failed to obtain a finding of fraud and the comment:-

"Fraud has a fundamental impact upon the parties' relationships and raises series public policy considerations." (Para. 72 at page 196C.)

Mr Rainey pointed out that this was said in the context of fraudulent claims, where it is well accepted that the law has a disciplinary element in order to discourage the making of false and fraudulent claims. By contrast, such a disciplinary element is not to be expected in other areas of insurance law, see Pan-Atlantic v. Pine Top [1995] A.C. 501, 549B-D. Despite Mr Rainey's valid point on this particular dictum, I do not consider it is open to this court to decide that section 17 of the Act has no application after the formation of the contract (according to Lord Clyde this solution is "past praying for", para. 6 of The Star Sea); nor do I think, in the light of the law set out in paragraph 22 above, that the operation of the section can be artificially limited to the two categories for which Mr Rainey contends and which Aikens J accepted viz (1) cases analogous to the pre-contract context and (2) fraudulent claims.

35. It seems to me that the solution to the problem must be found in the somewhat broader context of the appropriate remedy, as I have indicated in paragraph 26 above. Section 17 states that the remedy is the remedy of avoidance but does not lay down the situations in which avoidance is appropriate. It is, in my judgment, only appropriate to invoke the remedy of avoidance in a post-contractual context in situations analogous to situations where the insurer has a right to terminate for breach. For this purpose (A) the fraud must be material in the sense that the fraud would have an effect on underwriters' ultimate liability as Rix J held in Royal Boskalis and (B) the gravity of the fraud or its consequences must be such as would enable the underwriters, if they wished to do so, to terminate for breach of contract. Often these considerations will amount to the same thing; a materially fraudulent breach of good faith, once the contract has been made, will usually entitle the insurers to terminate the contract. Conversely, fraudulent conduct entitling insurers to bring the contract to an end could only be material fraud. It is in this way that the law of post-contract good faith can be aligned with the insurers' contractual remedies. The right to avoid the contract with retrospective effect is, therefore, only exercisable in circumstances where the innocent party would, in any event, be entitled to terminate the contract for breach.
36. The desirability of aligning the right to avoid with the right to terminate the contract for breach is self-evident. It is often observed that the right of avoidance is disproportionate (see the speech of Lord Hobhouse, paras. 61 and 72 at pages 191E and 196B). If the right to avoid in a post-contract context is exercisable only when the right to terminate for breach has arisen, the disproportionate effect of the remedy will be considerably less and the extra advantages given to insurers when they exercise a right of avoidance (eg non-liability for earlier claims) will be less offensive than they otherwise would be.
37. The requirement of materiality has, of course, always been required for avoidance for lack of pre-contract good faith. More significantly, it is also a requirement for the operation of the rule about fraudulent claims. The case of Goulstone v. Royal Insurance Co (1858) 1 F.&F. 276 is instructive. The insured made a claim under a fire policy in the amount of £660 in respect of furniture, linen and china. It emerged in evidence (1) that on the insured's marriage in 1846 there was a settlement of a quantity of furniture, (2) that in 1854 he had become insolvent and declared to his creditors that he had no furniture except that which belonged to his wife under the settlement and which was valued at £50 and (3) that the linen and china (which were not included in the settlement) had been furtively removed at the time of the insolvency. This concealment from the creditors was, of course, fraudulent; Chief Baron Pollock said to the jury that the plaintiff's interest was nevertheless legally insurable, whether or not the creditors ought to have the benefit of the insurance. He continued:-

"But the question is whether the claim [viz the claim on insurers] was fraudulent i.e. whether it was wilfully false in any substantial respect; for instance, as to private furniture which was sworn to be worth only £50 in 1854 and has not since been added to."

The Chief Baron is there drawing a distinction between the material and substantial fraud in the claim on underwriters in respect of the over-valuation of the furniture and the immaterial fraud of concealing the linen and china from the creditors. Further authorities in support of the requirement of materiality are set out in para. 27-2B4 of the current loose-leaf edition of Professor Clarke's work.

38. In the context of deliberate and culpable (but not fraudulent) post-contract conduct, Rix J in Royal Boskalis said that a fact would only be material if it had ultimate legal relevance to a defence under the policy [1997] LRLR 523, 589 col. 2 and Aikens J has adopted that as the appropriate test of materiality where fraud has been proved, see para. 76.
39. Aikens J expressed his conclusion as to the law in that and the following paragraph of his judgment. His view was that there was a continuing duty on the assured to refrain from a deliberate act or omission intended to deceive the insurer through either positive misrepresentation or concealment of material facts and facts would only be material for the purpose if they had ultimate legal relevance to a defence under the policy. I agree with the Judge's conclusion summarised in this way save that I would also add (even if it is usually or invariably to state the same conclusion in different words) that the insurers cannot avoid the contract of insurance for such fraudulent conduct unless the conduct was such as to justify their terminating the contract in any event. If and in so far as Aikens J was intending to go further that this and say that the insurers' defence of bad faith was inapplicable because no "good faith occasion" had arisen (and Professor Clarke thinks that this was the judge's preferred view) I would not agree, since it seems to me that the duty not to be materially fraudulent does continue at all times after the contract has been made.
40. To this extent, therefore, I would reject Mr Rainey's submission that there are only some occasions when the requirement of good faith exists post-contract and accept Mr Hirst's submission that the duty is a continuing one. If, however, I am wrong about that and there are defined categories of good faith arising post-contract, I would conclude that the giving of information, pursuant to an express or implied obligation to do so in the contract of insurance, is an occasion when good faith should be exercised. Since, however, the giving of information is essentially an obligation stemming from contract, the remedy for the insured fraudulently misinforming the insurer must be commensurate with the insurer's remedies for breach of contract. The insurer will not, therefore, be able to avoid the contract of insurance with retrospective effect unless he can show that the fraud was relevant to his ultimate liability under the policy and was such as would entitle him to terminate the insurance contract.

Application to the facts of the case

41. I have already given my reasons in paragraphs 14-16 for stating that the insurers would not have been entitled to bring the insurance contract to an end, if they had wished to do so. It remains to consider whether the fraudulent conduct of the insured was relevant to insurers' ultimate liability on the policy.
42. In my view the fraud was not relevant, ultimately or at all, to insurers' liability. The fraud was in relation to the jurisdiction in which and the law by which the claim against the insurers was to be tried. In the event, it turned out that the law of England and the law of Trinidad were the same so it made no difference to insurers' liability under the policy that it fell to be determined by English law. It is impossible to imagine that the place of trial of the claim against the insured ship repairers would have made any difference to insurers' liability. I have already given reasons for saying that I am not persuaded that fraud by either or both of the Baboolal brothers would have made the evidence of their employees on the matter of responsibility for tightening the bolts of the engine to the correct tension any more or less believable than it would otherwise have been. It is also the fact that the fraud was never directed at the insurers; the deception was aimed at the shipowners; it was incidental that the assured had also to deceive their own solicitors who had been appointed by and were being paid for by the insurers. All that can be said is that these solicitors maintained their summons opposing English jurisdiction somewhat longer than they might otherwise have done.
43. None of these conclusions is, in any way, intended to condone or belittle the fraud perpetrated by the assured. The fact that it was a fraud which was never likely to work and was exposed within about 6 months of being committed does not make it any the less reprehensible. The assured were, to coin a phrase, playing with fire, as these proceedings (now culminating 13 years after the original engine explosion) have shown. Nevertheless it would, in my judgment, be absurdly disproportionate that insurers should be entitled to avoid the insurance policy and thus be able to avoid a liability to their assured which they always had and to which there could never have been any defence, if the insured had not been so over-enthusiastic in trying to assist the insurers to defeat the shipowners' claim.
44. For these reasons, the defence based on section 17 of the 1906 Act fails and I would dismiss the appeal

MR JUSTICE CARNWATH:

45. I agree. The Australian equivalent of the 1906 Act (Marine Insurance Act 1909) has recently been the subject of detailed analysis by the Australian Law Reform Commission ('Review of the Marine Insurance Act 1909' Report 91, April 2001). The report would be a very useful starting point for any consideration of law reform in this country. In relation to their equivalent of section 17 (section 23), they propose that it should be replaced by a revised section which makes clear that the duty of 'utmost good faith' is an implied term of the contract of insurance, and extends, with certain qualifications, for 'the duration of the relationship between the parties'. The reference to the remedy of avoidance under this provision is deleted. A later provision would give a specific remedy to avoid the contract, for a fraudulent breach of the obligations of disclosure in the pre-contract period (their amended equivalents of 1906 Act ss 18-20). Neither their recommendations, nor their detailed consideration of the case law in relation to section 17, including The Star Sea case, provide any support for the wide interpretation put forward by Mr Hirst.

LORD JUSTICE ROBERT WALKER:

46. I also agree that this appeal should be dismissed for the reasons given by Longmore LJ.
ORDER: Appeal dismissed with costs; permission to appeal to the House of Lords refused. (Order does not form part of approved Judgment)