COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE COMMERCIAL COURT
Mr Justice Timothy Walker
London, WC2A 2LL
Wednesday 19 December 2001
B e f o r e :
LORD JUSTICE MANCE
LORD JUSTICE DYSON
| MORGAN GRENFELL & CO LIMITED
|- and -
SACE – ISTITUTO PER I SERVIZI ASSICURATIVI DEL COMMERCIO
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
(instructed by Freshfields Bruckhaus Deringer for the Respondent)
Mr Anthony Boswood QC, Mr Christopher Hancock QC and Ms Sara Masters
(instructed by Simmons & Simmons for the Appellant)
Crown Copyright ©
Lord Justice Clarke:
This is the judgment of the court to which all members of the court have made substantial contributions. It is divided into the following sections:
II. PRIMARY FACTS AND CONTRACTS
III. SUMMARY OF JUDGMENT
IV. CORRECT APPROACH OF TRIAL JUDGE TO EXPERT (AND OTHER EVIDENCE)
V. CORRECT APPROACH OF COURT OF APPEAL
VI. APPROACH OF THE JUDGE
VII. APPROACH TO SOURCES OF ITALIAN LAW
IX. STATUS OF EC
X. GOODS OF NON-ITALIAN ORIGIN
ANNEX A. PROFESSOR GAMBINO
ANNEX B. THE BANKING EXPERTS
ANNEX C. WITNESSES OF FACT
ANNEX D. THE NEW CLAUSE
II. PRIMARY FACTS AND CONTRACTS
"3. The Agency may issue guarantees, whether by insurance or reinsurance, covering the risks --- of a political, disaster, economic, commercial and exchange-rate nature (as referred to in Article 14 below) --- to which Italian companies are exposed when engaging in foreign trade. …
14. The guarantees which the Agency may issue under Article 3 above relate to the following risks incurred by Italian companies:
1) non-payment resulting from:
a) war …
b) natural disaster …
c) payment moratorium …
d) nationalisation of the debtor company;
e) any act or deed by a Government or foreign public body hindering performance of the contract;
2) non-payment for any cause not attributable to the insured party, when the other party is either a foreign Government or public body, or private person whose payment is guaranteed by a Government or a foreign public body authorised to give such a guarantee; …
4) problems arising in respect of foreign transfers from abroad …
9) non-payment due to the insolvency, in law or in fact, of a foreign private debtor; …
16. By way of extension to the provisions of Articles 3, 14 and 15(g) above, the Agency may provide cover against the risks referred to at points (1), (2), (4) and (9) of 14 for loans granted by foreign banks and lending institutions to borrowers in other foreign countries, provided that the purpose of the loans is to pay for Italian exports, or activities connected therewith, or the research or planning or execution of work or supply of services abroad by Italian companies."
"Insurance guarantee covering foreign currency buyer credit provided by foreign financial institutions to borrowers in third countries (public borrower and/or guarantor) pursuant to Art 16 Clause 1 of Law No 227 of 24th May 1977 on the Insurance and Financing of Export Credits, subsequently amended and integrated"
As the judge observed, although the contract is described as a guarantee, it was common ground that the relevant legal principles in Italian law are those of insurance and not guarantee.
"ART 3 – REPRESENTATIONS BY THE LENDER
3.1 The representations made by the Lender in the application for SACE's Guarantee presented on 27th January 1989 and subsequently in writing, as well as such documents as have been presented and signed by [MG] and any other document which may be submitted at the request of SACE, shall form the basis of this contract and form an integral part hereof.
3.3 By its execution of this contract, the Lender acknowledges that the provisions of Articles 1892 and 1893 of the Italian Civil Code apply to the representations made by it."
The meaning of Article 1892 of the Civil Code and its correct application to the facts of this case formed an important part of the judgment and are central to this appeal.
"ART 4 – SCOPE OF GUARANTEE"
4.1 Under this Contract SACE shall cover … the risk of non-receipt of payment from the Borrower under the Loan Agreement, and from the Public Guarantor under the Overseas Guarantee, in accordance with Clauses 1, 2 and 4 of Article 14 of the Act, which are as follows:
B) non-receipt of payment for any reason not imputable to the Guaranteed Party, when the buyer is a government, a foreign public authority, or a private enterprise or individual payment of whose obligations is guaranteed by a government or by a duly authorised public authority.
4.2 In view of the unconditional undertaking by the Borrower, in the Loan Agreement, to fulfil its obligations irrespective of any claim arising out of or related to the Supply Contract, SACE's guarantee shall not be conditional upon performance of the Supply Contract by the Italian Supplier nor shall it be affected in any way by reason of any claim which the Borrower may consider it legitimate to make against the Italian Supplier."
It should be noted that the Italian word translated in Article 4.1(B) as 'foreign public authority' is ente pubblico estero which should probably be translated as foreign public body or entity. It is the equivalent provision in the policy to Article 14.2 of Law 227 and it is common ground that they should both be construed in the same way.
"provide SACE, or any persons appointed by SACE, with all such information as may reasonably be required to verify the Lender's representations under this Contract."
It is not necessary to refer to any of the other provisions of the contract except these. Article 10 provides that any non-receipt of amounts due under the loan agreement would constitute a loss and give rise to a liability on the part of SACE five months after the due date for payment under the loan agreement. Article 13 provides that (as already stated) the contract is governed by Italian law. It also provides for the exclusive jurisdiction of the courts of Rome, but it is common ground that, notwithstanding that provision, MG was entitled to invoke the jurisdiction of the English courts as the courts of its domicile under Articles 8(2) and 12(2) of the Brussels Convention.
"It should be noted that in relation to the change in the economic and regulatory framework in Hungary, the nature of the Hungarian Borrower can be re-examined in order to determine whether or not to maintain the insurance cover for the risk described in Article 14.2 of Law 227 of 1977."
On 3rd January 1992 SACE sent MG an amended proposta in relation to Hungary I. It contained a reservation in the same terms as the proposta in respect of Hungary II. On 4th February 1992 MG informed EC that the Hungary II loan agreement was effective from that date and the first funds were advanced on 11th February. It is common ground that both Hungary contracts were subject to the terms of the reservation, although there is an issue as to its true construction.
III. SUMMARY OF JUDGMENT
"Misrepresentations or fraudulent or grossly negligent failure to disclose. If the contracting party, fraudulently or through gross negligence, misrepresents or fails to disclose circumstances which, if known to the insurer, would have caused him to withhold his consent to the contract, or to withhold his consent on the same conditions, the insurer can annul the contract.
The insurer forfeits his right to attack the contract if, within three months from the day on which he had knowledge of the falsity of the representation or of the failure to disclose, he fails to notify the contracting party of his intention to attack the contract."
"MG had made no, alternatively no proper, enquiries into the status of the borrower, the creditworthiness of the borrower, the viability of the project and/or the likelihood of repayment of the loan".
Particulars of the enquiries that it was alleged should have been taken were contained in the reports of Dr Leonardo Simonelli, who is a banking expert called on behalf of SACE . For its part, MG called Mr Robert Scallon as its banking expert. There was a stark conflict between their evidence.
Status of EC
MG's Alternative Claim
IV. CORRECT APPROACH OF TRIAL JUDGE TO EXPERT (AND OTHER) EVIDENCE
"(1) to inform the court of the relevant contents of the foreign law; identifying statutes or other legislation and explaining where necessary the foreign court's approach to their construction;
(2) to identify judgments or other authorities, explaining what status they have as sources of the foreign law; and
(3) where there is no authority directly in point, to assist the English judge in making a finding as to what the court's ruling would be if the issue was to arise for decision there."
Evans LJ added in paragraph 24 that it is important to note the purpose for which expert evidence is given, namely to predict the likely decision of the foreign court and not to press upon the English judge the witness's personal views as to what the foreign law might be.
"It is however the duty of the judge when faced with conflicting evidence from witnesses about a foreign law to resolve those differences in the same way as he must in the case of other conflicting evidence as to facts."
That statement of principle was followed in Grupo Torras SA v Al Sabah  1 Lloyd's Rep 7 per Stuart-Smith LJ, giving the judgment of the court, at p 18.
"12. … What difference does it make that these are findings of fact but of a "peculiar kind" because they are concerned with issues of foreign law?
13. In our judgment, the answer varies according to the nature of the issue which arises in the particular case and the kind of decision which the trial judge and now the Court of Appeal is called upon to make. Sometimes the foreign law, apart from being in a foreign language, may involve principles and concepts which are unfamiliar to an English lawyer. The English judge's training and experience in English law, therefore, can only make a limited contribution to his decision on the issue of foreign law. But the foreign law may be written in the English language; and its concepts may not be so different from English law. Then the English judge's knowledge of the common law and of the rules of statutory construction cannot be left out of account. He is entitled and indeed bound to bring that part of his qualifications to bear on the issue which he has to decide, notwithstanding that it is an issue of foreign law. There is a legal input from him, in addition to the judicial task of assessing the weight of the evidence given. …"
See also paragraph 19 on p 423.
V. CORRECT APPROACH OF COURT OF APPEAL
"6. An appeal to the Court of Appeal is by way of re-hearing (RSC Order 59 rule 3). The court exercises its own judgment, independently of, though not uninfluenced by the views of the trial judge. No one doubts this as, regards issues of law."
We interpose to observe that it is common ground that this appeal falls to be decided under the RSC and not the CPR because the appeal was brought before 2nd May 2000. We have not therefore considered whether the approach would be different under the CPR and have approached the appeal on the basis of the principles set out in the judgment of Evans LJ, who continued as follows:
"7. The same is true of issues of fact, though the inquiry takes a somewhat different form. It is well established that the court is reluctant to reverse a finding of fact made by a trial judge after hearing and seeing the witnesses, though the court will do this if satisfied that the finding is wrong. The reluctance is particularly great where questions of credibility and reliability arise, or where for any other reason the trial judge who saw the witnesses is better able to make the finding than the Court of Appeal, which has only a transcript of the evidence, is able to do; also, where questions of primary fact are in issue, as distinct from inferences which the court may be as well placed to draw as the trial judge was. In relation to such questions, the court will consider whether there was evidence which entitled the judge to make the finding which he did, rather than making its own decision afresh. …
8. These principles are established by a number of well-known authorities, including Benmax v Austin Motor Co Ltd  AC 370, Watt or Thomas v Thomas  AC 484, … The Ikarian Reefer  1 Lloyd's Rep 455 at p 458 and Pickford v Imperial Chemical Industries plc  1 WLR 1189. They are not in issue in the present case."
"11. The Court of Appeal's approach to the trial judge's findings of fact is no different when the finding is based on or takes account of the evidence of expert witnesses. The same general principles apply. It is less likely in the nature of things that questions of credibility will arise, but even so what is called the demeanour of an expert witness and his response to questioning may be important factors in deciding whether his evidence is reliable, or not."
Brandon LJ said much the same in the passage in Joyce v Yeomans  1 WLR 549 at p 556 to which we referred earlier:
"In my judgment, even when dealing with expert witnesses, a trial judge has an advantage over an appellate court in assessing the value, the reliability and the impressiveness of the evidence of the experts called on either side. There are various aspects of such evidence in respect of which the trial judge can get the 'feeling' of a case in a way in which an appellate court, reading the transcript, cannot. Sometimes expert witnesses display signs of partisanship in a witness box or lack of objectivity. This may or may not be obvious from the transcript, yet it may be quite plain to the trial judge. Sometimes an expert witness may refuse to make what a more wise witness would make, namely, proper concessions to the viewpoint of the other side. Here again this may or may not be apparent from the transcript, although plain to the trial judge. I mention only two aspects of the matter, but there are others."
Brandon LJ was there considering the evidence of medical experts, but in our view the same principles apply to all experts including experts on foreign law. It is true that the former are giving evidence of opinion and the latter are treated by English law as giving evidence of fact, but in both cases the witnesses are in truth expressing their opinions, at least in part.
"The same applies, in our judgment, in the Court of Appeal. When and to the extent that the issue calls for an exercise of legal judgment, by reference to principles and legal concepts which are familiar to an English lawyer, then the court is as well placed as the trial judge to form its own independent view.
VI. APPROACH OF THE JUDGE
"Mr Gioscia was a sound, reliable and reasonably impartial expert witness, on whose opinions I could rely as a basis for determining what the Italian Court's decision on the law would have been if the issues before me had arisen for determination in Italy. Professor Gambino was unreliable and partial, to the extent that I could place no reliance whatever on any of his opinions."
"In summary, I can attach no credibility to any of the evidence emanating from Professor Gambino, and I reject it in its entirety. Effectively, I am left with a situation in which the evidence of Mr Gioscia is uncontradicted."
VII. APPROACH TO SOURCES OF ITALIAN LAW
The Civil Code
"1892. Misrepresentations or fraudulent or grossly negligent failure to disclose. If the contracting party, fraudulently or through gross negligence, misrepresents or fails to disclose circumstances which, if known to the insurer, would have caused him to withhold his consent to the contract, or to withhold consent on the same conditions, the insurer can annul the contract.
The insurer forfeits his right to attack the contract if, within three months from the day on which he had knowledge of the falsity of the representation or of the failure to disclose, he fails to notify the contracting party of his intention to attack the contract.
…. If the accident [or loss – sinistro] occurs before the expiration of the period indicated in the previous paragraph, the insurer is not bound to pay the amount of the insurance."
OBLIGATIONS IN GENERAL
1175. Fair behaviour. The debtor and creditor shall behave according to rules of fairness.
PERFORMANCE OF OBLIGATIONS
Performance in General
1176. Diligence in Performance. In performing the obligation the debtor shall observe the diligence of a good pater familias.
In the performance of obligations inherent in the exercise of a professional activity, diligence shall be evaluated with respect to the nature of that activity (2104, 2236).
CONTRACTS IN GENERAL
REQUISITES OF CONTRACT
1337. Negotiations and precontractual liability. The parties, in the conduct of negotiations and the formation of the contract, shall conduct themselves according to good faith."
Italian jurisprudence has attached importance to the mutual duty imposed under Articles 1175 and 1337 in interpreting in the insurance context the scope of the obligation of disclosure arising under Article 1892.
(1) Were there circumstances, undisclosed by MG, which were objectively material to be disclosed?
(2) Would knowledge of such circumstance(s) have caused SACE to withhold its consent to the contract, or to withhold such consent on the conditions on which it in fact underwrote the risk?
(3) Did MG's failure to disclose any such circumstances involve gross negligence on MG's part (there being no question here of any fraud)?
(4) Did SACE notify MG of its intention to annul the insurance, within three months from the day on which it had knowledge of any such failure to disclose? (It is common ground that this requirement did not apply to any insured loss occurring either before or within three months after the insurer learns of the non-disclosure, which involves a sub-issue as to when any insured loss(es) arose.)
(5) In respect of the EG insurance, did SACE in June/July 1995 affirm the insurance with knowledge of any non-disclosure and thereby waive any right thereafter to annul it under Article 1892?
The Parties' Cases on the Facts
The Framework Case
"The applicant, by signing this application, acknowledges that he is familiar with Law n. 227 of 1977, as amended by Laws n. 393 of 1978 and n. 38 of 1979, and with SACE's standard insurance contract applicable to the transaction referred to in this application. Furthermore, the applicant acknowledges, pursuant to Articles 1892 and 1893 of Italian Civil Code, that all representation made herein are [sic] true and faithful and that no material facts or events have been omitted or altered in this application. The applicant undertakes to (i) inform SACE of any changes in the amount, drawdown, terms, repayment conditions, and [sic] which may occur after the filing of this application, and (ii) deliver the relevant documents to SACE." (underlining added)
The Italian equivalent of the underlined words reads: "e che non è state taciuta, omessa o alterata alcuna circostanza in rapporto al questionario che precede". The Italian appears to affirm that there has been no omission or alteration of any circumstance in relation to the preceding questionnaire.
"The role of good faith is of fundamental importance in the identification of facts which have a bearing on the representation of the risk and which the insured must therefore declare, to enable the insurer to reach the appropriate decisions on the basis of such facts regarding the conclusion of the contract and its terms. However, it is the actual extent of this obligation (or responsibility) that most frequently generates differences of opinion (as, for example, in this case), given the variable and almost indefinable nature of the facts relevant to this principle, and hence the need for an appropriate definition of the scope of facts to be disclosed, with a view, firstly, to counteracting any acknowledgement of fault after the event (premeditated or otherwise) by the insurer and, secondly, providing as precise a definition as possible of the insured's duty to supply accurate information. In this context, the insurer's duty to cooperate is fundamental. Although, in the majority of cases, the insurer is not capable of ascertaining all the facts which have a tangible effect on the nature of the risk, he nevertheless can (and must), in accordance with the rules of fairness, formulate a frame of reference as regards the facts to be disclosed, capable, despite its inevitably fluid nature, of providing guidance to the insured as to the information (on persons or property) to be disclosed. This should include information which, although not specifically requested, nevertheless falls, for reasons of consistency, within this frame of reference, with the result that non-disclosure of such information by the insured constitutes a breach of the principle of good faith. Under such circumstances, the insured cannot, in justification of his non-disclosure, adduce alleged indifference on the part of the insurer regarding knowledge of facts which are unspecified (precisely because they are unspecifiable).
The mutual responsibilities (or obligations) involved are therefore closely inter-linked. It is, however, the insurer's duty to clarify, as appropriate, the facts it is in his interest to know, especially since the insurer's evaluation generally involves highly subjective judgements specific to himself and not always wholly obvious to the insured, unless specifically made known. As a result, any doubts regarding the relevance of undisclosed or misrepresented facts, not specifically requested, or (by inference) the culpability of the person who should have disclosed them, must compromise the position of the person responsible, i.e. the insurer (today no longer in need of the tutelage accorded him in the past and, indeed, now in a position of strength which makes the appellants' reference to "uberrima fides" appear frankly outdated).
In this case, the frame of reference existed, but the fact that it did not include questions regarding previous fires suffered by the individual partners while engaged in their business activities was logically (and definitively) interpreted by the Court ruling on the merits as an indication of the insurance companies' indifference to the personal affairs of the individuals concerned (or, even more so, their close relatives). This was a radical conclusion, certainly, but nonetheless justified, not so much (or not only) by the subjective distinctions (now established in case law and jurisprudence) between non-partnerships and partnerships, as (and more so) by the ambiguous precontractual conduct of the appellants (over and above the suspicion, alluded to in the police report, of the appellants having been unashamedly attracted to the contract by the lucrative premium), which appears to rule out pre-meditation (or gross negligence) of the part of the insured in not disclosing the facts. The first two grounds of appeal must therefore be dismissed."
"For the purposes of establishing the wilful deception or gross negligence, it is also necessary for the declarant not only to be (or to have to be) aware of the circumstances not mentioned or inaccurately expressed, but also to be (or to have to be) aware of their value in bringing about the consent of the other party. To this end, to delimit the scope of the aforementioned obligation of the party being insured, the insurer, respecting the rules of proper conduct, is bound to prepare a frame of reference of the circumstances that they intend to know, such as appropriately to reduce the "spaces of indeterminateness" concerning facts, people or things that they are interested in knowing, with the consequence, in the absence of this, that any doubts as to the relevance of the circumstances not (or inaccurately) declared, in other words, as to the relative culpability, remain incumbent upon the insurer who has given rise to them (see Corte di Cassazione, 20th November 1990, no 11206). In other words, the subjective psychological element (fraudulent or culpable) must "relate to" not only the knowledge of the falsity or the concealment, but also the knowledge that the information was relevant for the purposes of the consent of the other party.
It follows that where the insurer, as is established in the case in point by the impugned judgement, has expressly stated in the special questionnaire, drawing the insured party's specific attention to the point, that the knowledge of previous losses of the same nature (whether relating to the things to be insured or to others owned by the contracting party) suffered by the insured party, is essential for the purposes of the effectiveness of the contract, and particularly for the purposes of articles 1892 and 1893 of the Civil Code, it must be considered that the contracting party who has made the reticent or false declaration was aware (or would have had to be aware in order not to fall into gross negligence) of the relevance of his declaration, it not being possible objectively to request more of the insurer to guarantee this awareness by the insured party of the relevance of the declaration."
"the contested judgment did not, as a matter of principle or absolutely, confine the insured's obligation of honesty solely to the information and details requested by the opposing party, but in this case affirmed the replies given to the specific questions posed with regard to the factual elements most closely connected with the type of insured risk were sufficient (i.e. with regard to fire insurance on a textile workshop ….). Within those limits …. the opinion of the Court of Appeal must be shared, given that, in cases where the insurance company takes pains to ask the insured for specific information, by means of a suitable questionnaire, regarding the risk concerned in the contract, the failure of such questions to take account of particular factual considerations closely connected with the subject of the proposed transaction is evidence of the insurer's indifference to these facts and, therefore, places them outside the scope of the matters of which the insurer wished to be informed".
In the event, this reasoning merely confirms the conclusions which we have anyway reached. The fact that SACE did not direct any question, either in or apart from its application form, to the extent of MG's inquiries into the transactions, to their viability or to the borrower's standing is of no more than evidential weight in relation to any issue which we have to determine. As such, it may be of considerable weight, as the Italian cases show. But it cannot be conclusive and its weight in any particular case must ultimately depend on the nature and particular circumstances of that case.
The Facts - Discussion
"The liability of the Borrower to make payment under this Agreement shall be in no way conditional upon the due performance by the Supplier of its obligations under the Contract, or SACE of its obligations under the SACE Insurance Guarantee, nor affected by any dispute under or unenforceability of the Contract or the SACE Insurance Guarantee …. The Bank shall not be under any obligation to enquire into the adequacy or enforceability of the Contract or the SACE Insurance Guarantee or as to whether any default, dispute or non-performance has arisen thereunder."
Article 4.2 of SACE's policy conditions, set out earlier in this judgment, reflected this.
"The term "Project Financing" is normally used to define the financing operations of a project, generally on a large scale, the repayment of which depends on the political, technical, and financial viability of the project itself, and in which the role of the owners, sponsors, and guarantors is subordinate.
The project financing risk as a result is the risk associated with such operations and can be distinguished from the purely political risk, in which the central aspect is the evaluation of the country, and of [sic] the commercial risk, in which attention is centred on evaluating the private guarantor or purchaser".
"SACE will grant or deny the request on the basis of the information gathered. Given that the purchaser is abroad these enquiries may be difficult and take time. It is therefore in the interests of the operator to provide SACE with any details that might assist with the gathering of the information as soon as possible. As well as the normal investigations that are carried out as a matter of course, there is always the possibility of evaluating the overseas clients on the basis of the information supplied by the above-mentioned insured parties on condition that ….."
In a dispute arising under a commercial policy, these passages might reinforce the evidential significance of any failure by SACE to ask questions in or outside its application form about the project's viability or buyer's standing. We would not however be ready to go so far as to accept MG's submission that they would exclude any duty of disclosure, even in relation to commercial insurance. But they again highlight the difference between SACE's concerns in relation to political and similar insurance on the one hand and commercial insurance on the other hand.
"While the "country risk" and "commercial risk" are currently assessed by SACE at the assumption stage, according to criteria and parameters that may also be assessed and verified on an international scale, evaluation of the underlying transactions and the standing of the Italian supplier has only been applied in special circumstances (eg project financing, transactions relating to countries that are considered with caution). On the other hand, no type of evaluation procedures would appear to have been defined for the lending bank providing the loan."
The judge cited and relied upon the second sentence of this paragraph. SACE submits that he misunderstood it, and that it refers to procedures for evaluation of the bank, not procedures to be undertaken by the bank. Even assuming that this is so however, the first sentence clearly reflects the fact that, prior to KPMG's "new approach", SACE did not itself investigate or manifest any positive interest in project viability or buyer standing (save in "special circumstances"). In that respect it is consistent with SACE's manuals. Before us, however, Mr Boswood pointed out that this does not mean that SACE did not assume that MG was itself investigating such matters. Indeed, he also suggested that passages in the KPMG reports support SACE's case that it did make such an assumption. We do not think that this was a correct reading of KPMG's reports, or any passage in them, and, even if was, it could not be decisive as to what SACE's actual state of mind was prior to and in 1991.
The Oral Evidence
"All the SACE employee witnesses who were called had been with SACE since its inception in 1977, save Miss Bartolucci who joined in 1978. None of the employee witnesses had any relevant commercial experience outside the confines of the Italian state bureaucracy. Their loyalty to SACE was transparent, and it permeated their evidence. With varying degrees of emphasis and detail, they all gave evidence to the effect that at the time of these transactions SACE expected the lending banker in buyer credit transactions to have done due diligence on the borrower and/or on the viability of the project and/or even on the ability of the exporter to perform the contract , despite in the latter case the express term in each of the SACE standard form contracts with MG that SACE's guarantee was not conditional upon performance of the supply contract by the Italian supplier (i.e. the exporter)."
The Banking Experts - Conclusions
SACE's Oral Evidence of Fact - Conclusions
Key Questions - Conclusions
"Misrepresentations or fraudulent or grossly negligent failure to disclose. If the contracting party, fraudulently or through gross negligence, misrepresents or fails to disclose circumstances which, if known to the insurer, would have caused him to withhold his consent to the contract, or to withhold consent on the same conditions, the insurer can annul the contract."
The key questions are (1) whether there were undisclosed circumstances objectively material for disclosure by MG to SACE, (2) whether disclosure of such circumstances would have caused SACE to withhold its consent, or its consent on the same conditions, to the insurances or any of them and (3) whether any failure to disclose any relevant circumstances occurred through MG's gross negligence (there never having been any suggestion of fraud by MG). We shall consider these questions under the headings, objective materiality, causation and gross negligence.
IX. STATUS OF EC
1. What is the correct test for deciding whether a body is an epe?
2. If SACE's test is applied, what was the status of EC at the time the covers were granted?
3. If MG's test is applied, what was the status of EC at the time the covers were granted.
4. If EC was not an epe at the time the covers were granted, are the covers void under Article 1895 of the Civil Code?
5. Did the status of EC change such that the covers became void under Article 1896 of the Civil Code?
6. If the answers to questions 4 and 5 are yes, are the covers rendered void or voidable or otherwise unenforceable by the application of the doctrines of condicio juris, presupposizione or mistake?
7. If the validity of the covers was not affected in any of the above ways, did SACE validly terminate the cover in August 1993 by the exercise of the contractual reservation on the ground that the status of EC had changed?
8. If so, what was the effect of the termination?
9. Is any of SACE's defences prevented by the doctrine of exceptio doli?
So far as necessary to decide this appeal we shall consider each of those questions in turn. We shall therefore begin with question 1. As will be seen, our answer to that question will involve some alteration to the remaining questions posed by Mr Boswood.
What is the Correct Test for Deciding whether a Body is an epe?
"Interpretation of Statutes. In applying statutes no other meaning can be attributed to them than that made clear by the actual significance of the words, according to the connection between them, and by the legislative intent."
The Competing Views
"(a) the entity takes care of public interests in a broad sense, ie pursues (i) State purposes or (ii) purposes which are instrumental to the State or (iii) purposes which are in any way considered by the State (either at national or local level) with particular interest insofar as they are supplementary or auxiliary to its own;
(b) the entity is subject to a legal regime which is different from that which governs private entities in that (inter alia);
(i) it has been established by one or more public entities (unless it has been established by operation of law); important events affecting the life of the public entity (eg putting the entity into liquidation or the reorganisation of the entity) require a legislative or administrative act;
(ii) it is not usually allowed to dispose of the assets destined for its offices and services insofar as these assets must be used for the achievement of its "institutional" purposes and cannot be diverted from such use;
(iii) it is the holder of public law powers and prerogatives (so called autarchia) and it is subject to particular rules of behaviour (eg to respect the principle of impartiality and good administration in accordance with Article 97 of the Constitution (according to which "the structure of public entities is provided for by the law in order to assure the good administration and impartiality thereof"));
(iv) it is subject to the direction and control of the State or other public entities in order to assure compliance with the law and consistency with the actions of the state and other public entities, or it forms part of a public organisation implying a public control over its activities; sometimes the courts have made reference to the intervention of the State or other public entities in the appointment and removal of directors as a typical feature;
(v) when a public body is established, certain assets (movables and/or immovables and/or cash) are contributed by its founder, being the State or other public entity; further, the State or other public entities participate in the expenses and the profits arising out of its activities; at the completion of the liquidation procedure, if any, remaining assets are attributed to the State;
(vi) it is not subject to the same insolvency regime as private entities; in the case of the insolvency or grave financial difficulty of a public entity the competent Ministry, typically the Treasury, must declare its liquidation; liquidation is also required where the objects of the public entity have ceased or are no longer feasible, or if the public entity is unable to implement its corporate objects; however, … , the State is not obliged to pay, nor is it liable in respect of, the debts or obligations of public entities;
(vii) it cannot be dissolved voluntarily, ie as a result of discretionary decision taken by its internal management organ; dissolution may take place for the reasons expressly stated in the Memorandum or Articles of Association of the particular public entity, or by provision of law or by virtue of an administrative act issued on the basis of provisions of law.
"In other words Law 227 envisages the possibility of covering the risk deriving from the sovereign will of the foreign state. Such will may be either directly attributable to the state or indirectly through its organisations: ie the public entities. The relevant element is that the decision of the public entity whether or not to make the payment must be attributable to the foreign sovereign state and this is why such risk is commonly referred to as 'sovereign risk' or risk of 'political insolvency' as distinguished from the risk referred to by Article 14/9 of Law 227 referred to as 'commercial insolvency'".
"one who, in one form or another, represents the public power itself (States, regional or local authorities having a subordinate status such as provinces or local government units, public authorities) and who cannot, either judicially or administratively, be made insolvent."
"(i) EC was not only capable of being put into insolvency but was the subject matter of an insolvency petition which had been presented in 1990.
(ii) The Hungarian Government had no obligation to inject funds into EC. EC was responsible for its liabilities up to the extent of its assets."
On the basis of those assumptions Professor Gambino expressed the view that EC was not an epe for the purposes of Law 227. He again stressed a little later that "it must be the case that the body cannot be made insolvent, so that the credit risk is a sovereign one".
"A public purchaser is one which may not be subject to bankruptcy through judicial or administrative procedures it being somehow an organ of the State".
Professor Gambino added that that definition was given after it had been stated in the report that "within EEC, and accordingly also on the Italian part, the said definition had been accepted".
"public entities are those that, independently from their legal structure, exercise functions which are proper of the State which - under any form - be held responsible (sic) for the fulfilment of the obligations undertaken by them and that are not subject to bankruptcy procedure. The public nature of the entity may also be recognised within the framework of the above definition [emphasis added] taking into account, for example, the following (alternative) elements: constitution of the entity by law; share capital constituted by an endowment fund by the State. In general, one should take into account also the public purposes that the entity pursues under its by-laws".
"in confirming said criteria (meeting of June 1965) added the important clarification that in the event that the research about the bankruptcy proceedings did not give results, one should have based the decision upon other relevant elements illustrated in the previous meeting of the Committee that indicated how on the background of the entity under consideration there be the presence and responsibility of the State"."
As can be seen, those criteria are not confined to the two advanced by Professor Gambino: the "alternative" criteria include some of Avv Gioscia's indicia including constitution of the entity by law and provision of capital by the state.
"State businesses in socialist countries which, in accordance with their statute expressly exclude any State guarantee with the usual formula "the State is not liable for the body's obligations or the body for those of the State."
"The clause [ie the 'usual formula' quoted above] cannot, in the Department's opinion, preclude recognition of public legal status because it shows the principle of cost effectiveness and managerial autonomy of the body, according to the new economic development models of socialist countries, but does not represent total "irresponsibility" of the State which gives the endowment fund, organises the business, nominates the decision-making bodies and ensures that the body is thoroughly checked.
One could maintain in this respect that the State guarantee is a consequence rather than a source of the public legal status of any one body.
There are similar restrictions on applying the criterion of not being subject to insolvency procedures when the body in question is located in a country where this practice has been stopped, as is the case."
Was EC an epe on the facts in December 1991 and January 1992?
"The state does not take on guarantees for obligations assumed by individual firms, the firms can however become insolvent."
The Ministry also, somewhat unhelpfully, said that the Hungarian authorities could not provide the information sought, which could be obtained for a fee, according to western practice, from law firms or banks.
"…. the Hungarian statement according to which the State would not guarantee any obligation for single firms, which would therefore become insolvent in the case of economic crisis, appears extremely relevant. If such a statement contains a general principle which is also valid for "State firms", the root of the problem has thus been solved insofar as not only can no economic entity in that country any longer obtain the qualification of "public body for insurance purposes", but moreover all the "recognition" given in the past must be withdrawn ….
However, and in conclusion, as far as EC is concerned, SACE has obtained a note … from [AVU] dated 08.07.91 from which it appears that this Hungarian firm (in charge, it would appear, of privatisation) claims not to have any intention of privatising EC which therefore will continue its activities as a "State firm". Just what the consequences and effect of such an expressed desire will be constitutes the key in finding a solution to the problem of the firm in question, as for all the other Hungarian firms. In other words, it appears indispensable to clarify with the relevant Hungarian Authorities (which can only be those State bodies in charge of privatisation), what the position of the Hungarian firms/bodies must be (also and, especially, in terms of liability for debts) insofar as by not being privatised, they will maintain their original status of State bodies/firms."
Mr Boswood submitted that that memorandum showed that SACE thought that a body could only be a "public body for insurance purposes", that is an epe for the purposes of Law 227, if the state in practice took financial responsibility for it. We agree that it does give some support for that submission. However, SACE's position thereafter was somewhat different because it focused exclusively or almost exclusively on the legal status of EC as a matter of Hungarian law.
"It should be pointed out that the insurance cover for the risk referred to in article 14/2 will be examined once there is confirmation of the legal status of the Borrower."
Such limited cover was not acceptable to MG and on 18th October MG applied for cover under all three provisions in respect of Hungary II.
"Within the meaning of the founding decree (dated 18 February 1986, Budapest) and that of registration (dated 9th May 1990, Miskole) both documents of the Ministry, I hereby declare that EC … is a state-owned enterprise".
Dr Pernozzoli said in evidence that he regarded attachment 5 as of particular importance or, as a he put it (T2/13/11/17) a "decisive document".
"However, I must say that the fact that EC was not going to be part of the privatisation process. Now this fact placed the company - EC – within the traditional system used in Eastern Europe; that is to say within a framework of an economy which, at least in part, was still centrally run. As we saw yesterday, our approach vis-à-vis Eastern Europe countries was based on the political and economic system with regard to assessing the legal status for insurance purposes.
Q. In such cases you did not expect a guarantee, as such, from the foreign state but you were satisfied that the economic system in the country in question would provide sufficient state backing, is that right?
A. Yes, it is right. However, I need to stress that I was not expecting this; it was the system that was expecting as much."
The documentation acquired points to a State framework in the incorporation (1986) of the business in question and of the continuing desire of those authorities to exclude it from the privatisation process underway maintaining the original legal status of "State body".
It is proposed, therefore, to recognise the PUBLIC legal status, for insurance purposes, of the Hungarian body [EC] with, moreover, the condition set out for the interested parties that SACE reserves the right to re-examine the legal status should the body subsequently be involved in the privatisation process."
"In its note of reply the Hungarian Ministry for Foreign Affairs claimed that the public or private nature of a commercial company did not entail any differences as far as the assumption of responsibility on the part of the Hungarian state vis-à-vis obligations assumed by the company itself was concerned; ie because, on the basis of the local regulations (law on economic companies no 6 of 1988), the companies, both public and private, can be subject to bankruptcy proceedings."
It was thus appreciated (as we see it) that there was a risk that the Hungarian state would not stand behind an entity, whether public or private, because it could be put into liquidation and because the state would not issue a guarantee.
Did the Status of EC Change?
"It should be noted that in relation to the change in the economic and regulatory framework in Hungary, the nature of the Hungarian Borrower can be re-examined in order to determine whether or not to maintain the insurance cover for the risk described in Article 14.2 of Law 227 of 1977."
It was common ground that the question under that clause was whether the nature of EC remained the same or whether at any relevant time it ceased to be an epe and became an ente privato for the purposes of Law 227.
"The section had recognised for insurance purposes the legal status of [EC] … as a state owned enterprise on the assumption of a government guarantee in respect of the obligations assumed by the said company in addition to the fact that it could not be made insolvent."
The judge said that, as a statement of fact, that paragraph was simply untrue. Mr Boswood submitted that that was unfair because everyone knew that there was no state guarantee so that the reference to "government guarantee" must have been a reference to an indirect guarantee or a guarantee in practice. There is some force in that submission, although it does not explain Dr Scifoni's reference to insolvency. The Embassy replied on 6th August 1992 as follows:
"… I can only repeat what has been said several times by the Hungarian government, that it will not (repeat not) give guarantees of its own in respect of obligations assumed by Hungarian businesses, whether publicly or privately owned."
"This is to certify that [EC] … is a state company that was established by Decision of Foundation No IG 568/1985/E/2501. The company is directed by the Company Council as well as … director general. At present [EC] … is not included in the list of companies to be privatised and will remain state property until the execution of the programmes guaranteed by SACE. If – on the basis of a legal rule – the company will be transferred into a company limited by shares, the shares will remain the property of the State"
As before, it appears that the translation is not quite accurate and that EC was not a company but a body and the reference to "Company Council" was a reference to the enterprise council.
"In this sense, therefore, the Departments – in view of the fact that to date the Diplomatic Representative in Budapest has not provided new information concerning the company under review and the wish of the Hungarian Government not to guarantee obligations taken on by Hungarian companies, whether public or private has not changed, as indicated above[-] propose exercising the right reserved by your Committee in the meeting of 14/11/91 by attributing NON PUBLIC legal status for insurance purposes to the body in question."
On 5th August 1993 the Committee decided to accept that recommendation. It decided to give non-public legal status to EC for insurance purposes "with effect from the date of today's decision and the body will consequently be deleted from the list of bodies which have been recognised as public by SACE". SACE notified MG of that decision on 14th September 1993.
X. GOODS OF NON-ITALIAN ORIGIN
Law 227 and the Contractual Documents
"….[SACE] may provide cover against [Article 14.2 risks] for loans granted by foreign banks and lending institutions to borrowers in other foreign countries provided that the purpose of such loans is to pay for Italian exports or activities connected therewith, or the research or planning or execution of work or supply of services abroad by Italian enterprises…." (emphasis supplied)
The critical words in Italian are:
"Purche detti crediti siano destinati al pagamento di esportazione italiane…"
"On completion of such works the Buyer will obtain a certificate of acceptance from the Contractor for the works executed by the Buyer for and on behalf of the Contractor within the scope of the contract".
"Details of the Italian materials, equipment and/or services supplied are set out in the attached copy invoice and Certificate of Work done duly certified by the Buyer under Article 6.2(d) of the Contract".
In the event, it was agreed between MG and SACE that the clause 3B alternative would be adopted.
"The insurance contract will be regulated by the general policy conditions, as well as by the regulations of the Italian Civil Code where applicable and where exceptions have not been made. The terms and conditions set out in this contract proposal will form an integral part of the insurance contract.
The basic assumptions of this contract proposal and therefore the conditions for the validity of the insurance guarantee are:
(A) that the financing be intended for the payment of approximately 82.35% of the value of the underlying commercial contract and refers exclusively to goods and services of Italian origin included in the project.
[The Italian original of this passage is: "che il finanziamento sia destinato al pagamento dell' 82.35% ca del valore del contratto commerciale sottostante e riferito exclusivamente a merci e servizi di produzione italiana incorporati nel opera"].
(B) that the balance of 17.65% of the value indicated in (A) be paid by the Buyer in the manner provided for.
The guarantee will come into effect when the following have been satisfied:
(1) your institution shall notify the date on which the Loan Agreement comes into force.
(3) the Italian exporter shall provide SACE with proper notification confirming the date of receipt of the cash payment as laid down in the above commercial contract.
It should be pointed out that any foreign disbursements above the amount indicated for local expenses will result in a proportionate reduction in the insurance cover."
As will become clear, this last sentence assumed considerable significance in the argument before us, although it had not been mentioned at any stage in the proceedings (including in SACE's written submissions for this appeal) until Mr Boswood came to make his oral submissions.
The Evidence of the Experts
"In view of the unconditional undertaking by the Borrower in the Loan Agreement to fulfil its obligations irrespective of any claim arising out of or related to the Supply Contract, SACE's Guarantee shall not be conditional upon performance of the Supply Contract by the Italian Supplier, nor shall it be affected in any way by reason of any claim which the Borrower may consider is legitimate to make against the Italian Supplier."
"It is my opinion that the word "destinati" means both in the normal use of Italian language and in the interpretation by the Cassazione as being actually used for the specified destination. Consequently any portion of the loan which does not actually pursue its prescribed destination is a risk not covered and an indemnity is not due for it".
"If MG had to concern itself with the actual use rather than the intended purpose of the loan, it would not know that all of its loan was insured until after all the loan advances had been drawn down and used, and "their actual use ascertained with certainty"."
These last words were quoted from the report of Avv Gioscia.
"Here we have a case in which the policy only provides insurance – in strict application of Law 227 – with respect to a loan "destined to purchase Italian goods" (our emphasis).
Thus both Italian law experts considered that the meaning of "destinato" was the same in Article 16 as in the contract documents. That was the position adopted by both parties before the judge, and it was reflected in the written submissions placed before us for the purposes of the appeal. SACE's submission (paragraph 9.2) said that the contractual provisions "mirror the statutory wording". MG's submission (paragraph 10.1) referred to the contracts as "reflecting the provisions of Article 16". That remained the position until, in his submissions in reply to us, Mr Boswood said that the law was no more than a "relevant consideration in construing the contract", and that the contract could be narrower than the Law. In other words, even if "destinato" in Article 16 was a purpose word, it did not follow that, where it was used in the contract documents, it was not a performance word.
"2.3…..The Borrower agrees that the Bank shall have no responsibility in respect of Disbursement Notices other than to check the signatures appearing thereon and that the amount of any invoices attached thereto equals the amount requested in the Disbursement Notice….
2.4….it is hereby acknowledged that the Bank shall be entitled (but not obliged) to rely on the accuracy and completeness of any information or certificate contained in any Disbursement Notice or in any document delivered pursuant thereto"
SACE's New Case
"It should be pointed out that any foreign disbursements above the amount indicated for local expenses will result in a proportionate reduction in the insurance cover".
"The rule is firstly, that the words used must be given their normal literal meaning and secondly, in case of ambiguity the court must seek to ascertain the intention of the parties in some other manner. In this connection the subsequent conduct of the parties is one such course".
Avv Gioscia (paragraph 4) put it this way:
"In interpreting the contract one must investigate, and determine what the common intention of the parties was, and not limit oneself to the literal meaning of the words. For this purpose, the overall conduct of the parties is of relevance, including conduct subsequent to the formation of the contract".
i) SACE was not entitled to annul the contracts under Article 1892 of the Italian Civil Code;
ii) EC was an epe at all relevant times so that SACE has no defence to MG's claims based upon its case that EC was not an epe and, in particular, has no defence under Articles 1895 or 1896 of the Code and was not entitled to refuse to maintain the Hungarian insurances in reliance upon the express reservations in them;
iii) SACE was not entitled to rely upon the fact that some of the goods supplied under the Hungarian contracts were of non-Italian origin; and
iv) the judge was right to hold that all SACE's defences failed.
In the light of these conclusions it has not been necessary for us to express an opinion on a large number of questions which were debated during the course of the argument, including MG's alternative claim. In the result, the appeals fail and must be dismissed.
Order: Appeal dismissed with 80% of the costs of the appeal; costs order below to stand; no order on claimant's appeal, those costs to be part of the costs of the appeal; no order on application for permission to adduce fresh evidence; application for permission to appeal to the House of Lords refused.
A. THE JUDGE'S CRITICISMS
Academic with No Relevant Experience
No Grasp of Commercial Practice
Not on Top of Source Materials
Put Forward Views that were Obviously Absurd and "simply to assist SACE"
(1) Escussione preventiva: MG had no cause of action in the EG action because it had failed first to enforce the collateral guarantee given by the Republic of Equatorial Guinea.
"it is expressly agreed that, notwithstanding all other conditions of the insurance contract, payment of an indemnification is subject to proof from the Insured that the obligation of prior enforcement of the above-mentioned collateral undertaking has been fulfilled."
In its original defence, SACE alleged that MG had no current cause of action because it had provided no proof of prior enforcement ("escussione preventiva") as required by Appendix 1. Professor Gambino's report (paragraph 19.1-19.3) appeared to support this plea. But it was somewhat equivocal in that paragraph 19.4 appeared to treat the point as going to MG's ability to execute a judgment, and not to whether there was a current cause of action at all. When cross-examined, he was asked to clarify the matter. He did not support the "no cause of action" defence. When asked (at T3/22/77) whether the "no execution" defence was available to SACE, he said that the judge could grant MG an indemnity against SACE only if there was proof that escussione had occurred or would occur. He acknowledged that there was no case law on the question whether an Italian court would refuse to enforce a judgment of the English court, and eventually said (T3/23/2) that an English judgment would be enforced in Italy.
(2) MG's failure to exercise a right to refuse to allow drawdowns to continue was a variation of the policy (sic)
(3) The only persons whose knowledge was relevant for the purposes of the three month limit in Article 1892 were the chairman of INA or the chairman of the Management Committee of SACE.
(4) The insured event did not occur until mid to late June 1996 when the liquidator made a statement about the insufficiency of EC's assets.
EC Directive 70/509
The Framework Case
"[The insurer] may prepare a framework of reference of the circumstances that he wishes to know about. Such a framework must inevitably be flexible in its approach, and this be capable of leading the other party to provide even the information that has not been specifically requested but that is pertinent. Such information must be provided in good faith by the applicant, who cannot justify omissions on the grounds that the insurer was not concerned with finding out about unspecified circumstances".
Removal of Sentence from First Report in Hungary Action
B. OTHER POINTS RELIED ON BY MG
Alleged Post-contractual Duties of MG
Ignorance of Fundamental Facts Relevant to Disclosure and Status Issues.
Other Instances of Suspect Presentation or Selective Translation
(1) Suspect treatment of authorities on mistake as to personal characteristics
(2) Selective translation of authority on gross negligence for Article 1892
"it is a case of gross negligence when the insured makes inaccurate statement or fails to disclose facts…not observing the care of using normal diligence in investigation as to the circumstances to be disclosed".
The words omitted were:
"not caring to examine the [insurance] questionnaire".
"(1) Export credit finance is a specialised form of lending promoted by an exporting government (through its ECA) to encourage exports from its country. In a typical buyer credit transaction, a buyer in one country (usually a relatively poor country) wishes to import a significant item of equipment purchased from a supplier (the exporter) in another country, usually a member of the OECD. Where commercial credit is not available, then the buyer will require an export credit.
(2) The ECA has an interest in seeing that the transaction proceeds, because its role is to encourage exports in the national interest. Equally, where the borrower or ultimate guarantor is a state or state entity the project may well not be commercially viable. A state is entitled to spend funds on any project it chooses, and it is common that projects are pursued on grounds other than commercial viability.
(3) In supporting a buyer credit, the ECA takes a credit risk on the borrower or ultimate guarantor. The lending bank, when structuring a buyer credit, will look for a payment risk which is acceptable to the ECA such as a state body, or government as ultimate guarantor. It is for the ECA to consider the country risk of the relevant state. In the event of default, the bank looks to the ECA to pay off the loan, and the ECA will in its turn pursue payment from the government guarantor.
(4) The lending bank in such a transaction considers that it has no credit risk because the loan is guaranteed by an OECD government (through its ECA). ECAs offer insurance guarantees (eg SACE) or unconditional guarantees (eg the United Kingdom). The Bank of England accepts that the net effect of the two types of contract is similar. In its capacity as MG's supervising body at the time, the Bank of England accepted the SACE insurance guarantees as unconditional OECD government undertaking and as zero weighted for capital adequacy purposes.
(5) In a buyer credit transaction structured on this basis, the lending bank does no due diligence. By definition, the lending bank is not prepared to accept the credit risk involved in a commercial loan, but is prepared to provide a buyer credit, because the risk of loss is eliminated by the guarantee or insurance policy of the ECA of the supplier's country. Thus the bank is not concerned to assess the solvency of the borrower or the commercial viability of the transaction. Such an investigation would be out of keeping with normal export credit practice in a transaction of this type."
The judge added:
"I accept the evidence which I have sought to summarise here, together with the rest of Mr Scallon's two expert reports. "
"Dr Simonelli drew no distinction of any kind between political and commercial risks, nor between ordinary buyer credit transactions and project finance. It is implausible to suggest that the degree of due diligence to be expected of a bank is the same in all these cases."
- "'Project financing' is a different concept in banking, which involves the analysis of the economic viability of the project off the proposer's balance sheet (p.3) …
- There is a major difference between buyer credit extended in relation to a loan to a bank of the country of the buyer (the buyer bank) or to the commercial entity (private or public) which has entered into the commercial transaction with the supplier. Of course, in this second case the links between the financial transaction and the commercial ones are difficult to avoid and normal prudence expects a more scrupulous analysis by the lending bank of the buyer. (p. 7) …
- Due diligence is not an exact science. The nature and extent of the checks required depend upon the outcome of the bank's initial investigations of the borrower, the supplier and the impact on them of the underlying contract. However there are certain checks that a bank must undertake in all cases. Initially, these checks focus upon the borrower and the supplier. If these checks establish that the borrower or the supplier are small companies and that the transaction involves a relatively important project and that the project itself is the primary source from which the loan will be repaid, then a detailed review of the viability of the project should be undertaken." (p. 9)
"Well, firstly due diligence mention [?as I mentioned] is not an exact science and indeed procedure tended to differ between banks, between size, between several differentiation and indeed there is also differentiation if you are talking about a purely commercial or an inter-government agreement or a public entity backed by a guarantee. It depends a lot on due diligence. The kind of satisfaction you receive to your gradual velocity, to your confidence of probability of the loan to be repaid." (T3/26/150)
It can be seen that Dr Simonelli's oral evidence suffered from his imperfect English. But the general sense of this answer was clear (and he repeated his acknowledgement of the difference on the next day: T3/27/14). We also note that MG itself in its submissions (part 3 paragraph 135) rightly acknowledges this answer. It seeks, however, to contrast it with a previous reply, relating to IMI, that "[it] is a bit of everything". MG interprets it as referring to IMI's "(alleged) procedures" of due diligence. In our view it is clear from the question and answer that Dr Simonelli was referring, not to IMI procedures, but to its business. There is therefore no contrast. The upshot is that we cannot see the basis for the first of the judge's specific criticisms.
"This simply ignores the reality of the commercial position, namely that MG would not have touched the transaction with a barge pole without an insurance guarantee from SACE. No remotely sensible banker would lend on a hotel project in Equatorial Guinea without ECA cover."
That can be accepted, but it ignores the differences that nonetheless exist between, on the one hand, a hotel project in EG which has been properly and objectively conceived and planned for the good of its promoters or of the local country and, on the other hand, a hotel project without any sensible commercial or social rationale or with serious question-marks over the identity and integrity of its promoters. Dr Simonelli readily (rather than "eventually" as MG submits) accepted that the rationale of a transaction could be its social, rather than strictly commercial, good. The point that Dr Simonelli was making in his report (paragraph 7.1.12) was that the whole project was suspect in the latter sense. The fact that a prudent banker would only enter into certain projects if it had ECA backing cannot of itself mean that a prudent banker would be willing to enter into any and every transaction, however suspect, if it had ECA backing. Mr Scallon himself accepted this, since (a) he accepted that banks do care for the success even of transactions covered by ECA insurance, since such transactions involve administration and their success or failure can affect a bank's public reputation and future relationship with an ECA, so that he acknowledged that banks would at least get down the "key facts" relating to such transactions and (b) he accepted that, if a bank knew of a winding up petition against a potential borrower (like that against EC in November 1990), it would have investigated the position and would not have pursued any application to SACE unless and until it was satisfactorily resolved.
"Dr Simonelli was a most unimpressive witness. He was a leading exponent of the technique of giving lengthy answers to deflect cross-examination."
We have studied the passages which MG has identified for us in this connection. We have much in mind here the principles and limitations on review of findings of fact in this court, which we have set out in the main body of the judgment. There are clearly both difficulties and dangers inherent in any review of the judge's opinion on a point such as the present. The transcript is a poor reflecter of any impression a witness makes. It is also without question true that Dr Simonelli gave certain lengthy answers at the end of Day 26 and start of Day 27. He was dealing with matters such as the nature and aims of political risks insurance, the different concept of Government funding operations, his activities while at Finest and the general activities and purposes of ECAs. He had evident difficulty in expressing himself adequately and coherently in English. A foreign speaker having such difficulty may well tend to go back over the same ground with the aim of trying to clarify himself. The impression gained from the substance of his answers is, however, that he was doing his best to be clear and comprehensive. We cannot see a basis in the transcript for the judge's apparent view that Dr Simonelli was adopting a "technique of giving lengthy answers to deflect cross-examination"; and we have difficulty in seeing how the conclusion that the judge reached in that respect could have been based on observing Dr Simonelli.
"SACE placed great reliance on Schedule 3 to [Dr Simonelli's] report, containing details of due diligence said to have been done by other banks in SACE based transactions. However, the information was hearsay only and merely derived from Dr. Simonelli's "contacts …. in this wonderful international banking". His statement that he had many friends (at a named major bank) "and I have often discussed with them the banking philosophy of due diligence" had an air of comic unreality about it. I attach no credence to it."
The last statement to which the judge was referring was in these terms:
"I have many friends at Chase Manhattan and I have often discussed with them the banking philosophy of due diligence. The principles of due diligence are described below".
It was made in his report. The reference to "this wonderful international banking" came in Dr Simonelli's oral evidence. When asked to confirm that his appendix 3 derived essentially from what his contacts in the banking world had told him, he said:
"Contacts and transactions. You know, in this wonderful international banking the contact among banks are many. The way of this is the practice of syndication which means many banks participating to a deal and together with syndication there is another beautiful instrument which I have learned to appreciate in the City of London which is the information memorandum. …."
"Well, I would like to know if there are other manuals updated, because if it is the English or the Italian. This is the danger of this manual that when they go from general definitions they go in detail – it is very difficult to be precise. I am against manuals in general because they do not help, but I do not know if this is the last updated."
It seems to us impossible to gain from this answer any real support for a view that Dr Simonelli was not impartial.
"… you could say that in recent years it is becoming more of a painting by numbers exercise, but I think Dr Simonelli is of an era when it was more of an art, and myself too."
So far as it was incumbent on Dr Simonelli to seek to explain SACE's manuals at all, his answer, once he had been taken through all the relevant sections, was that he thought that the assumption in relation to Article 14.2 cover was that the bank would have gathered information. In that connection, although this was not a document which had been previously produced, he produced then and there in court an information memorandum prepared by MG in 1979. On its face, this related to a transaction insured by SACE in which MG was involved as managing bank and in which MG was seeking to obtain sub-participations by other banks. We agree that the value of this document was, in the absence of any investigation of its context, very limited. But there was nothing in this course of evidence to undermine the independence of Dr Simonelli's evidence.
(i) He assimilated export credit guarantee cover (as provided by for example the ECGD) with "insurance guarantees" as provided by SACE (see report footnote 2 and p 14 and T3/26/67 and 101). He did not identify the potential duty of disclosure in respect of the latter as a material difference (and the fact that he did not do so did not derive from any familiarity with Italian principles of disclosure, since he had none).
(ii) He relied upon the Bank of England's willingness, as the then banking regulator, to treat both types of "guarantee" as reducing the lending bank's credit risk to nil, and he treated this as consistent with the view that such a bank need not inquire into project viability or borrower standing. But the Bank of England's approach presupposes that any insurance guarantee is valid, which in turn presupposes that the bank has duly undertaken any diligence, or made any disclosure, required to achieve such validity.
(iii) He acknowledged that the OECD consensus meant that ECAs lend only 85 per cent of any loan, with the aim of sharing the risk with the lending bank (a "standard practice in insurance" as he put it), that it was also the practice of SACE further to restrict its insurance to 95 per cent of that 85 per cent, and that cases might exist where an ECA would accept an element of project financing as qualifying for political risks cover (under Article 14.2 or equivalent), in which cases it would probably only insure a much lower percentage. But, we would observe that in such a case, if the bank took no further step, it would have a direct financial involvement, which one might expect would lead it to inquire into the project and borrower. Indeed, in the third situation (political risks insurance, for a much lower percentage, relating to project finance transactions), Mr Scallon expressly accepted that the bank would in its own self-interest analyse the project risks (T3/26/90). Mr Scallon's explanation that banks undertake no diligence because they carry no risk could only have full force in relation to loans (of which the present are of course instances) where the bank covers its uninsured interest by insisting on cash collateral.
(iv) He acknowledged that a bank seeking insurance against political risks on the commercial market (rather than from an ECA) would "obviously" look at "the nature of the transaction and the status of the borrower and the guarantor" (T3/26/19). But, when later asked whether a prudent bank in such a situation "has got to act as if it were an uninsured bank at the outset", his evidence went as follows:
"A. It is a little difficult, given that the bank would not be doing the business probably without the policy.
Q. Well, the bank would obviously hope to engage in the policy in order to insure the risk, but would you not agree that the bank has to act as a prudent insured at the outset?
Q. And in doing so it therefore would have to investigate the creditworthiness of the borrower and satisfy itself as to that?
Q. I am sorry?
Q. You are saying, are you, that in the case of a commercial insurance ….. [f]or political risks …. [t]he bank would not have to investigate the creditworthiness of the borrower?
A. Because it is a state risk, a sovereign risk. This is the kind of transaction we are talking about where the bank is interested in doing business with a foreign state."
(v) Mr Scallon's evidence was that, even when insured with an ECA, banks care whether the borrower can repay or not, because of the administrative burden involved in any loan, the risk to their reputation if the loan fails and the risk to their relationship with the ECA (T3/26/51). Hence, he said, the bank "has to take a view on the country and the nature of the transaction in very broad terms before it presents it to the ECA", and has to "get down the key facts"; these, however, meant in his view only the most basic facts about the supply, the loan and the borrower, which (we would observe) could by themselves give no real assurance about the soundness of the transaction.
(vi) Later, he also said "The bank will have done, as I told you before, [a] very basic view of the project. Whether the bank goes into great depth or not in its analysis seems to me to be somewhat irrelevant since it is the ECA that takes the decision and does its own analysis" (T3/26/63). In this connection, the following further exchange, which took place immediately before, is also relevant:
"Q. …. Upon what basis do you as a banker assume that the insurer ECA is actually carrying out its own investigations on the creditworthiness of the borrower, or the viability of the project?
A. Because I would think that any insurer, commercial or ECA, would not issue cover without carrying out an analysis.
Q. So you assume, do you, that somebody has to do some analysis somewhere of the creditworthiness of the borrower and the viability of the project?
A. I assume that the insurer would be doing analysis. What analysis it does, since it is the one taking the risk, if it is giving Article 14.2 cover, it is probably giving effectively a political cover. Whether it analyses the project, I doubt, unless it is project financing" (T3/26/62-63; see also T3/26/98 and 110)
This evidence may be contrasted with what Mr Scallon said in his report. In paragraph 13 he said, in relation to Article 14.2 cover, that:
"Having decided that it will accept the state risk of a particular country, the ECA will then decide which projects to pursue. Here the key consideration for the ECA is that the project is government-backed. The precise status of the buyer and the borrower is therefore of less importance: the borrower may be a government-owned bank, a state agency, a state-owned company, a privately owned company, a company with foreign capital or a special purpose company whose only asset is the capital good being financed. By contrast, the key consideration for the lending bank is that the loan is guaranteed by the ECA."
In paragraph 26, Mr Scallon continued by saying that a buyer's government might produce a list of projects it wished to be financed, which
"may include projects of a strategic or political nature, which are often not commercially viable (eg to promote the development of economically backward parts of the country or the health or education of the population). The ECA may decline to support certain projects (eg those with a military flavour or those which it regards as extravagent). However, it often supports useful projects (eg schools or hospitals) which do not generate revenues and other projects which generate some revenues, but not enough to pay off the loan over the period in question (eg rural landing strips or maritime navigation aids."
These passages accepted that ECAs are interested in the usefulness and rationale of the project to be financed and identified the precise status of the buyer and borrower as of "less" (rather than no) importance in Article 14.2 cases.
(vii) Mr Scallon's evidence treated lending to a foreign government and lending to a foreign public entity as equivalent. (T3/26/55-57 and 73-76). Although he accepted initially that whether or not a foreign government would back a foreign public entity may, depending he said on the situation in the country concerned, be "contingent upon the circumstances in which the epe itself is not able to repay the loan" (T3/26/56), the effect of his evidence was that banks and, he believed, ECAs assumed that foreign governments would back foreign epes (T3/26/57 and 75-76). We note at this point that, of the four transactions with SACE insurance in which Mr Scallon was able to identify BZW involvement, one involved project finance, one (the only one on which BZW was the arranging bank) was to Gazprom, one of the largest gas concerns in the world, the third was to the Russian state bank (VEB) and the fourth was to an Italian/Russian joint venture. In this connection, any occasion which BZW or Mr Scallon had for doubting or considering whether there was effective state backing for a public entity would appear limited.