Case Nos: QBCMF 2000/0058, 0059 & 0060
Neutral Citation [2001] EWCA Civ 1932
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE COMMERCIAL COURT
Mr Justice Timothy Walker

Royal Courts of Justice
Strand,
 London, WC2A 2LL

 Wednesday 19 December 2001
B e f o r e :

LORD JUSTICE CLARKE
LORD JUSTICE MANCE
and 
LORD JUSTICE DYSON

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	MORGAN GRENFELL & CO LIMITED 	Plaintiff Appellant	
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SACE – ISTITUTO PER I SERVIZI ASSICURATIVI DEL COMMERCIO	
Defendant
Respondent	

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(Transcript of the Handed Down Judgment of
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)
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Mr Conrad Dehn QC, Mr Michael Brindle QC, Mr Timothy Howe  and Mr  Richard Handyside (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)

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Judgment

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:
I.		INTRODUCTION		                	
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
VIII.		NON-DISCLOSURE
IX.		STATUS OF EC
X.		GOODS OF NON-ITALIAN ORIGIN
XI.		CONCLUSIONS

ANNEX A.	PROFESSOR GAMBINO
ANNEX B.	THE BANKING EXPERTS
ANNEX C.	WITNESSES OF FACT
ANNEX D.	THE NEW CLAUSE

I.	INTRODUCTION 
1.	This is an appeal from two judgments of Timothy Walker J dated 23rd April 1999 in two actions in which he held that the defendant (“SACE”) was liable to the claimant (“MG”) in the sums of US$20,326,232.93 and DM177,293,981.21 respectively inclusive of interest.  The total amount of the judgments in sterling terms is about £112 million.  They reflect conclusions reached by the judge after a lengthy trial of both actions and set out in a written judgment handed down on 30th March 1999.
2.	In both actions, which were known as the Equatorial Guinea or EG action and the Hungary action respectively, MG was seeking to recover under insurance policies written by SACE.  MG is a bank whereas SACE is the Italian state authority charged with the insurance of export credit risks.  MG provided export credit finance in the form of a loan known as a buyer credit in each of three transactions insured by SACE.  In each case the transaction concerned the supply or proposed supply of goods or services by Italian companies by way of export from Italy.
3.	In the EG transaction an Italian company, P&M Srl (“P&M”), agreed to refurbish and construct a new luxury hotel in Equatorial Guinea to be called the Hotel Medialuna, although the borrower was a company called Palmanova SA (“Palmanova”) which needed finance for the purposes of the project.  MG provided the finance and the loan was guaranteed by the Republic of Equatorial Guinea (“REG”).  Palmanova failed to repay the loan and the REG refused to pay under the guarantee.  In the EG action MG sought to recover the amount of the loan which was insured by SACE.
4.	In the case of Hungary there were two transactions known as Hungary I and II.  In each case the Italian exporters were San Marco Progetti SpA (“San Marco”) and Arrow Engineering SrL (“Arrow”) and the borrower was Elzett-Certa (“EC”).  In each case EC failed to repay the loan which was insured by SACE.  MG’s case was that EC was a foreign public body or ente pubblico estero (“epe”), that it followed that an epe had failed to honour its obligations under the buyer credit and that SACE was accordingly liable to it under the terms of the insurance policies.
5.	SACE advanced a number of defences to the claims.  It abandoned some of them and the judge rejected the others.  In this appeal SACE criticises the approach of the judge to the evidence, especially the expert evidence, and submits that he was wrong to hold SACE liable to MG.  It is convenient first to identify the relevant contracts and briefly to set out some of the primary facts before referring shortly to the issues determined by the judge and then discussing the issues in the appeal.  Some of those issues are common to both the EG and the Hungary appeals and some are relevant only to the Hungary appeal.  The issues which are common to both can be considered under these heads: the correct approach of a trial judge to expert evidence; the correct approach of this court in a case of this kind; the judge’s approach to the evidence; the correct approach to sources of Italian law; and non-disclosure, although in the case of non-disclosure there may be factual differences between the two cases.  The issues which are relevant only to the Hungary actions relate to the status of EC, including in particular the question whether EC was an epe, the question whether SACE has a defence in relation to insured loans not used to purchase goods of Italian origin and an alternative claim advanced by MG which was rejected by the judge but which MG raises by way of cross-appeal.
II.	PRIMARY FACTS AND CONTRACTS
6.	It is convenient at the outset to give a short account of the primary facts and to identify the principal features of both the credit agreements and the insurance policies.  So far as it is necessary to do so, we shall include a more detailed account of the facts when we consider the particular issues raised in the appeal.
Equatorial Guinea
7.	The genesis of the EG transaction is to be found in a Protocol of Agreement concluded in May 1988 between P&M and the REG which provided for the refurbishment and construction of the hotel.  The hotel was in the vicinity of Bata Airport which the REG wanted to be upgraded.  The protocol envisaged that the works would be financed by a triangular (or triangolare) buyer credit transaction and government guarantee.  The borrower was Palmanova, which was set up for the purpose in July 1988.  Palmanova became the owner of the hotel in June 1990.
8.	On 6th December 1988 a commercial contract was signed between P&M and Palmanova for the refurbishment of the hotel for a total cost of about US$14 million.  A buyer credit agreement was entered into on 7th December 1988 and for present purposes may be treated as between Palmanova as borrower, REG as guarantor and MG as lender.  It provided for the provision of a credit facility of US$11,900,000, which was some 85 per cent of the contract price, repayable over seven years from completion of the works.  Repayment was guaranteed by the REG.  The agreement was subject to a number of conditions precedent including a 15 per cent down payment by Palmanova and the provision of a SACE insurance guarantee in respect of 90 per cent of the loan.  The judge held (and it is not in dispute) that MG would not have lent the money if SACE had not entered into such a contract.  MG also took various other forms of security.  Ten per cent of each drawdown under the loan agreement was to be retained by MG in an escrow account and the uninsured portion of the loan, namely US$2,100,000 was also secured by a guarantee from P&M.  There was also to be a “Security Account” into which the hotel’s receipts would be paid and which would be used to service the loan.  Finally, and importantly for present purposes, repayment was guaranteed by the REG.  The agreement, which of course included both the credit agreement and the REG guarantee, was governed by English law.      
9.	On 24th January 1989 MG filled in an application form which had been provided by SACE.  In the form it sought insurance cover from SACE including cover “against risks of non receipt of payment (in case of public borrower or guarantor) Art 14.2 of Law 227”.  Law 227 was a reference to an Italian law of 24th May 1977 which established SACE.  We shall return both to the application form and to the law in more detail below, but it is convenient to set out here the relevant parts of Articles 3, 14 and 16 (in which SACE is referred to as “the Agency”) as follows:
“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.”    	
10.	In the EG case the “other party” referred to in Article 14.2, namely Palmanova, was a “private person whose payment is guaranteed by a Government”, namely the REG.  We note in passing that the Italian word which has been translated as ‘Government’ is ‘Stato’ and it may be that it would be more accurate to translate it as ‘State’.  We also note that the Italian expression which is translated as ‘foreign public body’ in Article 14.1(e) and 14.2 is in each case ‘ente pubblico estero’. 
11.	On 17th June 1989 the Ministry of Waters provided a collateral guarantee under which the Ministry undertook to supply freely exportable goods in the form of timber and fishing licences which could be sold if the money in the hotel’s security account was insufficient to repay the loan.  SACE’s committee approved the grant of cover on 13th July 1989 and a proposta di contratto (“proposta”) was sent out on 1st August 1989.  Cover was granted for 85 per cent of the loan on condition that the waiting period was five months and that the provision of goods under the collateral guarantee would discharge SACE’s liability.  The total premium was US$748,762.88, of which an initial amount of 30 per cent was paid on 6th September 1989.  Thereafter MG expressed unhappiness with the collateral guarantee because it did not wish to have to deal with any goods supplied under it, but it eventually accepted SACE’s original offer on 21st December 1989 on the basis that only if goods were sold pursuant to the collateral guarantee would SACE be released to the extent of the value of the goods.
12.	The insurance policy was issued on 5th February 1990.  By this stage there had been some variations to the loan agreement.  The first supplemental loan agreement was entered into on 21st December 1989 in order to reflect the reduction in SACE’s cover from 90 per cent to 85 per cent of the loan.  By an agreement of the same date P&M agreed to guarantee the remaining 15 per cent as well as a sum to cover interest in respect of the period before MG’s right to claim an indemnity arose, with the result that P&M would pay 25 per cent of each drawdown into a deposit account with MG by way of security for P&M’s obligations under the P&M guarantee.
13.	The terms of the policies, which (with the exceptions referred to below) are substantially the same in all three cases and are governed by Italian law, will be discussed in more detail below, but it is convenient to refer to some of the key provisions here by reference to the EG policy.  It is between SACE and MG and is described as follows in the heading: 
“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.   
14.	The preamble, which is expressed to be an integral part of the contract, includes references to Law 227, the Civil Code, the REG guarantee and the credit agreement.  Article 1 contains a number of definitions.  For example MG is described as “the Lender” and “the Guaranteed Party”.  Article 2 exhibits the loan agreement and the REG guarantee and states that they have been expressly approved by SACE.  Article 3 provides, so far as relevant as follows:
“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.
15.	Article 4 provides, so far as directly relevant to the 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:
A)	….
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.
16.	Article 5 sets out the guaranteed amount to which we have already referred.  Article 6 relates to the effectiveness and starting date of the contract, but there is no need to refer to it because it is not in dispute that the contract came into effect.  Article 7 includes an obligation upon MG as lender to 
“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.
17.	The first request for payment was made by P&M on 28th February 1990 and the first drawdown was made on 20th March 1990 in the sum of US$2.725 million.  Further drawdowns were made thereafter.  There were also second, third and fourth supplemental agreements dated 6th August, 8th October and 31st December 1990 respectively.  Of those, it is only necessary to refer to the agreement dated 8th October 1990 which increased the amount of the loan available by US$4,462,500 to a total of US$16,362,500.  SACE agreed to a number of variations to the policy including in particular, by letter dated 5th July 1991, both the increase of the loan by US4,462,500 and an increase of its exposure by 85 per cent of that sum.  By that time the whole of the original loan had been drawn down.  On 5th September 1991 P&M entered into a third supplemental guarantee to reflect the increased amount of the loan.  The further sum of US$4,462,500 was drawn down on 16th September 1991.
18.	Palmanova defaulted on the first repayment on 9th December 1991.  MG made a claim in respect of it under the REG guarantee, but the REG failed to pay.  The due date for payment by SACE of the first indemnity was 14th May 1992 and it was paid on 31st August 1992.  On 16th September 1992 the Ministry of Works wrote an open letter outlining the terms of a decree by which the President of the REG cancelled the order which awarded the hotel to a Mr Mebuy on the ground that the works had not been completed.  By that time Palmanova and the REG had defaulted on the second instalment with the result that the due date for its payment by SACE was 13th November 1992.  SACE paid the second instalment on 19th January 1993.  In the meantime P&M had gone into liquidation and neither Palmanova nor the REG paid any of the subsequent instalments with the result that MG claimed an indemnity from SACE in respect of each of them.
19.	There ensued a considerable amount of discussion and correspondence between MG and SACE but in the event SACE made no further payments.  The last instalment fell due from SACE on 13th November 1995.  Like the others, it was not paid and this action was commenced by writ on 4th April 1996.  We will further refer to the facts relating to the EG transaction so far as necessary below.
Hungary
20.	EC was created on 1st January 1986 and set up as a state enterprise managed by an enterprise council, its assets being directly owned by the Hungarian state.  Since one of the crucial issues in the Hungary actions is whether EC was an epe, we shall return below in some detail to the status of EC in the context of the changes in Hungarian law and practice in the late 1980s and early 1990s. 
21.	On 23rd June 1991 EC entered into an agreement with a joint venture comprising the two Italian companies, San Marco and Arrow, for the construction on a turnkey basis of a factory to manufacture ultra light aero parts and aluminium locks in Eastern Hungary.  The contract price was DM49 million (of which DM40.35 million was in respect of goods to be imported into Hungary from Italy).  A buyer credit loan agreement was made on 25th June 1991 between MG and EC.  This was varied by supplemental agreements (notably by a supplemental agreement dated 28th September 1991) whereby MG agreed to lend EC up to DM44 million, mainly for the purpose of financing up to 100 per cent of the amount required to pay for the works under the supply contract.  The loan agreement expressly provided (by clause 6.6) that the liability of EC to make payment “shall be in no way conditional upon the due performance by the Supplier of its obligations under the [supply] Contract”.  It was subject to a number of conditions including the provision of a SACE insurance guarantee.  It is this first Hungarian project which is known as Hungary I.
22.	On 2nd July MG submitted to SACE an application for insurance requesting cover under Articles 14.1, 14.2 and 14.4 of Law 227.  The application form had been provided by SACE and was the same standard form as that which had been submitted by MG in connection with the EG transaction.  Upon receipt of the application, SACE began making its own enquiries through diplomatic channels in Hungary into the legal status of EC.  We shall consider these enquiries in more detail when we deal with the issue of EC’s status.
23.	On 18th September 1991 EC entered into a second supply contract with San Marco.  This was to build a factory for the manufacture of aluminium cans for beer and soft drinks in Eastern Hungary.  Its terms were similar to those of the Hungary I supply contract.  The contract price was DM200 million (of which DM142 million represented the cost of Italian materials etc).  On 28th September a buyer credit loan agreement was entered into between MG and EC.  This was varied by supplemental agreements under which MG agreed (subject inter alia to the provision of a SACE insurance guarantee) to lend up to DM188 million mainly for the purposes of financing up to 100% of the amount payable under the supply contract. It is this second project which is known as Hungary II.
24.	Meanwhile SACE was continuing with its enquiries as to the legal status of EC.  On 1st October SACE issued a proposta in favour of MG offering cover in relation to Hungary I in respect of the risks referred to in Articles 14.1 and 14.4 of Law 227.  The proposta expressly stated that cover under Article 14.2 would be “examined once there is confirmation of the legal status” of EC.  That was not acceptable to MG, since it was not prepared to proceed with the Hungary I loan without Article 14.2 cover.
25.	On 18th October 1991 MG applied to SACE for insurance cover under Articles 14.1, 14.2 and 14.4 of Law 227 in respect of the Hungary II transaction.  The application was on the same standard SACE form as that which had been used in respect of the EG and Hungary I transactions.
26.	On 8th November, an internal briefing note (or appunto) was prepared by SACE for its management committee meeting: it recommended that EC be recognised as having public legal status (ie as an epe), but that it be a condition of the insurance that SACE reserve the right to re-examine the legal status if EC were subsequently to be privatised.  On 14th November the SACE committee resolved to recognise EC as an epe, but subject to the express reservation of rights recommended in the appunto.  On 19th November the management committee decided to extend the Hungary I insurance cover to include Article 14.2 cover, subject to this express reservation.
27.	By fax dated 20th November 1991 SACE communicated to MG its decision to offer Article 14.2 cover in respect of Hungary I, although without the reservation.  On 25th November SACE informed MG of its approval to the commencement of drawdown.  On 5th December 1991 MG declared to EC that the loan agreement and supplemental agreements were now effective, and instalments of the loan were drawn down later that month. 
28.	In relation to Hungary II, on 19th December 1991 SACE sent MG a proposta offering cover under Articles 14.1, 14.2 and 14.4.  It contained the following express reservation:
“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.
29.	Thus by early February 1992 at the latest both the Hungary I and II loans were effective and drawdowns were being made.  On 31st July 1992 SACE issued the policy document in respect of Hungary II.  The policy document in respect of Hungary I was not issued until 28th June 1995.  Since it was by then in different terms it does not evidence the agreement made in 1991 or 1992.  The terms of the policies as evidenced by the proposte and the policy document referable to Hungary II were in substantially the same terms as in the case of EG.  In so far as they were different or it is necessary to refer to their terms for the purposes of resolving particular issues which arise in the appeal we shall refer to them below.  
30.	By October 1992, all the principal sums under both Hungary I and II had been drawn down.  Thereafter only capitalised interest remained to be added to the loans.  In the summer of 1993, SACE undertook a re-examination of the legal status of SACE.  An appunto dated 29th July 1993 from SACE’s Legal Department to its committee (which was written in circumstances to which we shall return) recommended that SACE should attribute non-public legal status to EC and exercise the reservation.  On 5th August the committee accepted the recommendation and resolved to ascribe non-public legal status to EC from that date.  On 14th September SACE formally communicated its decision to MG and said that the Article 14.2 cover was “to be considered lapsed as from the aforementioned resolution”.  SACE invited MG to request cover under Article 14.9 against commercial insolvency but MG declined to do so.  When asked by MG for an explanation for the withdrawal of cover, SACE replied by letter dated 14th November that it was “a direct consequence of the privatisation of Elzett Certa”.  By this letter SACE also stated that it was purporting to cancel the insurance cover with retrospective effect so as to affect the advances already made by MG.
31.	By the end of 1993 EC was in serious financial difficulties and was dependent on the continuing financial support of a Hungarian state entity, AVRt, and/or the Hungarian state itself.  EC defaulted on its obligations under the Hungary I and II loan agreements.  During the early part of 1994, there were discussions as to whether AVRt  would assume responsibility for all of EC’s debts.  SACE was willing to reinstate the Article 14.2 cover if it received an assurance that the debts of EC were the ultimate responsibility of the Hungarian state.  On 12th May, SACE’s committee resolved to recognise the public status of EC and reinstate cover under Article 14.2, subject to receipt of a letter from the Minister of Privatisation and a “letter of patronage” from AVRt (confirming that AVRt was responsible for EC’s obligations).  These letters were received and on 1st August 1994 SACE formally reinstated Article 14.2 cover for both Hungary I and II with effect from 12th May 1994.  The “letter of patronage” did not, however, as a matter of Hungarian law amount to a binding guarantee on the part of AVRt to be responsible for the debts of EC.
32.	At a board meeting of AVRt on 30th May 1994 AVRt decided to transform EC into a joint stock company, which (so long as AVRt held 75 per cent of its shares) would have rendered AVRt liable for its debts, but by a resolution dated 26th September 1994 AVRt withdrew this decision because of EC’s lack of assets.  Accordingly, EC was never transformed into a joint stock company and AVRt never became liable for its debts.  On 3rd October EC was declared insolvent.  It went into liquidation on 8th December 1994, the financial support of the Hungarian government having been withdrawn.
III.	SUMMARY OF JUDGMENT
33.	The judge identified the two main issues before him as the non-disclosure issue, which arises in both actions, and the status issue, which arises only in the Hungary action.  
Non-disclosure
34.	Article 1892 of the Italian Civil Code, which is part of Chapter XX on Insurance, provides:
“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.”
35.	SACE did not (and does not) say that MG made any relevant misrepresentation, but said (and says) that through gross negligence MG failed to disclose circumstances which, if known to SACE, would have caused it to withhold its consent to the contract.  As described by the judge, the gross negligence which was originally put forward as SACE’s primary case was that in each case MG ought to have investigated the ability of the borrower to repay the loans and the viability of the commercial transaction proposed and ought to have disclosed material facts in relation to such matters to SACE.  At the trial that became at best SACE’s secondary case.
36.	At the beginning of the trial SACE’s primary case was put on the basis that the crucial non-disclosure was of MG’s failure to do any due diligence itself, it being common ground that MG did not take any steps to make enquiries as to the viability of the underlying commercial arrangements.  As formulated in SACE’s amended pleadings, the allegation was that MG was in breach of duty and grossly negligent in failing to disclose that 
“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.
37.	The same was true of the experts on Italian law called by the parties.  SACE called Professor Gambino whereas MG called Avvocato Gioscia.  In circumstances about which SACE complain (and to which we shall return) the judge rejected Professor Gambino’s evidence in its entirety on all aspects of the case including non-disclosure.  By contrast he accepted the evidence of Avv Gioscia.  He also preferred the evidence of Mr Scallon to that of Dr Simonelli on banking practice.  We shall return to non-disclosure in detail below, but in short the judge held that under Italian law MG owed no duty to SACE to disclose any of the matters of which SACE complained. 
38.	Under the heading of materiality the judge further held (as was common ground) that in order to be material a fact must satisfy two elements.  The first was that, viewed objectively, the fact must involve a higher probability that the insured event will occur and the second was that the fact must subjectively be so important that, had it been known by SACE, the insurance would either not have been concluded at all or would only have been concluded on different terms and conditions.  The judge held that SACE failed to satisfy the second of those two elements.  He held that none of the matters which SACE said should have been disclosed were regarded as relevant by SACE at the time and that disclosure of them (or any of them) would have made no difference to SACE.  It would have entered into each of the contracts whether the facts were disclosed or not.  The judge further acquitted MG of gross negligence.  SACE challenges these conclusions on this appeal.  By contrast MG submits if necessary that the judge should have held that SACE had also failed to satisfy the first of the two elements, that of objective materiality.
39.	It should be noted that in the EG action the appeal depends entirely on the non-disclosure point because, if the judge was correct, it is not now in dispute that SACE is liable to MG for the amount of the judgment.  The Hungary action is more complicated, but, apart from non-disclosure, the most important point for consideration is whether the judge was correct to reject SACE’s submissions with regard to the status of EC.
Status of EC
40.	The judge held that at the time the contracts were made EC was an epe within the meaning of Article 14.2 of Law 227.  He did so partly by accepting the evidence of Avv Gioscia and partly by an analysis of the relevant facts.  He further held that EC did not cease to be an epe at any relevant time thereafter.  He also considered and rejected a number of other status defences, although none of them strictly arose given his conclusion that EC was an epe throughout.
Other Defences
41.	SACE argued at the trial that to the extent that the goods supplied by the Italian supplier were not in fact of Italian origin the loan did not fall within the scope of the insurance.  In Hungary I there was a dispute as to whether DM7.7 million worth of goods were of non-Italian origin.  In Hungary II MG agreed that goods to the value of DM47,273,027.33 were of non-Italian origin with a residual dispute as to four items.  The judge did not resolve those issues of fact because he held that on the true construction of the contracts, considered against the background of Law 227, the relevant question was not whether the loan was actually used to purchase goods of Italian origin, but whether the purpose of the loan was to enable the purchase of goods of Italian origin.  He reached that conclusion largely by accepting the evidence of Avv Gioscia.  SACE submits on this appeal that he was wrong so to hold.
42.	Finally the judge rejected two further defences relating to drawdown procedure and alleged mistake which do not arise on this appeal. 
MG’s Alternative Claim
43.	In the Hungary action MG put forward an alternative claim under Article 4.1A(e) of the two policies which was rejected by the judge.  MG has served a respondent’s notice asserting that the judge was wrong so to hold.  Since this is an alternative claim, it arises only if the judge was wrong to hold SACE liable on the principal claim.             
IV.	CORRECT APPROACH OF TRIAL JUDGE TO EXPERT (AND OTHER) EVIDENCE
44.	It is plain from the above that there were a number of issues of Italian law which the judge had to resolve.  The resolution of those issues involved detailed consideration of starkly conflicting evidence given by Professor Gambino for SACE and Avv Gioscia for MG.  The judge was also faced with conflicting evidence from the two banking experts, Dr Simonelli and Mr Scallon, and from a number of witnesses of fact on both sides.
45.	It is common ground that, as it is put in Rule 18(1) of the 13th edition of Dicey & Morris on The Conflict of Laws at paragraphs 9-001 and 9-002, in an English court foreign law must be pleaded and proved as a question of fact to the satisfaction of the judge, although it has been said that it is “a question of fact of a peculiar kind”: see Parkasho v Singh [1968] P 233 at 286 as subsequently approved in the cases cited in paragraph 9-010 note 30 of Dicey & Morris and most recently in MCC Proceeds Inc v Bishopsgate Investment Trust Plc [1999] CLC 417 at 421. 
46.	In MCC Proceeds v Bishopsgate this court discussed in detail the correct approach of both the trial judge and the Court of Appeal to expert evidence on foreign law.  In paragraph 23 (at p 424) Evans LJ, giving the judgment of the court (which included Morritt and Chadwick LJJ) summarised the function of an expert witness on foreign law as follows:
“(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. 
47.	It has been said that where there is conflicting evidence of foreign law the court should approach the conflict in the same way as it approaches other conflicts of fact.  Thus, for example, in Bumper Corporation v Commissioner of Metropolitan Police [1991] 1 WLR 1362 Purchas LJ, giving the judgment of the court, said at p 1368 F-G:
“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 [1996] 1 Lloyd’s Rep 7 per Stuart-Smith LJ, giving the judgment of the court, at p 18.     
48.	Thus the judge must evaluate the evidence of the witness in much the same way as he would evaluate the evidence of any witness of fact.  He must test the evidence against the relevant documents and the probabilities and take account of any views which he forms as to the independence and impartiality of the witness.  As in the case of what may be called an ordinary witness of fact, an expert witness may show signs of partisanship or bias which may invalidate the whole or a part of his evidence: see eg Joyce v Yeomans [1981] 1 WLR 549, per Brandon LJ at p 556 (quoted below).  It will necessarily be a very rare case indeed in which a judge can properly say that the witness is so partisan or biased as to make the whole of his evidence worthless.  It will ordinarily be essential for the judge to compare the evidence of each of the witnesses and to decide in the light of all the circumstances what the true position is and in every case the judge must find the relevant facts, whether they be what may be called ordinary facts or facts of a peculiar kind, namely the principles of the relevant foreign law.
49.	In assessing expert evidence of foreign law, the role of the judge is in one respect at least different from his role in assessing ordinary evidence of fact.  It is that the judge is himself a lawyer.  In the MCC Proceeds v Bishopsgate case Evans LJ said in paragraphs 12 and 13 on p 421:
“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.
50.	In that case the court was concerned with the construction of the Uniform Commercial Code which was part of the law of New York.  It was therefore a question upon which an English judge might perhaps be expected to make a valuable contribution.  In this case, on the other hand, the judge was faced with differing views of Italian law, which is not based in any relevant respect upon the common law.  Indeed, whatever their true extent, the principles of Italian law which the judge had to consider, especially Article 1892 of the Italian Civil Code, are significantly different from the principles of non-disclosure in English law.  In these circumstances, there was less room for the judge to apply his own legal training and experience to help determine the relevant question, namely how, in the case of each disputed question of law, the Italian courts (and in particular the Corte di Cassazione) would have resolved it.
51.	It follows that, in our view, this is a case in which the correct approach was to consider the evidence of Italian law substantially in the same way as the other evidence of fact and opinion: see also A/S Tallina Laevauhisus v Estonian State Steamship Line (1946) 80 Ll L Rep 99 per Scott LJ at 107, which was recently followed by Moore-Bick J in Glencore International AG v Metro Trading International Inc [2001] 1 Lloyd’s Rep 284 at 300.  However, in approaching the expert evidence of Italian law, it was in our view appropriate for the judge to have at least some regard to his own experience and training in so far as it was relevant to the particular issues which he was considering.  
52.	We should stress in this regard that the judge was not bound to accept the evidence of one or other of the witnesses.  It was of course open to him to accept parts of a witness’s evidence and to reject other parts.  Thus, for example, it was open to the judge to accept part of the evidence of Professor Gambino and part of the evidence of Avv Gioscia.  In that event the judge would have to decide, in the light of the principles of Italian law which he found to exist, what conclusions the Corte di Cassazione would have reached on the key questions in the case.  In carrying out that exercise the judge would apply the principles of Italian law to the facts as he found them, which would involve essentially the same exercise as is performed by the judge in every case.  To that extent at least he would have to apply his own legal training and experience.  It was in any event incumbent on the judge to set out his findings of fact (including his findings as to Italian law): see for a recent example of the importance of the trial judge setting out appropriate findings of fact: the unreported decision of the Judicial Committee of the Privy Council dated 21st July 1999 in West Alliance Insurance Company Limited v Jamaica Flour Mills Limited.
53.	We may perhaps be permitted to add that we hope that the time may not be far off when it will be permissible for the English courts to take judicial notice of decisions of foreign courts, including those in the European Union, (and perhaps academic writings) in deciding what the relevant foreign law is in cases of this kind.  
V.	CORRECT APPROACH OF COURT OF APPEAL
54.	The correct approach to an appeal in which the appellant is seeking to reverse findings of fact, especially findings of fact which relate to the credibility of witnesses whom the judge has seen giving oral evidence, has been considered in very many cases.  It is summarised by Evans LJ in MCC Proceeds v Bishopsgate and can be seen from these extracts from his judgment at pp 420 to 424:
“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 [1955] AC 370, Watt or Thomas v Thomas [1947] AC 484, … The Ikarian Reefer [1995] 1 Lloyd’s Rep 455 at p 458 and Pickford v Imperial Chemical Industries plc [1998] 1 WLR 1189.  They are not in issue in the present case.”
55.	Evans LJ then referred to the proposition that issues of foreign law are issues of fact of a peculiar kind and said:
“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 [1981] 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.
56.	Evans LJ then set out paragraphs 12 and 13 most of which we have already quoted.  Paragraph 13 concludes:
“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.
57.	We have already expressed our view that there was less room here than there was in that case for the judge to apply his own legal training and experience to help determine the relevant question, namely how, in the case of each disputed question of law, the Italian courts (and in particular the Corte di Cassazione) would have resolved it.  That is because Italian law deploys principles and legal concepts which are in some respects different from those of the common law, although, as in the case of the judge, it seems to us to be appropriate for us too to have at least some regard to our own experience and training in so far as they are relevant to the particular issues raised by the appeal.
58.	The argument on this appeal has ranged over a very wide area of Italian law which we have found of great interest.  However, we recognise that it is in principle much more satisfactory for the Italian courts to determine disputed questions of Italian law than for us to do so.  We shall therefore only express views on issues of Italian law which it is necessary to determine in order to decide the issues which arise on this appeal.      
VI.	APPROACH OF THE JUDGE
59.	The judge essentially accepted the bulk of the evidence given on behalf of MG and rejected that given on behalf of SACE.  In particular he rejected the evidence given by Professor Gambino on behalf of SACE and accepted that given on behalf of MG by Avv Gioscia.  He expressed his conclusions thus:
“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.”
He added:
“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.” 
60.	The judge gave a number of detailed reasons in support of those conclusions which have been the subject of a sustained attack by Mr Boswood.  We have already expressed our view that, although a trial judge has to form a view as to the impartiality of an expert witness and (where it is in issue) consider the credibility of such a witness just as in the case of any other witness, it will be the rare case indeed in which he can properly disregard the whole of the evidence of a witness as the judge did here.  We have reached the conclusion that, while the judge was entitled to be sceptical of the approach adopted by Professor Gambino, in rejecting the whole of his evidence as he did, he went too far.  
61.	The evidence of Professor Gambino on the one hand and of Avv Gioscia on the other touch many different issues in the case.  It will therefore be necessary to consider some aspects of that evidence in the course of our discussion of the issues which arise for decision on this appeal.  However, in the light of Mr Boswood’s submission that the judge was unfair to Professor Gambino in a number of respects, it has been necessary to consider his conclusions in some detail.  We have set out in Annex A to this judgment the views which we have formed on most, if not all, of those points. 
62.	We should, however, emphasise that, having rejected the evidence of Professor Gambino, the judge did not simply accept the whole of the evidence of Avv Gioscia but considered each point in turn.  We too will consider each point in turn in so far as it is necessary to do so in order to decide the issues on this appeal.  
63.	As to the other witnesses, the judge also set out in detail the conclusions which he reached as to the reliability both of the two banking experts and of the various witnesses of fact who gave evidence.  For the most part he accepted the evidence of the witnesses called on behalf of MG and rejected much of the evidence given on behalf of SACE, but he correctly did so by reference to particular aspects of the case.  Again, as in the case of Professor Gambino, SACE has challenged many of the conclusions reached by the judge.  The evidence of both the banking experts and the witnesses of fact is primarily relevant to the issues of non-disclosure but, again it seems to us to be convenient to set out our conclusions as to the witnesses in annexes to this judgment.  We have therefore set out our conclusions relating to the banking experts in Annex B and to SACE’s witnesses of fact in Annex C.   
VII.	APPROACH TO SOURCES OF ITALIAN LAW
64.	Since much of the argument both at the trial and on this appeal involved a consideration of principles of Italian law, it is appropriate to indicate at the outset what appears to us on the evidence to be the way in which the Italian courts approach sources of Italian law and the use which they make of decided cases.
65.	Unlike English law, there is no doctrine of binding precedent in Italian civil law.  But that is not to say that the Italian courts do not have regard to case law.  Decisions of the Corte di Cassazione provide particularly authoritative guidance for the interpretation of legislation and declarations of the law.  A judge who is required to determine an issue that has been the subject of decision by the Corte di Cassazione will, in practice, usually follow the guidance given by that court.  But he or she is not obliged to do so.  Where the Corte di Cassazione has established a trend in relation to a point of law by deciding a number of cases in the same way, the case law provides particularly strong authority.  This is normally referred to as giurisprudenza pacifica (“undisputed precedent”).  Even in such a case, a court (whether the Corte di Cassazione or a lower court) is not bound to follow previous decisions.  
66.	As for the status of the opinions of legal academics and other writers, these do not constitute a source of Italian law.  However, Avv Gioscia explained in his first report (paragraph 5.4) that in practice,  “an argument submitted by a party during legal proceedings, if it is supported by particularly authoritative and/or widespread legal theory, may be considered with greater favour by the judge (who, however, remains free to disregard it), where there exists no case law to the contrary.” 

VIII.	NON-DISCLOSURE

The Civil Code
67.	The issues of non-disclosure fall to be decided by reference to Article 1892 of the Civil Code.   This article appears in Chapter XX (headed Insurance) of Title III (headed Specific Contracts) in the Italian Civil Code.   We repeat its terms, for convenience:
“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.”
68.	In earlier Titles I and II (headed “Obligations in General and Contracts in General”), the Civil Code contains the following general provisions:
“Title 1
OBLIGATIONS IN GENERAL
CHAPTER I 
PRELIMINARY PROVISIONS
….
1175.  Fair behaviour.  The debtor and creditor shall behave according to rules of fairness.
CHAPTER II
PERFORMANCE OF OBLIGATIONS
SECTION I
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).

Title II
CONTRACTS IN GENERAL
CHAPTER II
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.
The Questions
69.	The judge found, and it is common ground, that in order to “annul”, or avoid, the contract under Article 1892, an insurer must demonstrate the existence of both objective and subjective conditions.  First, the circumstance must “involve a higher probability that the insured event will occur”.  Secondly, the circumstance must be unknown to the insurer and be subjectively material in the sense that it would, if known to the insurer, would have caused the insurer to withhold its consent to the contract, or to withhold consent on the same conditions.
70.	The following issues arise 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?
71.	Questions (2) and (3) arise on SACE’s appeal.  Questions (1), (4) and (5) are raised by respondents’ notice.  At trial, the onus was on SACE to establish an affirmative answer to questions (1), (2) and (3): cf G Scalfi, I Contratti de Assicurazione, p.130 (Bundle G6(2)/54).  However, in relation to question (3), Scalfi (in translation) observes that “normally it is not necessary for the insurer to infer specific evidence ….”.  This observation was made with regard to tariff insurance of a very different kind from the present, as appears in the next sentence: “In fact the non-insurability results for the most part from the general conditions of the contract and the amount of the premium that would have been asked for the greater risk is deduced from the tariffs that the enterprise provides to its agents”.  In the present case, the same assistance is not to be found either in the general conditions of insurance or in any “tariff”.  SACE’s “tariff” of premiums made no provision or allowance whatever for any such variations in circumstance as SACE contends should have been disclosed by MG.  It based premiums simply on the length of loan and the perceived reliability of the relevant country (here Hungary or Equatorial Guinea).
72.	MG submits that both SACE’s primary and alternative cases of non-disclosure under Article 1892 fall at the hurdles presented by each of questions (1), (2) and (3).  The judge did not accept MG’s submission on question (1), but accepted it on questions (2) and (3).  Before us, MG repeats its submissions on all three questions, while SACE submits that the judge’s favourable view on question (1) points to a different answer on questions (2) and (3).
73.	It is evident from what we have already said that Italian law regarding misrepresentation and disclosure in an insurance context differs very significantly, both in structure and context, from English law.  The most obvious difference consists in the insurer’s need to establish fraud or gross negligence on the insured’s part (question (3)).  Question (1) leaves open the question through whose eyes is the assessment to be made whether a circumstance misrepresented or not disclosed did “involve a higher probability that the insured event will occur”.  Is this objective question to be answered by the court taking its own view? Or does it require the court to seek to establish the view which would have been taken by one or other or both of the parties at the time?  Mr Boswood points to the statement by Avv Gioscia in evidence that “the objective inference which the undisclosed information must have on the evaluation of the risk” was something “which the judge is entitled to determine”.  He accepts that the effect was that a judge, faced with an issue under Article 1892, had to determine the objective materiality of the undisclosed circumstance to a hypothetical prudent underwriter, adding however that this was not an issue on which anyone had at trial suggested that an Italian court would expect to hear expert evidence from actual underwriters.   In that respect, at least, he submitted that Italian law or practice differed from English.
The Parties’ Cases on the Facts
74.	Much of the evidence adduced in the present case (including some of the evidence of Italian law) is capable of having relevance to more than one, and in some respects all three, of questions (1), (2) and (3).  We start by summarising the circumstances which SACE submits should have been but were not disclosed.  Originally, as we have said, these consisted in a raft of detailed matters, relating to the nature of and parties to the underlying transactions for which the loans were required, which it was said that MG knew or ought with due diligence to have discovered.  Shortly before trial, SACE announced its different “primary case”, which was reflected in a re-re-amendment to its pleadings in November 1998, during the course of the trial.  The essence of the new case was that MG failed to disclose, in relation to each loan, that it had not made any real inquiry into (i) the financial standing of the borrower and supplier, (ii) the viability of the project or, therefore, (iii) the likelihood of the loan being repaid.  
75.	We deal later in this judgment with the more particular or extended terms in which SACE suggests that such disclosure should have been made.  But it also remains SACE’s case that such inquiries would, if made, have revealed (a) in relation to the two Hungary loans, that EC lacked any financial strength, that it had indeed already had one winding up petition presented against it, and that no proper studies had been undertaken by anyone into the feasibility or viability of the projects for which it was borrowing and (b) in relation to the EG loan, that the project was from the outset lacking in any plausible prospect of serving commercial or indeed social interests and that there were irregularities affecting the alleged owners, borrowers and managers throwing further doubt on its bona fides.  It is important to note that MG did not have actual knowledge of any such circumstances as mentioned in (a) and (b).  By the conclusion of the appeal, these circumstances were also no longer really relied upon by Mr Boswood as circumstances calling for disclosure, independently of SACE’s primary case that MG should have disclosed its own want of due diligence.  Their relevance was (at most) to demonstrate that the want of due diligence was, on the facts of this case, significant (with the result that if it had been disclosed and diligent inquiries had then been undertaken, whether by SACE itself or MG, the insurances would still not have been underwritten).  We return to this area later in this judgment.
76.	The witnesses called by MG acknowledged that MG approached the present loans quite differently from the way in which it would have approached loans on which it had exposure which was not covered by any credit insurance or equivalent or by any cash collateral.  Mr Narten had primary responsibility within MG’s export credit department for the EG transaction from 1989 to its completion.  He was a director of MG from 1990 to 1997, and oversaw the Hungary transactions, with the assistance as loan officer of Mr Lazzaroni in relation to the arranging of insurance with SACE.  Mr Narten said that, because loans (or drawdowns) were conditional on SACE insurance, and because cash collateral was obtained to cover the uninsured balance, MG did not perceive itself as carrying any risk.  Accordingly, it “did not carry out an analysis of the commercial status of the transactions and no due diligence was done, either prior to the loan being granted by the bank or during the period of the loan”.  The rationale he gave in his witness statement was that “It is assumed by the bank and presumably by SACE that the buyer’s government has examined the project and its size and deemed it to be sufficiently of national interest to commit public funds to its repayment if necessary”.
77.	SACE submits that such an approach reversed the relationship of the (primary) loan transaction and the (ancillary) insurance.  MG responds that SACE knew that the loan transaction was not one into which MG was, or would ever have been, prepared to enter without credit insurance, that SACE itself never showed any interest in any feature of the transaction other than the public nature of the borrower or the existence of a state guarantee, and that, if SACE had been interested in any assessment of the viability of the transaction or the standing of the borrower, it could, would and should have enquired itself.  MG observes that SACE did to a greater or lesser extent make such inquiries in the case of insurances against the insolvency of private buyers (“commercial” insurance cover under Article 14.9 of Law 227) and in respect of project finance (where repayment is expected to come from the success of the transaction).

Article 1176
78.	SACE relies on Article 1176 of the Civil Code to argue that the diligence which MG was obliged to exercise was, under the second paragraph, that “inherent in the performance of a professional activity”, consisting here of the granting of a loan as a banker.  MG’s response, backed by Avv Gioscia, is that the case concerns the obligation of disclosure under an insurance and that the placing of insurance was not within MG’s “professional activity” as a banker, so that only the first paragraph can apply.  We find it difficult to see how either paragraph of Article 1176 can be directly applicable when considering, under question (1) whether MG acted as a prudent banker.  However, we would agree with Professor Gambino to this extent, namely that the second paragraph is relevant when considering, under question (3), whether MG performed its duty of disclosure.  
79.	Article 1176 is concerned with obligations arising from a relationship between two parties.  The granting by MG of loans to the borrowers did not involve any such obligation or, we think, arise in any relevant sense from any relationship between MG and SACE.  MG was simply acting as a banker in deciding whether or not to grant the loan, not fulfilling some obligation towards SACE.  Having said that, if MG failed to act with the diligence or skill that would ordinarily be expected of a banker, when so acting, the question arises whether that fact was material for disclosure to SACE and whether the circumstances of its non-disclosure were such as to give SACE a right of avoidance under Article 1892.  The second paragraph of Article 1176 is potentially relevant in that context, in so far as it requires the question whether MG acted grossly negligently in failing to disclose any material circumstances to be evaluated on the basis that the insurances with SACE were taken out by MG in the course of and as part of its professional activity as a banker.
The Framework Case
80.	The judge concluded that the whole of SACE’s case on non-disclosure failed at a preliminary stage, on the basis of what has been called the “framework” case.  That is the name which has been ascribed to a decision of the Corte di Cassazione on 20th November 1990 in case no 11206.  As interpreted by the judge, the case is authority for the proposition that the circumstances which are material for disclosure by an insured under Italian law are delimited in scope by the proposal (or questionnaire) which the insurer can and should prepare and have the insured complete.  On this analysis, information cannot be material for disclosure (or be “withheld”) under Article 1892 unless it (a) falls within the scope of a question specifically asked in the proposal or (b) “falls, for reasons of consistency, within th[e] frame of reference” set by the proposal.
81.	The judge applied this analysis to the present insurances by taking as the relevant proposal SACE’s standard application form which MG completed and submitted in each case.  That application form was in five sections or boxes, each expressed in English and Italian.  Box A required insertion of the name, address, telex number and Italian representative of the applicant foreign lender (MG).  Boxes B, C and D provided for a description of the financial transaction: box B required MG to state the borrower’s country (paese di destinazione), the identity of the buyer and borrower (here in each Hungarian case EC), any guarantor and the object of the loan; box C required details of the loan agreement (its date, date for entry into force, amount and currency), interest details, any syndication, the identity of MG’s Italian paying agent and drawdown and repayment details; while box D required the identity of the Italian supplier, the supply contract and the breakdown by value of the supply (first into goods, services, civil works, etc of Italian origin and, second, into foreign products, local expenditures and other payments abroad) as well as details of the way in which the insured was to pay the insurance premium.  
82.	Section E was headed simply “Notes”, with a blank half-page for that purpose.  Under section E were two boxes for MG to tick to identify whether it wished cover under (a) Article 14.2 and/or (b) Article 14.1 and 4 of Law 227.  Below that, and immediately above the place for the applicant’s signature appeared this text (taking the English version):
“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.
83.	The questionnaire is, thus, heavily focused on the technical aspects of the transaction.  None of its sections sought specifically any information about either the viability of the project or the borrower’s standing.  MG recorded the object of the first Hungarian loan as being a “loan of up to 85 per cent of the value of materials and equipment of Italian origin and up to 15 per cent of local services for those goods of Italian origin for the renovation and renewal of a turnkey plant for the production of superlight engines, car locks and components”.  In the case of the second, it was “for the total value of material and equipment of Italian origin needed for the construction and setting up of a turn key plan for the production of aluminium cans”.  In the case of the EG loan, it was for “ristrutturazione e fornitura de materiali dell’hotel Medialuna International a Bata” (ie refurbishment and provision of materials in respect of the Hotel Medialuna at Bata).
84.	In relation to both Hungarian loans, MG used box E to insert the information that it would be insisting that the Italian exporter open a cash collateral account in which sufficient of each drawdown would be deposited to cover the percentage of the risk not covered by SACE.  In other words, MG disclosed that it intended to ensure that it had no uninsured exposure.  It also asked SACE to provide cover for waiting period interest, and informed SACE that interest accrued in the drawdown period was to be capitalised as set out in the loan agreement.
85.	The judge considered that information regarding the extent to which MG had exercised due diligence, the viability of the project or the standing of the borrower fell neither (a) within the scope of any question specifically asked in the proposal nor (b) for reasons of consistency within the frame of reference set by the proposal.  Accordingly, such information could not be material for disclosure.  Further, if information regarding project liability and borrower standing are not material for disclosure, then it would anyway follow that information that no due diligence had been undertaken to investigate such matters was also immaterial.  
86.	If the judge’s analysis of Italian law was correct, then it seems to us that his conclusions in these respects would also be correct.  SACE suggested that box E should have been used to inform SACE that due diligence had not been exercised or to give information about the project’s viability or borrower’s standing.  No doubt it could have been so used.  But, despite the unrestricted nature of any “notes” which might be entered in box E, it cannot be said that box E asked any specific question about MG’s due diligence or conduct, about the viability of the project or about the standing of the borrower.  Nor can it, we think, be said that information on any of these topics was required “for reasons of consistency, within the frame of reference set” by the application form.  The question in our view therefore presents itself whether the judge’s analysis of Italian law can be accepted.
87.	In the framework case, the Corte di Cassazione was concerned with a fire insurance taken out by a partnership, one member of which was a Mr Langella.  There had been a previous fire at premises owned by Mrs Langella and managed by Mr Langella.  This fact had not been disclosed to the present insurers, who asserted that, had it been disclosed, they would on enquiry have learned further facts which would have led them to reject the present proposal.  The insurers had, however, issued a questionnaire which included no questions about any previous fires suffered by members of the partnership individually (or their relatives), in the course of their entrepreneurial activities.  The claim succeeded before the court below, and the Corte di Cassazione refused to intervene.  The Corte di Cassazione said that the insurers’ case failed to take into account, first, “the specific psychological dimension attributed in law” to the obligation of good faith (by which we understand it to have had in mind the requirement under Article 1892 of fraud or gross negligence) and, secondly, the unrestricted duty of fairness incumbent on the insurers (in which connection the report refers to Articles 1175 and 1137 – presumably a mistake for 1337 – of the Civil Code).
88.	The key passages on the latter aspect read as follows:
“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.”
89.	In a further judgment delivered on 25th March 1999 (SOGET SpA v Lloyd Italico SpA; case no 2815), which was not drawn to the judge’s attention, the Corte di Cassazione returned to the theme.  In view of the date of this judgment and the probability that it was not published, even in summary, until after Timothy Walker J’s judgment was handed down on 20th March 1999, we acceded to SACE’s request that we should look at it.  In our view the Court did no more than underline what it had said in 1990.  The relevant passages read as follows:
“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.”
90.	The importance of the framework case lies in its recognition of a duty on the part of insurers to establish a framework for disclosure “capable, despite its inevitably fluid nature, of providing guidance to the insured as to the information (on persons or property) to be disclosed”.  Given such a framework, the insured must then disclose “information which, although not specifically requested, nevertheless falls, for reasons of consistency, within this frame of reference”, and cannot then, in justification of his non-disclosure, assert “indifference on the part of the insurer regarding knowledge of facts which are unspecified (precisely because they are unspecifiable)”.  The gist of Avv  Gioscia’s evidence was that this principle excluded any duty of disclosure outside the scope of the guidance given within, or falling “for reasons of consistency” within, the frame of reference.  The judge accepted this evidence, having already indicated that he could attach no credence to Professor Gambino’s evidence.
91.	We think that Professor Gambino’s evidence on the framework case was, on any view, flawed.  He failed to quote fully or accurately from the framework case in his original report.  He omitted the words “(and must), in accordance with the rules of fairness”, which introduce the duty on the part of insurers to provide a framework.  We discuss the judge’s criticism in this regard in detail at paragraphs 19 to 21 of Annex A.  The rest of the extract from the framework case which he cited in his reports was incompletely quoted.  It omitted in the Italian the last three words, without any dots to indicate the omission, in circumstances where the words anyway required to be included and translated, although nothing was made of this at trial.  The translation seems to us to have been defective.  It did not give a full impression of the significance which the Corte di Cassazione evidently attached to the framework provided by such a proposal.  Professor Gambino did not make the translation himself, although it is clear that he had some ability to understand and review English, and he said that he had reviewed the translation to the best of his ability.  
92.	Further, when exhibiting a passage from Professor Donati’s Treatise on the Law of Private Insurance (1954), his report accompanied it with a translation reading as follows: “there is however 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 in Italian “de esaminare il questionario o” and to fit into the English translation they should in fact have appeared as an additional phrase “examining the questionnaire or” after the words “not observing the care of” [which would themselves have been better translated as “not taking the trouble to”, followed by infinitives].  Again, Professor Gambino cannot be criticised as translator.  His evidence is, however, open to comment at the least for failing to recognise the potential significance of the questionnaire in Italian authority, and for failing to identify and address this (see further paragraphs 32 to 35 of Annex A).  That does not however avoid the need for careful analysis to see what it is precisely that the framework case did establish.  Nor does it mean that the evidence that Professor Gambino did give, when he was questioned about the significance of the questionnaire in Italian authority, must be wholly disregarded.  Yet this is what the judge appears to have done.
93.	When questioned, Professor Gambino drew attention to two specific points, which need to be addressed.  First, he pointed out that the 1990 decision (and other decisions) show that even a specific question, in a questionnaire or otherwise, is not conclusive on materiality.  That observation is however consistent both with the subjective nature of the test expressed in Article 1892 and with the further condition to reliance on Article 1892, namely that the circumstance not disclosed should increase the risk of the insured event occurring.  It does not by itself demonstrate that matters outside the scope of the questionnaire can be disclosable.
94.	Secondly, Professor Gambino highlighted the paragraph in the judgment, in which the Corte di Cassazione speaks of the insurer’s evaluation generally involving “highly subjective judgments specific to himself and not always wholly obvious to the insured, unless specifically made known”, and concludes that “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 be resolved against insurers.  In his cross-examination, Avv Gioscia accepted that the absence of any relevant question was “evidence of indifference on the part of the insurer” (T3/19/5).
95.	The judge did not address this evidence, but found simply that the scope of the questionnaire concluded the scope of the circumstances which could be material for disclosure.  We do not consider that the Italian authorities cited to the judge or the expert evidence which we have summarised justified his conclusion.  The proper interpretation both of the authorities and of the expert evidence given on both sides was and is in our view that, although an insurer has a duty to provide a “framework” for “guidance”, its significance is ultimately evidential.  It is capable in particular of resolving any doubt about the materiality of an undisclosed circumstance.  It is capable of assisting at this level in relation to each of the questions which arise: whether the circumstance not disclosed involved a higher risk of the insured event occurring; whether it would, if known to the insurer, have led the insurer to reject the proposal or to impose different terms; and whether its non-disclosure occurred due to any fraud or gross negligence on the insured’s part.  The authorities show in our view that it is capable of carrying particularly compelling weight in the latter two contexts.  But we do not accept that it can be right to treat it as determinative - at the outset and without further consideration - of any question of either objective or subjective materiality.  
96.	The Corte di Cassazione judgments thus identify the evidential significance of the framework set by a questionnaire in resolving “doubts” about materiality.  This leaves open, in our view, the position in the event of circumstances obviously calling for disclosure which would, if known to the insurer, clearly have influenced its acceptance, or the terms of its acceptance, of the risk.  Ultimately, we consider that there must be cases where the nature of the insurance, the questionnaire and the undisclosed circumstance, the nature of the evidence regarding the reason for non-disclosure and the insurer’s likely reaction if there had been disclosure enable an insurer to advance a case of avoidance, although the circumstance not disclosed was not covered by any questionnaire.
97.	During the course of his submissions before us, Mr Boswood produced full transcripts of a trio of cases, which MG’s expert, Avv Gioscia, had only produced in the form of headnotes (massime).  Mr Dehn objected to their late production on appeal.  Clearly, they ought, if material at all, to have been produced below.  We indicated that we would look at them, while reserving the position regarding their admissibility, if it became apparent that this would cause embarrassment or injustice which MG could not meet by producing further written comment from Avv Gioscia.  In the event, only one of the transcripts appears to us of real relevance, and that is a transcript of a Corte di Cassazione decision of 21st October 1980 (case no 5638), in which one of the grounds of complaint was that the judgment below had “regarded the insured’s obligation of honesty as having been satisfied merely by virtue of the answers posed by the insurer on the relevant questionnaire, whereas the contractant should have autonomously represented all circumstances known to him and unknown to the insurer which might influence the latter’s consent or lead it to impose different conditions”.  
98.	The Corte di Cassazione met this complaint by saying that:
“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
99.	We turn therefore to the facts in more detail.  Some matters are relatively clear, although the significance (if any) to be attached to them is in issue.  Others were strongly disputed and were the subject of expert evidence about banking practice and of factual evidence from SACE personnel.  The judge took views which were very generally adverse to the witnesses called by SACE.  SACE challenges the justification for the judge’s views.
100.	MG relies on a number of background factors.  First, SACE was set up by Law 227 to promote Italian exports.  At trial SACE originally suggested that it was entitled to be treated no differently from any commercial insurer, but it is apparent that there were significant differences.  The risks proposed to SACE could include risks that were uninsurable on an ordinary commercial basis, and might have no direct economic rationale (e.g construction of state infrastructure like roads or a barracks).  Secondly, all three of the present transactions involved buyer credits.  MG lent to the buyer and SACE’s insurance related to the risk of default by a buyer which was either a foreign public entity or guaranteed by a foreign state.  Performance of the relevant supply contract by the Italian supplier was expressly irrelevant to the buyer’s obligation to repay the loan made by MG: see clause 6.6 (the “Isabel” clause) in the loan agreement providing that:
“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.
101.	Thirdly, MG asserts that SACE lacked either apparent or actual interest in the project’s viability or the borrower’s standing or in whatever due diligence might have been exercised by MG in relation thereto.  In the forefront of this submission, MG relies on the evidential weight to be attached to the absence of any relevant questions put in (or indeed outside) SACE’s standard application form.  The form focused simply and solely on the transaction’s technical details.  Further, MG had since 1977 made some 47 applications for buyer credit cover to SACE, and, although many of them had not led to any transaction or insurance, in relation to none of them had MG disclosed or SACE sought information about the extent of MG’s inquiries, or the project’s viability or the borrower’s standing.  SACE did however from time to time seek information on other matters.  Mr Narten of MG agreed in evidence that SACE might simply have been proceeding on the basis that MG had done due diligence and had found nothing that required disclosure.  But it may be thought improbable that SACE can have considered this to have been the case over the whole course of so long a series of applications.  Further, SACE’s silence in this respect may be contrasted with its attitude in project finance and other commercial transactions with insureds or potential insureds other than MG, where it seems that it did to a greater or lesser extent on occasion seek information on the subject of the project’s viability and the borrower’s standing.
SACE Manuals
102.	MG also relies on SACE’s manuals for 1988, 1990, 1991, 1992 and 1994.  A copy of the current manual was kept at the material times in MG’s offices.  The manuals provided general guidance on SACE’s requirements and procedures.  All the manuals issued prior to the writing of the present insurances distinguished between risks (described as similar in concept to “political” risks) insured under Article 14.2 and “commercial” risks insured under Article 14.9.  They contained sections dealing with commercial risks which mentioned expressly that SACE’s decision to accept cover was “subject to investigation of the suitability and solvability [solvency] of each foreign debtor or guarantor”.  There were no equivalent statements in relation to risks insured under Article 14.2.  Further, the 1990 manual described, as “a new form of overseas operation” which SACE was now prepared to underwrite, project financing in these terms:
“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”.
103.	MG points out that the 1990 manual contained a (new) section indicating that even in relation to commercial risks, SACE expected that it would or might have to make its own enquiries about the borrower’s standing:
“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.
104.	SACE seeks to explain the lack in the manuals of any real reference to or emphasis on the project’s viability or buyer’s standing in the context of Article 14.2 risks, by pointing out that, with insurance under Article 14.9, the project’s viability and the buyer’s standing are the only factors determining the risk, whereas, with insurance under Article 14.2, the primary consideration is whether the foreign state or public entity will be good for the money – in other words “country risk”.  SACE points out that interest in country risk as a primary factor does not necessarily exclude interest in project viability or buyer standing as a secondary factor.  Nor does it necessarily exclude the possibility that SACE was, in cases where its primary interest was in country risk, prepared to leave it to an insured bank to undertake due diligence and to disclose material circumstances in the areas of project viability and buyer standing.  
105.	The judge also, we think, went too far when he accepted MG’s submission that SACE’s case expected a “higher degree of due diligence ….  in a political risk case than in a commercial risk case”.  SACE was not suggesting that its investigations in its own interest in a commercial risk case were any reason for MG to do less by way of due diligence in such a case.  But SACE’s suggestion that it was interested in project viability and buyer standing when writing an Article 14.2 policy would be more persuasive if there was evidence that project viability or buyer standing actually featured as a secondary factor in SACE’s assessment or decision-making in relation to any risk under Article 14.2.  There is no real documentary evidence that it did.  We will deal in due course with the oral evidence given on the point.
Premium Calculation
106.	MG also relies upon the basis on which SACE calculated premium.  Once SACE decided whether or not to issue cover under Article 14.2 in respect of a risk, it fixed the premium exclusively by reference to the perceived country risk.  The premium did not depend on or take into account any assessment of the project’s viability or the buyer’s standing.  Countries were simply placed into one of three pre-determined premium bands.  MG submits that, if neither a project’s viability nor a buyer’s standing was relevant to the fixing of premium, it is implausible to suggest that they were material to the acceptance of risk in the first.  SACE relies on the reservation (relating to EC’s public status) introduced into the present Hungary transactions as demonstrating that it was always open to SACE to introduce special terms into its insurances.  But there is no suggestion or evidence that special terms were ever introduced to take account of features relating to a project’s viability or a buyer’s standing.  
107.	By contrast, as we have said, SACE did on some occasions ask questions of potential insureds about the project’s viability and the buyer’s standing in the case of insurance sought under Article 14.9.  The schedules attached to its manuals indicate however that, although its satisfaction about such matters was relevant to its acceptance of the risk, the premiums it charged were also based on an inflexible banding of risks into categories (depending on the length of the loan and whether there was a bank guarantee).  The judge did not address this consideration, and it seems to us therefore that he may have been too ready to deduce from the inflexibility of the premium charged in respect of risks accepted under Article 14.2 that SACE did not regard project viability and buyer standing as material in cases under that article.  Risks accepted under Article 14.9, in relation to which SACE was undoubtedly interested in the project’s viability and buyer’s standing, were also inflexibly rated.  The distinction remains that, in relation to Article 14.2 risks, SACE appears never to have asked for or made its own investigations in relation to the project’s viability and buyer’s standing.
KPMG
108.	 Another area of the documentation on which MG and the judge placed weight consisted in a series of reports made by KPMG, as management consultants, in late 1993 and in 1994, in relation to which SACE personnel completed short questionnaires in late 1994.  The “overall message” which the judge derived from these long and detailed reports was that “the detailed precontract due diligence which SACE suggested would have been expected of banks such as MG in fact was not and would not have been expected by SACE at the time of the transactions at issue …”.  The principal significance of the reports can only have been as material for cross-examination of SACE witnesses.  The authors of the KPMG reports were not called, and their understanding of SACE’s practices must have been based on what they were told by SACE or gathered from their reading of SACE files.  Even when KPMG spoke of their proposed “new approach” (a phrase on which the judge placed reliance), we bear in mind that KPMG were concerned with the future, rather than with a precise identification of past practice.  
109.	Nevertheless, KPMG included this paragraph:
“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
110.	We turn to the evidence given by witnesses called by SACE.  The judge said this of SACE’s factual witnesses:
“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).”

111.	The judge said that what he described as these witnesses’ “party line” was inconsistent not only with the approach revealed in SACE’s manuals, but also with what SACE actually did in relation to Article 14.9 risks and did not do in relation to Article 14.2 risks, with the new approach recommended by KPMG and with the standard SACE premium calculation.   He then went through each witness in turn, giving his individual assessment.  In a subsequent judgment, given on MG’s application for indemnity costs, the judge indicated, however, that he considered that self-deception, rather than deliberately deceitful evidence, had led to the “party line”.  
112.	The judge also had to consider what he described as a “head on collision” between the evidence of the banking experts called by MG and SACE.  Mr Scallon called by MG said that due diligence was neither done by nor required of banks engaged in buyer credit transactions.  Dr Simonelli called by SACE said that banks did and should do due diligence.  The judge rejected Dr Simonelli’s evidence and accepted Mr Scallon’s.
113.	Mr Boswood submits that the judge’s assessment of SACE’s factual witnesses was “plainly wrong and very unfair”, and that “in place of a proper analysis of the [expert] evidence the judge once again resorted to an unjustified and offensive personal attack” on Dr Simonelli.  Although the judge expressed his conclusions on the factual and evidence witnesses in separate sections of his judgment and in that order, there is a possible interplay.  If as a matter of proper banking practice, banks do regard themselves as bound to undertake some form of due diligence in respect of buyer credit transactions, even though they are insured with an export credit agency such as SACE, the SACE witnesses’ evidence that they expected some degree of due diligence, may be regarded as having some support in reality, even if it is not a reality of which most of SACE’s witnesses (whose training lay in the main in law and insurance) could be expected to have had direct experience.  If, on the other hand, there is no such practice, then SACE’s witnesses were attesting to an expectation which had no such support.
114.	In these circumstances, we have given detailed consideration to the judge’s treatment and assessment both of the banking experts and of SACE’s witnesses of fact.  In an attempt to make this overlong judgment somewhat more digestible, we have included the results of that assessment in two annexes.  As already stated, we discuss the evidence of the banking experts in Annex B and that of the witnesses of fact in Annex C.
The Banking Experts - Conclusions
115.	Standing back from the evidence given by both experts, we have to consider whether it substantiates a general proposition that a prudent bank either would or would not do due diligence in relation to the borrower’s standing and to the project’s viability or rationale, when lending monies which it would only lend if it obtained (a) export credit agency (“ECA”) insurance and (b) cash collateral securing any uninsured exposure.  One difficulty about identifying the issue in these general terms is that the concept of “due diligence” is itself an open one.  As we have pointed out in Annex B, Dr Simonelli at all times acknowledged that the degree of due diligence to be expected of a prudent bank would vary according to the nature of the transaction and, if it was with a government or state entity, according to whether the bank’s exposure was covered by political risks insurance.  That it was for the ECA to investigate and assess the political or “country” risk for itself in the last situation seems clear.  But, as we have also pointed out, it does not necessarily follow that an ECA like SACE would not, when granting insurance cover, assume that the basic integrity and to some degree capability of the borrower and the basic rationale of the transaction, whether commercial or social, had not been ascertained and considered.  
116.	With a loan to a foreign government, any enquiries in this area might be expected to be limited, although in some areas of the world one might expect that the possibility of fraud or diversion of the monies lent would be considered.  With a loan to a foreign public entity, behind which its foreign government had no legal obligation to stand, we would have expected both a lending bank and an ECA to be conscious of a risk that the foreign government’s actual willingness to fund any deficit or provide funds to repay the loan might in the event depend on the basic integrity and good sense of the underlying transaction.  Quite apart from this, it seems obvious, and Mr Scallon accepted, that banks do care whether transactions in which they are involved succeed, even if they are 100% covered by ECA insurance and cash collateral.  It is bad for their reputation and business, both generally and in relation to the particular ECA involved, if they allow themselves to become involved in failed transactions.  We also note the evidence given, regarding the need for due diligence by a bank insured against political or “country” risks, by Mr Mauro.  He was a banker with Italy’s largest banking group, San Paolo, from the late 1970s to January 1992 and had considerable experience of foreign transactions, many of them insured by SACE.  His evidence on this point was not mentioned by the judge, who disregarded the whole of his evidence for reasons which, we conclude in Annex C, lack force.
117.	In the result, in so far as it is MG’s case that a prudent bank could enter into the present transactions without giving any consideration to their rationale or integrity or the relevant borrower’s ability to perform (apart from government support), we for our part would prefer the evidence of Dr Simonelli that such an approach cannot be regarded as consistent with banking prudence.  That MG happened to adopt such an approach cannot, of course, conclude the issue of prudence.  Much of Mr Scallon’s and MG’s reasoning was based on the view that MG had, to SACE’s knowledge, passed on the whole credit risk to SACE.  That was coupled in the case of Mr Scallon with his assimilation of insurance cover with the protection of an ordinary guarantee.  
118.	The two are, however, conceptually and factually different.  Although the insurers here undertook and investigated for themselves the political risk, we do not accept that a prudent banker would regard this as reducing its role to, in effect, the mere identification of the bare outlines of the transaction required for completion of boxes A to D of SACE’s application form.  Mr Scallon in his report (paragraph 49) said that the bank’s task was to “facilitate the transaction”, but in our view, even in this situation, proper standards of prudence must require a bank to understand the rationale and, in so far as this was ostensibly commercial, the general feasibility of the transaction, before proposing it to an export credit insurer for political risks insurance.  Here, both the Hungary transactions and the EG transactions were represented to MG as having commercial rationales.  
119.	We have been considering the position from the viewpoint of prudent banking, the area of expertise in which Dr Simonelli and Mr Scallon were called.  It was not suggested that prudent banking practice was affected by whatever might be the scope of disclosure required under Italian insurance law.  Since neither Mr Scallon nor, so far as appears, any relevant MG witness had in mind any detailed principles of Italian insurance law, there would have been little scope for such an argument.  In any event, we do not think it likely that prudent banking practice, in a bank’s own interest, would vary according to such a factor.  Nor, on the facts of this case do we see any basis for MG to think that SACE was taking over responsibility for investigating, not only political risk, but all other aspects of  risk.
SACE’s Oral Evidence of Fact - Conclusions
120.	The factual evidence to which we now turn goes to SACE’s state of mind, both actual at the time when the insurances were granted and hypothetical in the situation as it would have been if SACE had been told at that time that MG had done no due diligence whatever, or had been told of matters which due diligence would have revealed.  We have set out above the judge’s general observations that the loyalty of the employees or former employees called by SACE “was transparent, and it permeated their evidence”, and about the “party line” that they (albeit through “self-deception”) adopted.  He was equally or more critical of these witnesses when considering them individually.  
121.	Having carefully reviewed the judge’s individual comments on SACE’s factual witnesses, we conclude that in this area too a number of the detailed reasons which the judge gave for his general rejection of their evidence do not stand up to examination, so that, to some extent at least, we have to make our own assessment of the overall impact of the factual evidence.  We start with two general points.  First, it seems to us that the judge may have been too quick generally to move from the undoubted fact that SACE did not ask MG questions about or display interest in its manuals about project viability or the borrower’s standing to a rejection of SACE’s witnesses’ evidence that they assumed that MG as a bank had considered such matters, and too abrupt in dismissing witnesses’ evidence simply on this ground.  The two are not of themselves necessarily inconsistent.  
122.	Secondly, subject to the evidential effect of the silence of SACE’s standard application form, Article 1892 of the Italian Civil Code looks not to the matters which actually engaged SACE’s attention, but to any matters which would if known to SACE have caused it to withhold its consent, or consent on the same conditions, to the contract of insurance.  The judge may have been too quick to deduce immateriality under Article 1892 from a conclusion that SACE’s witnesses did not in their own minds positively address either project viability or the borrower’s standing.  He did of course also conclude that SACE’s failure to include in its application form any questions addressing project viability or borrower standing precluded it from relying on Article 1892, so that the issue of SACE’s subjective state of mind only arose on a hypothesis which he did not accept.
123.	As indicated earlier, we have set out in Annex C the conclusions which we have reached in the case of particular witnesses.  As a result of what, we fear, is an excessively long re-evaluation of both the witnesses of fact in Annex C and the expert banking witnesses called by SACE in Annex B, it will be apparent that in a number of cases we differ from the judge in the harshness of his appraisal.  Against the background of all that we have said so far about the documentary material and the oral evidence, we thus return to the three basic issues which arise under Article 1892.  
Key Questions - Conclusions
124.	In considering the key questions, we remind ourselves that the relevant part of Article 1892 provides:
“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.  
Objective Materiality
125.	We start with the issue whether there were undisclosed circumstances objectively material for disclosure.  We will consider first the circumstances which it is said that MG should have disclosed, and then whether they were objectively material for disclosure to SACE.  SACE’s primary submission is that MG should have disclosed that it had done no due diligence, and in particular (i) that it had made no investigations at all into borrower ability to repay or project viability, (ii) that it did not care whether the relevant loan was repaid or not by the borrower or the relevant foreign state, (iii) that in deciding whether or not to make the loan it regarded the sole relevant consideration as being whether SACE would issue insurance cover, (iv) that it therefore regarded SACE as primary obligor, rather than as insurer and (v) that it regarded itself as acting not as a bank, but as a facilitator.  The characterisation of the disclosure postulated is obviously important, not least since it may significantly affect the likelihood of any disclosure having any impact on SACE (the second issue).  
126.	The last four of the suggested particular disclosures all appear to us tendentious and unrealistic.  We do not accept that MG “did not care” whether the relevant loan was repaid by the borrower or foreign state.  We accept that it lent money for the transaction in the belief and expectation that it would be repaid, even though it did not investigate that as it would have done if it had been an ordinary commercial transaction.  We accept that, as far as MG’s witnesses were concerned, MG was acting as a banker, even though it took steps to cover the whole of its perceived risk.  Both MG and SACE appear to us to have been under the influence of views that lending to foreign state entities could be equated with lending to the foreign state, and that foreign states, at least eventually, pay their debts.  For this reason neither made nor consciously expected any real investigation into the borrower’s standing or the project’s viability.  If any disclosure regarding due diligence was called for, it was of this fact.  And this fact could have been disclosed in terms which were relatively neutral and far less likely to strike any discordant note within SACE than the other particular disclosures suggested by SACE.
127.	SACE’s secondary case was that MG should have disclosed the facts which it would have discovered had it inquired into project viability and borrower standing with due diligence.  Ultimately, Mr Boswood did not really pursue this case (Thursday, 25th October 2001; T7/11/87).  Curiously, MG’s skeleton (part 3, paragraph 130) drew attention to the point in a way which appeared at first sight to lend it some credence.  But examination of the source material there cited (consisting of both experts’ reports) confirms the close inter-relationship between this point and the issue of gross negligence, and confirms the general difficulty which SACE would have had in making anything of it.  Matters which were outside MG’s actual knowledge could not trigger the operation of Article 1892 unless, at the least, it was through gross negligence by MG that they were outside MG’s actual knowledge.  It cannot in other words be gross negligence to fail to disclose a circumstance of which one is ignorant for reasons not involving gross negligence.
128.	In order to succeed on its secondary case, SACE would, therefore, have to establish that MG was grossly negligent in failing to carry out due diligence, that, if it had done so it would have learned facts which were objectively material to the risk and that, if such facts had been disclosed to SACE, it would not have entered into the insurances, either at all or on the terms on which it did.  In these circumstances, it is not possible to identify whether a fact is material until it is decided whether MG was grossly negligent in failing to  carry out due diligence and, if so, what facts such due diligence would have revealed.   We shall therefore confine this part of the judgment (and that relating to causation) to SACE’s primary case and only return to its secondary case in so far as it is necessary to do so.
129.	SACE’s primary case, that MG should have disclosed that it had carried out no due diligence, relates undoubtedly to a circumstance within MG’s actual knowledge.  SACE’s primary case is therefore free of the problems identified in the last two paragraphs as attaching to its secondary case.  The primary case involves no more than an inquiry whether MG was grossly negligent in failing to see the relevance for insurance purposes of or to disclose what it actually knew, namely that it had not carried out due diligence.
130.	MG’s first response to the primary case is to argue that whether or not inquiries have been undertaken by a banker cannot affect the standing of any given borrower, the viability of any given project or the likelihood of any repayment of a loan to that borrower in respect of that project, and cannot therefore increase the probability that a claim may arise under a given insurance covering the same.  This argument, if valid, does not depend on the loans having been made a foreign public body or to a private borrower guaranteed by a foreign state.  On the contrary, it would apply equally to credit insurance relating to a loan to an ordinary commercial concern.
131.	The argument takes as given the borrower, the project, the loan and the insurance.  In doing so, in our judgment, it starts at the wrong place.  Materiality falls to be judged at a stage when neither the insurance nor, on the facts of this case (where the loan to the borrower was always dependant on the grant of insurance cover to MG by SACE), the loan or the project can be assumed.  Whether an undisclosed circumstance “involves a higher probability that the insured event will occur” is a question which only arises in the context of pre-contractual disclosure and which must be interpreted sensibly.  As a question, it does not derive from any express statutory language, but by implication, and its underlying rationale is clearly that the risk has been increased.  Indeed, we note that both Avv Gioscia in his report (paragraph 10.7) and Professor Gambino at points in his oral evidence (T3/21/83 and T3/22/4) referred to a need for “an objective influence on the evaluation of the risk” or for correct assessment of the risk.   
132.	The question cannot, therefore, in our view be appropriately answered by assuming that a particular insurance has already been entered into in respect of a particular loan.  “Higher probability” must, we consider, postulate a comparison between the situation as it is said it would have appeared to be in consequence of the non-disclosure (viz, that inquiries had been made and had been satisfactory) and the situation as it actually was (viz, that no such inquiries had been made so that it was uncertain whether the position was satisfactory).  The likelihood that a claim may arise under an insurance which has been entered into to cover a loan where there has been an inquiry (with a satisfactory result) into the borrower, the project and the likelihood of repayment is clearly less than the corresponding likelihood under an insurance where no such inquiry has been made at all.  The latter situation is, in other words, more likely to lead to the insurance of poorly performing loans than the former, and in that sense more likely to lead to the occurrence of an insured event.  
133.	In his cross-examination, Professor Gambino accepted that SACE could not justify an avoidance of the insurance by reference to MG’s failure to investigate the proposed project or debtor, if the investigation would have revealed nothing adverse.  In other words, he accepted MG’s case that there could not in this situation be said to be a higher probability of the insured event occurring.  The judge was entitled to reject Professor Gambino’s evidence on this.  Professor Gambino was not expressing a view based on any authority or reasoned analysis.  The matter is one of first principle, depending ultimately on the correct point of focus.  In our judgment, the only principled answer, which makes sense in the context of Italian law as a whole, is that which we have already stated.
134.	We also regard as simplistic and unacceptable any submission that, because these were loans, in the case of Hungary, to a foreign public body and, in the case of EG, to a company guaranteed by a foreign state, neither the financial standing of the borrower and supplier nor the viability of the project could have any bearing on the probability of the insured event arising.  First, the insured event was simply default by the borrower, which was not the same as the foreign state, however much it was guaranteed or supported by that state.  Second, although neither MG nor SACE may have given this appropriate attention at the time, the transactions themselves had, or were presented as having, some underlying rationale.  While states and public bodies may disburse monies on purely social projects, without prospect of any or any immediate financial yield, the present transactions did involve borrowing for purposes which were ostensibly commercial as well as being of some public interest.  The likelihood of the foreign state honouring its guarantee or providing financial support, in the case of default by the borrower, is, objectively, likely to be influenced by the state’s perception of the viability of the original project.  This is of course said viewing the matter objectively from the viewpoint of the court and/or the prudent insurer, although the course of events in the present case also illustrates it.  At the time, neither MG nor SACE viewed matters in this light, which is the problem lying at the root of this litigation. 
135.	In conclusion, for the reasons we have given, we consider that, objectively, circumstances did exist, consisting of MG’s failure to exercise any due diligence in relation to either the Hungary or the EG loans, which were material for disclosure to SACE, in that they did increase the probability of an insured event occurring in the sense which we have described.
Causation
136.	The second question is whether the circumstances which were not disclosed would, if known to SACE, have caused it to withhold its consent, or its consent on the same conditions, to the insurance.  The question is thus essentially a question of causation.
137.	We start by considering whether, in the light of our re-evaluation of the expert and factual evidence, it is established that SACE’s actual state of mind was that it expected the lending banker in buyer credit transactions to have done due diligence on the borrower and/or on the viability of the project.  The answer to this question must derive from a consideration of all the material before the judge, oral and documentary as well as the inherent probabilities.  In so far as the question relates to the matters which actually occupied the attention of SACE’s underwriters and Management Committee, and despite our less harsh assessment of the factual evidence given by SACE witnesses, we have no hesitation in concluding that they did not actually focus attention on any question of due diligence, in relation to the borrower or the project, at all.  Nor do we think that SACE has made good any case that its underwriters or committee made any conscious assumption that MG was executing any due diligence in such areas.  
138.	The judge observed that the SACE witnesses lacked any relevant outside commercial experience.  SACE appears to us to have operated bureaucratically and its underwriting technique was certainly formulaic.  If a risk was accepted for political risks insurance, no distinction was made according to whether it involved a loan to a government, a loan guaranteed by a government or a loan to an epe.  Although even Mr Scallon said that ECAs like SACE would interest themselves in the usefulness of the project, there is no indication in SACE’s contemporary internal documentation or practice that consideration of this aspect played any real role in the minds of those actually underwriting or the Management Committee when considering political risks insurances.  The premium in all cases was the same and was related simply to the perceived risk of financial default of the relevant foreign state (taking into account the period of the loan).  The most that may be inferred is that if a bank had put forward an application for a project which was obviously ridiculous, or involved a buyer known to be the subject of insolvency proceedings, SACE would have declined it.
139.	As we have pointed out, a finding that SACE did not consciously address commercial considerations does not directly answer the key question posed by the express terms of Article 1892.  That question involves a hypothesis of disclosure to SACE.  But disclosure of what? And in what terms?  In considering these questions, since we are at present considering SACE’s primary case, we are concerned only to consider facts which MG actually knew. 
140.	MG could for example have said that its information about the proposed transaction was effectively limited to that disclosed in the application, coupled with assurances from EC as to the importance of the project for Eastern Hungary, and that it had conducted no further enquiries.  In respect of EG, MG could have submitted, as the extent of its further information, the superficial feasibility study that it had itself received and had allowed to pass without further inquiry, and again could have pointed out that it had made no further enquiries.  
141.	The evidence adduced by SACE fails to satisfy us that, if disclosure had been made in such a way, it would either have elicited any unfavourable response or reaction to the application on SACE’s side.  Since SACE never consciously addressed such aspects, it seems to us altogether conceivable that its underwriters would not have been sufficiently alert or thoughtful to attach any significance to them.  And if that had been so, SACE could hardly have complained at a later date about not knowing any circumstances which due diligence would or might have revealed.  We reach these conclusions with confidence in relation to the Hungary loans and on a narrower balance in relation to the EG loan and additional advance.  
142.	Further, it is at this point that the framework case becomes capable under Italian law of having significance.  That SACE never asked any questions about due diligence or about borrower standing or project viability is, on the authority of that case as we interpret it, not conclusive, but it speaks cogently for the irrelevance to SACE of the suggested disclosure, if it had been made.  Although a prudent bank would not, we consider, have adopted the attitude which MG did to these transactions, we cannot say, in the light of all the evidence, that the relevance to SACE of the undisclosed matters was so obvious as to overcome the evidential weight attaching to SACE’s failure to identify such matters as relevant in its standard application form.  We therefore conclude that SACE has failed to establish that any circumstances material for disclosure to it would, if known to it, have caused it to withhold its consent, or its consent on the same conditions, to the making of any of the relevant loans.
Gross Negligence
143.	Lastly, we turn to the third issue, which also derives from the express language of Article 1892.  This issue is whether, so far as there was any failure by MG to disclose objectively material circumstances, this occurred through gross negligence.  We have to reconsider the judge’s conclusion on this point, having regard to our different view about banking prudence.  There is no question of fraud.  It is common ground under Italian law that gross negligence means negligence of “serious intensity” or “non-compliance with the most elementary rules of prudence and care” (Avv Gioscia’s first report, paragraph 5.3, citing Corte di Cassazione authority).  It is clear that it is not every failure to exercise ordinary or proper prudence in the exercise of a professional activity that will constitute gross negligence in this context.   
144.	When judging whether negligence is of such “serious intensity”, we think that it must be legitimate, and indeed necessary, to bear in mind the purpose for which the judgment is being made and the consequences of such a judgment.  Further, there is Corte di Cassazione authority that gross negligence involves either an actual appreciation of the circumstance not disclosed and its materiality or a failure to appreciate that was itself grossly negligent: see the quotation from SOGET SpA v.  Lloyd Adriatico SpA (25th March 1999; case no  2815), set out at paragraph 89 above.  We would however accept SACE’s submission that MG was in this connection acting as a professional for the purposes of Article 1176 (set out at paragraph 68 above) when seeking to protect itself by political insurance.  Hence its conduct falls to be judged against the standard of a prudent bank engaging in such activity.
145.	Was MG’s failure to appreciate that it was incumbent on it to do further due diligence of such serious intensity as to constitute gross negligence and deprive it of the whole insurance? And was its failure to appreciate that it should disclose its failure to do due diligence of such serious intensity as to have these effects? We consider that the answer to each of these questions is negative.  
146.	We identify these considerations.  First, not only MG but at least one other banker could it seems take an attitude similar to that taken by MG.  Mr Scallon’s evidence was (as we point out in Annex B), in certain respects more nuanced and less consistent than the judge thought and we do not accept him as the touchstone of prudence.  But he was a banker with at least some experience in the field and was prepared to support MG’s approach generally on the issue of banking prudence.  Secondly, and more importantly, SACE’s failure, both in its own underwriting and in its relations with banks with whom it dealt, ever to consider or make any inquiry about project viability or borrower standing or about any due diligence that the bank had undertaken must be regarded as combining with and contributing to MG’s failure to consider or address these issues.  The attitudes and practices of both were at fault.  Both were under the influence of an overriding belief that in cases of political risk insured under Article 14.2 there was no need or cause to focus on anything save the “country” risk, which, it is common ground, it was for SACE to assess.  Thirdly, as a matter of Italian law, the framework case has considerable evidential significance.  Since SACE did not identify due diligence, project viability or borrower standing as topics of any interest to itself, it faces an uphill struggle in asserting that MG was grossly negligent in failing to disclose any circumstances relating to those topics, including any failure to undertake or inquire into them.  
147.	In these circumstances it would, in our judgment, be unjust to hold that MG was grossly negligent either in failing to carry out due diligence or in failing to inform SACE that it had not done so, so as to bring Article 1892 into operation.  MG’s failure to disclose what were in our view objectively material circumstances did not have the necessary degree of seriousness or intensity.  It follows that SACE’s primary case fails, even if our conclusion on causation is wrong.
148.	It further follows that SACE’s secondary case fails because (as explained earlier) SACE would have to establish gross negligence in failing to carry out due diligence before questions of the objective materiality of facts which would have been discovered by such due diligence or questions of causation could arise.  In these circumstances it is unnecessary to identify the objectively material facts (if any) which would have been discovered if due diligence had been carried out – a hypothetical exercise which would also be both complicated and difficult.  Since SACE has failed to establish the necessary gross negligence, we shall not embark on this further enquiry.     
Conclusions
149.	The result is that, although our assessment of the expert banking and factual evidence differs from the judge’s, and in particular we differ from him on the issue whether MG acted as a prudent banker, we arrive at the same ultimate conclusion on the issue of non-disclosure, for two reasons.  First, SACE has failed to establish that disclosure would have affected it subjectively as required by Article 1892.  Secondly, MG was not on any view guilty of gross negligence.  It follows that SACE was not entitled to annul the contracts under Article 1892.   It is also unnecessary in these circumstances for us to go into the further issues of time bar and waiver or affirmation argued by MG on its cross-appeal under the terms of Article 1892.
IX.	STATUS OF EC
Introduction
150.	One of the striking aspects of this case is that, before it agreed to provide cover to MG, SACE considered in detail the question whether EC was an epe for the purposes of Article 14.2 of Law 227.  It concluded that it was and decided to provide the cover.  Yet one of the principal bases of its defence was (and remains) that EC was not an epe at that time, or indeed at any material time thereafter, and that it follows that it is not liable to MG under either of the Hungary transactions.
151.	The status of EC at each relevant time is the central point for decision in this part of the case because it is correctly accepted by SACE that, if EC was an epe at all material times, this head of defence fails.  On the other hand, if EC was not an epe at any of the material times, the parties have each deployed a series of arguments of Italian law designed, in MG’s case, to show that SACE was nevertheless liable under the contracts and, in SACE’s case, to show that it was not.  This debate has ranged over a number of different areas of Italian law and has given rise to a sharp division of opinion between Professor Gambino and Avv Gioscia.
152.	Mr Boswood posed a number of questions under this heading as follows:
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? 
Common Ground
153.	The following was common ground between Professor Gambino and Avv Gioscia.  Law 227 did not define an epe.  It was for Italian law to determine what criteria were relevant when deciding whether a particular body was an epe for the purposes of Article 14.2 of Law 227 and Article 4.1(B) of the policy, which the experts were agreed were the same question. The question was an objective one which could not be answered solely by asking whether the entity concerned would be a public body as a matter of the law of its place of incorporation or establishment, although the status of the body concerned was a relevant fact against which the question whether the body was an epe for the purposes of Law 227 was to be judged.  
154.	There was no decision of any Italian court, including the Corte di Cassazione, which had considered the meaning of epe for the purposes of Law 227.  Like any statutory provision, Article 14.2 of Law 227 fell to be construed in accordance with Article 12 of the Provisions of the Law in General, which provides, so far as relevant:
“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
155.	The experts did not agree what the relevant criteria were.  Avv Gioscia’s views may be summarised as follows.  Since the expression epe was not defined in the statute, it should be construed according to the principles established by legal theory and case law.  The relevant foreign law, which in this case was of course Hungarian law, was relevant in order to identify the characteristics of the particular entity to establish whether or not it satisfied the concept of epe in Italian law.  It was thus necessary to identify what the legislator intended by using the expression epe in Article 14.2.  He rejected the suggestion which had been advanced by Professor Gambino (and to which we shall return below) that assistance could be obtained from EC Directive 70/509.  He did, however, express the view that Law 227 absorbed, as he put it, the spirit and criteria of a document known as the OECD Consensus, which had come into existence in 1976 and been improved in 1978.  The main purpose of the Consensus was to provide the institutional framework for an orderly export credit market, but it did not include a definition of the kind of public body or authority which would be insured or guaranteed.  
156.	Avv Gioscia regarded the reference to “legislative intent” in Article 12 as a subsidiary criterion to be used “in case the literal meaning of a given provision is unclear”.  In his opinion this was not such a case and it was only necessary to apply the first criterion in Article 12, namely to apply the meaning normally attributed to the words.  In short, the meaning of epe in Law 227 was the same as the meaning attributed to the notion of a public entity for the purposes of Italian domestic public law. 
157.	He said that under the principles established by what he called “legal theory and case law” the question whether an entity (other than the state and an entity defined as a public entity) could be defined as public must be determined by reference to the question whether a combination of certain indicia existed.  He identified the indicia as follows:
“(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.      
158.	None of those indicia was considered sufficient or essential in itself but, rather, a combination of them was necessary in each case.  Avv Gioscia said in his first report that the courts evaluate the status of a particular entity on a case by case basis by reference to a combination of two or more of the indicia.  He made it clear in his evidence that the number of indicia which would have to be satisfied before it was concluded that a particular body was an epe would depend upon the particular circumstances.  In his report he pointed to factors which he said that the cases showed to be of particular weight.  They were the extent of the direction and control of the state or other public body over the particular entity’s activities, including the extent of such involvement in the appointment and removal of its directors, whether the entity was established by one or more public entities and the participation of the state in its profits and expenses.
159.	It seems to us that in the context of an insurance claim under Article 14.1(e) of Law 227, covering the act or deed of an epe hindering contractual performance, factor (iii), that is whether the alleged epe was the holder of public law powers and prerogatives, would also have to be satisfied by an affirmative answer. 
160.	Avv Gioscia also pointed to the existence of economic public entities or enti pubblici economici in Italy, in respect of which some at least of the above indicia must be present, including in particular that the entity must be subject to the direction and control of the state or another public entity (albeit sometimes at a very low level), that it must be established either by operation of law or by another public entity, that, at least at the time of incorporation, its assets must be provided by the state, that it must not be subject to the same insolvency regime as private entities and that it cannot be dissolved voluntarily as a result of a discretionary decision on the part of its internal management.  Avv Gioscia stressed, however, that the entity could be subject to compulsory winding up in circumstances in which the state was not directly or indirectly responsible for its debts.  He also said that it was not necessary to qualify as an ente pubblico economico that it should not be permitted to dispose of its assets destined for its offices or services or that the state or some other public entity should participate in its profits or expenses.    Finally, it was Avv Gioscia’s opinion that it was sufficient for the entity to be an ente pubblico economico in order to be an epe for present purposes.      
161.	It is thus apparent that on Avv Gioscia’s view of the correct principles, if the question whether EC was an epe at a particular time had arisen in Italy, it would have been for the Italian court (and ultimately the Corte di Cassazione) to consider a wide range of circumstances and to decide in the light of all the circumstances whether a sufficient number of relevant indicia were satisfied to make it an epe for the purposes of Article 14.2 of Law 227. 
162.	Professor Gambino approached the matter somewhat differently.  He stressed the purpose of Article 14.2 and placed considerable reliance upon the reference to legislative intent in the part of Article 12 of the Provisions of the Law in General quoted above.  His view was that the purpose of Law 227 was to provide cover in respect of liabilities which were the responsibility of the relevant state.  His evidence ultimately was that in the case of capitalist states the relevant liability must be the legal responsibility of the state, whereas in the case of states such as Hungary, which had previously been part of the Soviet bloc, it was sufficient if the state was in practice financially responsible for the liabilities of the entity concerned.
163.	The judge rejected the evidence of Professor Gambino and preferred that of Avv Gioscia in part at least because of his view of Professor Gambino’s evidence generally and in part because of his conclusion that Professor Gambino changed his opinion as his reports developed and his evidence progressed.  Mr Boswood submitted that the judge’s conclusions in this regard were unfair to Professor Gambino, whereas Mr Dehn submitted that they were justified.  We therefore turn to consider them.
164.	In his first report Professor Gambino said that for the purpose of facilitating Italian exports Law 227 permitted banks which financed the purchase of such exports to be insured in respect of the risk of non-payment which was “directly attributable to the direct or indirect will of the State which is the destination of the export, not to pay the exporter or the bank”.  He added:
 “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’”.
165.	Professor Gambino then placed some reliance on EC Directive 70/59.  He expressed the view that the Directive was immediately binding in Italy.  He recognised that Law 227 was intended to be of broader scope than the Directive, which was concerned with the adoption of a common credit policy in respect of medium and long term supplier credit transactions which involved a public buyer or a private buyer whose commitments were guaranteed by a public buyer.  However he expressed the view that the Directive was a source of interpretation of Law 227 and that the expression epe must be given the same meaning as was given to the expression ‘public buyer’ in the Directive, namely
“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.”
 
166.	A little later in his first report Professor Gambino said that he had been asked to assume these facts:
“(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”.
167.	It is, in our judgment, plain that in his first report Professor Gambino was saying that Article 14.2 should be construed by reference to the Directive and that a body could not be an epe within the meaning of the Article if it could be made insolvent.  Moreover, we are unable to accept SACE’s submission that Professor Gambino was saying in his first report (as he did later) that an entity could be an epe even though it could be made insolvent provided that the state would in practice be financially responsible for its debts.  If he had been expressing that view in his first report, he would have answered the question posed on the two assumptions just stated by saying that EC was an epe provided that the Hungarian state was in practice responsible for EC’s financial liabilities.  Yet his first report cannot fairly be read as expressing that view.   
168.	In his second report, which was written in response to Avv Gioscia’s first report (to which we have referred above), Professor Gambino expressed his disagreement in a number of respects.  He stressed the importance of the reference to legislative intent in Article 12 and dismissed the significance attached to the indicia relied upon by Avv Gioscia which derived from Italian administrative law.  He then referred to Law 131 of 1967 which was the forerunner of Law 227 and observed that, in the Parliamentary report presenting the draft of Law 131 to the Senate, ente pubblico was defined in connection with the “risk of non-payment when the purchaser or the guarantor is a State or foreign public entity” as follows:
“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”.
169.	Professor Gambino then reverted to the terms of the Directive and concluded that no possible interpretation could be given to the expression epe in Law 227 other than that of an entity which may not be declared bankrupt whether judicially or administratively and whose obligations are ultimately those of the state itself.  It seems to us that on a fair reading of his second report up until that point, the Professor was essentially restating the opinions which he had expressed in his first report.  Moreover that is the case that was put to Avv Gioscia in cross-examination at the trial.  
170.	On the other hand it does seem to us that on a fair reading of his evidence as a whole Professor Gambino’s evidence was that in some states at least (notably those which were part of the Soviet bloc), whether or not it can be made insolvent, an entity can be an epe provided that the state will in practice be financially responsible for its debts.  Indeed, some support for that conclusion is to be found in the part of his second report after that referred to above.  He there discussed the difficulty of applying by analogy the principles applicable in Italy in countries which had previously been part of the Soviet bloc and which were developing their economic systems.
171.	In this regard, Professor Gambino considered the approach adopted by SACE from about 1983.  During the hearing of the appeal there was some debate as to the relevance of SACE’s approach to the status of EC.  For the most part Mr Dehn submitted that it was relevant, whereas Mr Boswood submitted that it was not, at any rate to the question of Italian law what criteria would be applied to the question whether an entity such as EC was an epe.  We shall return to that issue, so far as necessary, below, but it is fair to say that both experts (perhaps naturally) relied on what SACE in fact did in so far as they thought it assisted their respective theses.  We should add that it is also fair to both experts to say that they accepted that the question was an objective one and that the views of SACE, even if relevant, were certainly not conclusive.  In this regard both experts referred to a document known as the Scifoni memorandum dated 28th June 1983 in support of their respective views.  
172.	We will return to the memorandum in a moment as part of a discussion of  those views.  For present purposes it is sufficient to record our conclusion that the judge was not being entirely fair to Professor Gambino when he characterised his evidence to the effect that a body is not an epe if the state will not in practice stand behind it financially as a gloss on his reports.  It was a gloss on his first report but not on his second.  We have already expressed our view that it was not appropriate to reject the whole of Professor Gambino’s evidence as unreliable.  In our view the correct approach to this part of the case was for the judge (and now for us) to consider the theses developed by the two experts on their legal merits as a matter of Italian law.
Discussion
173.	We do not think that the evidence of either Avv Gioscia or Professor Gambino should be accepted (or indeed rejected) in its entirety.  Rather, we consider that the enquiry which would be undertaken by an Italian court is in one sense wider than that proposed by Professor Gambino and in a different sense wider than that proposed by Avv Gioscia.
174.	As to the latter, we think that the approach proposed by Avv Gioscia is too narrow in so far as he suggested that the meaning of epe could be ascertained by an analysis of the language of Article 14.2 without regard to the legislative intent.  We prefer the approach of Professor Gambino in this regard.  Article 12 of the Provisions of the Law in General clearly requires the court to have regard both to the “actual significance of the words” and to the “legislative intention”.  In our judgment, the correct approach is to construe Article 14.2 of Law with both those factors in mind.  Thus we accept Professor Gambino’s evidence that it is important to have regard to the scope and purpose of the law in deciding what criteria should be applied to the question whether a particular entity is an epe.
175.	On the other hand we are unable to accept Professor Gambino’s evidence in so far as he rejected as irrelevant the indicia derived from Italian domestic administrative law relied upon by Avv Gioscia.  Mr Boswood in argument (and indeed Professor Gambino in evidence) pointed to the fact that the cases relied upon by Avv Gioscia related to very different matters, notably to questions such as whether the employees of an Italian entity were subject to private or public employment laws or whether a particular dispute should be heard in an administrative tribunal.  On the other hand, the question that was common to all of the cases cited by Avv Gioscia was whether a particular body was an ente pubblico.  It is true that in most of them the issue that arose was one of jurisdiction, ie whether the dispute should be heard by the administrative court or the ordinary court.  But it does not follow that the phrase should necessarily bear a different meaning if the issue is different.  The concept of an ente pubblico is a familiar one in Italian domestic law and its application undertaken not infrequently.
176.	In these circumstances it is, in our judgment, likely that an Italian court would have in mind the criteria ordinarily applied in Italian domestic law to decide whether a body was an ente pubblico, while also having in mind the particular purpose of the Law which it was construing.  Thus we accept the submission that the comparative significance of the individual criteria or indicia set out by Avv Gioscia will vary depending upon the question which the court has to decide.  Nevertheless it seems to us that the various indicia set out by Avv Gioscia and quoted above are all more or less relevant to the question for decision, namely whether EC was an epe for insurance purposes, and we accept his evidence that the Italian courts would have regard to them.
177.	That conclusion is, in our judgment, supported by the contents of the Scifoni memorandum, which seems to us to be a document of some significance as to the true meaning of epe for the purposes of Law 227.  In any event it is permissible to examine it because of the reliance placed upon it by both experts.  A close examination of the memorandum reveals that it does not support Professor Gambino’s narrow approach in a case such as the present.  
178.	The memorandum was largely drafted by Dr Scifoni, who qualified as a lawyer in 1968 and had been employed by SACE in its legal department since 1977.  It was prepared for the consideration of SACE’s Management Committee, which had asked for a report on the criteria then currently used in establishing the legal status of foreign bodies for insurance purposes (ie for the purposes of Law 227) in comparison with those used by European Community insurance bodies.  The memorandum was thus produced in order to identify the criteria that the legal department applied for the purpose of establishing whether a foreign borrower was an epe.  It was also produced in order to make recommendations for changes to those criteria, but the recommendations that were made were not in fact adopted so that we have disregarded them for present purposes. 
179.	In our judgment, the importance of the Scifoni memorandum lies in the fact that it sets out the criteria that were generally applied by the very organisation that was set up to operate Law 227, and which by 1983, and even more so by 1991, had acquired considerable experience in so doing.  Dr Scifoni said in evidence that it represented the true position (T2/14/70).  Dr Pernozzoli also gave evidence about the memorandum (T2/12/77 ff).  It is true that he did not say in terms that it accurately identified the applicable criteria, but the whole tenor of his evidence was that this was his view.  It is, therefore, clear that these experienced lawyers considered that, as a matter of law, the criteria adopted by them were the correct ones to apply.  Moreover, Professor Gambino agreed at one stage that these criteria “were appropriate criteria for them to use in judging the question of ente pubblico estero” (T3/23/28).  
180.	The memorandum explains the system adopted by SACE at the time, which involved an investigation of the position through the Ministry of Foreign Affairs, a report to the Management Committee and a decision by that Committee.  If the decision was favourable, the entity was put on a list of approved bodies which was distributed to those who might wish to establish trading relations with such bodies.
181.	The memorandum expressly recognises that, given the absence of a definition of epe in Law 227, the definition of an epe is “largely left to case law and legal doctrine, the theory of which is far from being concluded and accepted in Italy or abroad for two principal reasons”.  Those reasons were the proliferation of public bodies and increasing state interference in the economy.  
182.	The memorandum states that “SACE’s attitude to this question [sc which criteria to apply] rests largely on that of the previous management”.  That is a reference to the attitude of SACE’s predecessor ACE contained in a resolution dated 11th December 1963 which is quoted in Professor Gambino’s report as follows:
 “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”.
And later:
“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.
183.	It is true that the Scifoni memorandum also says that “generally” the committee had based its decisions on the twin criteria of direct or indirect guarantee by the state of the body’s obligations and the absence of insolvency procedures.  The same point is made a little later, where the memorandum shows that SACE recognised that its “usual habit” of giving public legal status after having verified the existence of a state’s undertaking or guarantee cannot always be applied, giving as one example: 
“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.”
184.	That passage is followed by an important part of the memorandum, some of which was quoted by Professor Gambino and some by Avv Gioscia:
 “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.”
185.	Professor Gambino interpreted the sentence which forms the penultimate paragraph in that extract as meaning that, even in the case of a state which deployed what he described as the non-recourse formula (quoted above), SACE was prepared to accept such an entity as a public body “because of the very fact that the State, in those regimes, was responsible in all cases.”  By “responsible” in that sentence Professor Gambino must have meant responsible in practice.  However, we do not accept Professor Gambino’s interpretation of the sentence.  He construed it as if it said the opposite of what it in fact says.  Thus he construed it as if it said that the guarantee of the state was the source of the public nature of the entity because it was his evidence that to be an epe in a case like this the state must in practice guarantee its liabilities.  That is quite different from saying, as the paragraph in fact does, that the guarantee is the consequence of the fact that the body is an epe.
186.	The sentence seems to us to be of some significance.  Our understanding of it is that, if the state funds the body, organises and controls its business, and nominates those who run it, a consequence is that the state can be treated, in a practical and non-legal sense, as guaranteeing or as standing behind its obligations.  If these features are present, it is not, of course, a necessary consequence of them that there will be, as a matter of law or practice, such a state guarantee or support.  But it is clear that it was SACE’s view that this was at least a likely or expected consequence.  That situation is contrasted by the memorandum with that which obtains in the more “usual” case, where it is considered to be sufficient simply to verify the existence of a state guarantee.  In such a case, it would be true to say that the state guarantee was the “source of the public legal status” of the body.
187.	Dr Scifoni said of the passages quoted above in his evidence (T2/14/70) that they recorded the true position and that “this was in fact our common policy or position vis-à-vis the entities in socialist countries”.  It seems to us that the words “but does not demonstrate 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” reflect several of Avv Gioscia’s indicia.  They unquestionably go far wider than Professor Gambino’s narrow twin criteria.  
188.	The importance of this part of the memorandum is that it recognises that there are cases where Professor Gambino’s narrow approach is not apt, and that in a case (such as the present) which involves a state business in a socialist country, a wider approach is necessary.  In his second report and in his evidence, Professor Gambino recognised this to some extent. That is why he accepted that it would be sufficient if the state guaranteed the borrower’s obligations in practice.  But the memorandum supports Avv Gioscia’s view that he did not go far enough and that there are a number of indicia to take into account in a case of this kind.
189.	We are nevertheless of the view that those indicia include the two criteria relied upon by Professor Gambino.  We accept his evidence that an Italian court would have regard to both of them.  Thus it would have regard both to whether the entity concerned could be made bankrupt and to whether the relevant state would have a legal obligation to discharge its debts.  
190.	Both those considerations seem to us to be relevant criteria, whether or not the definition in the Directive can properly be regarded as an aid to construction of Law 227.  We recognise that, as Professor Gambino accepted in cross-examination, the Directive was a dead letter in the sense that it was not implemented and did not have direct effect in Italy and, indeed, that it was much narrower in scope than Law 227.  On the other hand, as appears in the Scifoni memorandum, SACE had regard to an earlier definition which derived from a European Community Technical Committee in the early 1960s and which defined a buyer as public when, as part of the state or an extension of it, “it cannot legally or from an administrative point of view become insolvent”.    
191.	There is no reason why SACE should not have regard to that definition or indeed to the definition in the Directive, although the memorandum did not for some reason refer to the Directive.  In short we accept Professor Gambino’s evidence at least to the extent that an Italian court would have regard to the definition in the Directive and, in particular, would regard the possibility or otherwise of putting the entity concerned into liquidation as a relevant factor to be taken into account among many others.  It should be noted in this regard that Law 227 did not adopt the definition in the Directive, or indeed any specific definition.  That seems to us to point to the conclusion that the legislator intended (as the Scifoni memorandum put it) that the meaning of epe in Law 227 should be “largely left to case law and legal doctrine”.  (For further comment on Professor Gambino’s evidence about the Directive, see paragraphs 15 to 18 of annex A.)  
192.	As to the attitude of the relevant state (in this case Hungary), there is no doubt that the existence or otherwise of a legal obligation on the part of the state to discharge the financial obligations of the entity concerned was an important factor in deciding whether it was an epe for the purposes of Law 227.  We are also of the opinion in the light of all the evidence that, where there was no such legal obligation, as was common in socialist countries (as the Scifoni memorandum observed) the question whether the state would in practice stand behind the entity was also a relevant factor.  However, we do not think that it was a conclusive factor.
193.	The argument presented on behalf of SACE both to the judge and on this appeal really amounted to this.  Where an entity was a public body in the state concerned in the sense that, by the law of that state, it had the legal status of a public rather than a private body, it was not an epe for the purposes of Law 227 if it could be put into liquidation unless the state was financially responsible for it either in law or practice.  Like the judge, we have reached the conclusion that the Italian court would not have approached the definition of an epe so narrowly, but would have had regard to a wider range of criteria as Avv Gioscia said in evidence, and as the Scifoni memorandum suggests.
194.	Both Professor Gambino in evidence (and Mr Boswood in argument) placed considerable reliance upon the purpose of Law 227, namely to provide cover in respect of the liabilities of foreign states and state entities and thus upon the importance of the responsibility of the state for the transaction concerned, whether legal or practical responsibility.  We see the force of that argument, but it must be recognised that the question whether an entity (in this case the foreign buyer) is an epe is no more than a threshold question entitling SACE to provide cover under Article 14.2 of  Law 227.  As Mr Boswood correctly accepted in argument, SACE was not bound to provide cover for an epe.  It could properly refuse to do so if it regarded the risk as too great, although we have to add that SACE’s mechanical approach to underwriting generally may well have meant that it gave too little attention to this possibility at the relevant times.
195.	That risk was of course the risk that the epe and/or the state would not in fact pay the bank.  That risk has variously been described as a country, political or sovereign risk.  It has been aptly so described because, whether or not legally liable to pay, the risk accepted by SACE was that the state would not in fact pay.  That was the risk which it was for SACE to weigh up as a matter of practice.  It was not, in our judgment, a question which an Italian court would have regarded as determinative of the threshold question whether the entity concerned was an epe.  Given SACE’s discretion whether or not to insure a particular epe, it was not necessary, in order to satisfy the legislative purpose of Law 227, to introduce a requirement that the state would in practice stand behind the entity financially before it could be regarded as an epe.           
196.	That conclusion is, in our judgment, underlined by the fact that such a test would be very difficult to apply.  Mr Dehn submitted that such a test would be unworkable.  When and how would such a test be applied?  It is likely that at the date of the cover the most that could be said would be that the state had in the past stood behind the entity or had usually done so.  Suppose that the position was that the state had indeed invariably stood behind the entity in the past but that, unknown to SACE or anyone else, the state had resolved not to do so in the future or only to do so up to a modest limit, would the test be satisfied?  SACE would we think answer that question in the negative since its test was formulated by Mr Boswood at one stage of the argument as being whether the state would in fact provide the body with sufficient funds to repay its foreign creditors.  We accept Mr Dehn’s submission that that would be an unworkable and most unsatisfactory test.
197.	Whether a state would be likely in practice to stand behind a particular entity in the future is a political question or at least a question of a political nature.  It is a question which seems to us to be appropriate for resolution by a body which has a discretion whether or not to insure the body concerned because it involves weighing up the factors which point to a likelihood of payment against those which point the other way.  It is not a question which admits of a clear answer and is thus not suited to a threshold question such as whether the entity is an epe.
198.	We recognise that some of those considerations might be deployed in support of an argument that the question whether the state would in practice stand behind the entity should be treated as entirely irrelevant to the threshold question.  We do not, however, think that an Italian court would go so far as to disregard the likelihood of the state paying its debts altogether, although what weight the court would attach to it would depend upon the circumstances.  It would simply treat it as one factor among many others. 
199.	In conclusion, it is our view that an Italian court would consider whether the various indicia referred to both by Professor Gambino and by Avv Gioscia were satisfied in the case of EC and, in the light of its conclusions, decide whether EC was an epe for the purposes of Law 227.
Was EC an epe on the facts in December 1991 and January 1992?
200.	As can be seen, this is an amalgam of the second and third questions posed by Mr Boswood which are set out above.  That is of course because, for the reasons which we have given, we do not think that the test proposed by either witness should be accepted in its entirety.
201.	Although Professor Gambino and Avv Gioscia agreed that that question could not be answered solely by reference to the legal status of EC in Hungary, it was common ground between the parties that (as stated above) the legal status of EC when the covers were granted, that is in late 1991 or early 1992, was a relevant factor to take into consideration in answering the question whether EC was an epe for the purposes of Law 227 at that time.  In our view it was an important factor, to which we now turn. 
202.	The parties were advised by distinguished Hungarian lawyers, MG by Dr Sandor and SACE by Dr Forgo.  Although they both gave oral evidence, their oral evidence was much shorter than it would otherwise have been because they were able to meet and agree a large number of matters.  We note in passing that that agreement is eloquent testimony to the value of experts’ meetings.  
203.	In this regard their agreement may be summarised as follows. As already stated, EC was created on 1st January 1986 as a state enterprise, which was an economic organisation and a legal person established by the state under the State Enterprise Act (Act VII of 1977).  A state enterprise could either be managed by an enterprise council or be under administrative control.  EC was managed by an enterprise council.  Its assets were provided by the state on establishment.  Thereafter, they were independently managed by the council but remained owned by the state, which was free to inject further funds if it saw fit.  The assets could not be withdrawn without an Act of Parliament.  The state was entitled to exercise control over an enterprise council by exercising founder’s rights and by appointing one person to the council.  The founder’s rights included termination (or liquidation) of the enterprise if the book value of its assets fell by 20 per cent.
204.	The late 1980s was a time of considerable political and economic change in Hungary.  In 1986 the Liquidation Decree (Law No 11 of 1986) was adopted so that Hungarian state enterprises could be put into insolvent liquidation.  On 1st January 1989, the Hungarian Companies Act (Act VI of 1988) came into force.  It prescribed rules governing commercial companies and indicated the beginning of the move from a centralised to a market economy.  On 1st March 1990, the Transformation of State Enterprises Act (Act XIII of 1989) came into force.  It governed the transformation of state enterprises into commercial companies: a precursor to the start of the privatisation of selected state enterprises.
205.	In 1990 the State Property Agency (“AVU”) was formed by Act VII of 1990 in order to transform selected state enterprises into commercial companies and to supervise and manage the privatisation of state assets.  EC was not one of the companies selected to come within the portfolio of AVU, so that at the end of 1990 EC remained a state enterprise under the management of an enterprise council and was (as Mr Boswood put it) not down to be privatised.  On 12th November 1990 a liquidation petition was filed against EC in a Hungarian court, although the petition did not become public knowledge and no further steps were taken to put EC into liquidation before the covers were granted.
206.	The Hungarian State was not at any time liable for the obligations of state enterprises including EC but (as the experts’ agreement put it in the section dealing with the period 1986 to 1990) would often provide financial assistance to such enterprises. 
207.	EC was founded by the Ministry of Industry and Trade, which exercised founder’s rights until 1990.  Although state enterprises did not in general fall within AVU’s portfolio until 1992 after the covers were granted, from the coming into force of the Act VIII of 1990 (which set out the functions of AVU other than those relating to privatisation) AVU was given certain supervisory rights over all state enterprises including those such as EC which did not then fall within its portfolio.  Under that law AVU’s consent was needed to the validity of contracts concluded by state enterprises under which state owned assets over a certain value were intended to be transferred into private hands.  Contracts entered into in the ordinary course of business and contracts concluded with other state enterprises were not, however, subject to AVU’s consent.
208.	As already stated, EC entered into an agreement with San Marco and Arrow on 23rd June 1991 and the first Hungary I loan agreement was dated 25th June 1991.  On 4th July 1991 EC wrote to AVU telling it about the MG loan, observing that the credit gave it the opportunity of settling its financial problems and expressing the view that its privatisation was not necessary.  The letter concluded by asking AVU to confirm that EC was a state owned company and that it would not undergo privatisation by the state.  It appears that EC had previously wished to be privatised because on 8th July AVU replied, observing that, since EC’s intention to be privatised had been withdrawn, and since AVU no longer intended to privatise it (or, according to another translation, since no further privatisation plans had been submitted to AVU), EC would continue to operate as a state body.
209.	SACE itself investigated the status of EC in the course of 1991.  As already stated, on 2nd July 1991 MG submitted to SACE an application form for cover in respect of the Hungary I transaction.  On 24th July SACE faxed MG asking for certain information including copies of the most recent financial statements relating to Arrow.  On 25th July it wrote to the Ministry of Foreign Affairs in Rome asking it to ask the representatives of Italy in Hungary to obtain information and documentation “that will help identify the legal status” of EC.  In particular it said that it was particularly interested in finding out whether a body can be subject to insolvency proceedings, that is whether Hungary’s legal system incorporated such a process, and whether EC’s obligations had been guaranteed by the state.  It also asked to be kept informed as to any subsequent changes in its legal status.    
210.	On 29th July MG informed SACE that given the nature of the “public sector association” of EC no further ancillary guarantee was envisaged.  On 5th September SACE’s Management Committee resolved to offer cover under Articles 14.1 and 14.4 but not under Article 14.2, pending the outcome of the checks into the legal status of EC.  As already stated, the Hungary II agreement between San Marco and EC was signed on 18th September and the supplemental loan agreement for Hungary I was dated 28th September.  By this time or a little earlier SACE had received a formal certificate dated 6th September to the effect that EC, which was described as a lock manufacturing, die casting and tool making company, was a “state company directed by the Company Council”.  It was agreed that a better translation would be “state body directed by the enterprise council”.  SACE decided that that was not sufficient and on 23rd September asked the Italian Embassy in Budapest to obtain the information previously requested “with particular reference to the state guarantee and with a request to confirm whether the body in question has been the subject of privatisation measures.”  
211.	On 26th September 1991 the Embassy replied in detail.  It stated that the certificate was properly authenticated and quoted a communication from the Hungarian Ministry for Foreign Affairs which included the following:
“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.
212.	In its reply of 30th September, which was signed by Dr Pernozzoli, who was head of the legal department from 1977 until 1996, SACE made a number of detailed and not entirely consistent points.  We refer to some of them.  First, SACE suggested that the word “however” in the above quotation should read “therefore”.  Secondly, SACE said this:
“…. 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.
213.	As indicated earlier, SACE issued a proposta dated 1st October 1991 in favour of MG limited to cover in respect of Hungary I under Articles 14.1 and 14.4 but not 14.2.  As to Article 14.2 cover it stated:
“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.
214.	SACE collected as much material as it could as to the status of EC and on 8th November its legal department issued a note (or appunto) for consideration of the Management Committee.  It was signed by Dr Pernozzoli and also by the Director General Dr Ruberti and the Assistant Director Dr Martinez.  Attached to it were five documents emanating from Hungary.  Attachment 1 was the duly certified deed of establishment of EC dated 18th February 1986 by which the Minister of Industry and Trade ordered the establishment of EC as from 1st January 1986.  It spelled out the scope of its activities as the manufacture, repair and retailing of various metal products and identified its capital as HUF303,186,000.  Attachments 2 and 3 respectively were the letter dated 4th July 1991 from EC to AVU and AVU’s reply dated 8th July 1991 to which we have already referred.  Attachment 4 was the formal certificate (to which we have also already referred) dated 6th September to the effect that EC was a “state company directed by the Company Council”.  
215.	Attachment 5 was a declaration dated 31st October 1991 issued by a Vice-Secretary of State at the Hungarian Ministry of Finance in these terms:
“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”.
216.	He agreed that the Ministry of Finance did not say that the state was providing a guarantee of EC’s obligations but he added (T2/13/12/6):
“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.”
217.	Having referred to each of the attachments, the note of 8th November concluded as follows:
“Conclusions
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.”
218.	That note was considered by the Management Committee at its meeting on 14th November 1991 when it discussed the question whether EC should be accepted as an epe “for insurance purposes”, that is for the purposes of cover under Article 14.2 of Law 227.  It decided that it should be so accepted subject to the parties being informed that SACE reserved the right to re-examine the legal personality concerned if EC “should become involved in the privatisation process”.  
219.	Also on about 14th November (we think) the Italian Embassy in Budapest wrote to the Ministry of Foreign Affairs and to SACE discussing the problems involved in cases of this kind.  That letter included a comment upon the statement of the Hungarian Ministry for Foreign Affairs dated 26th September (quoted above) as follows:
“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.
220.	The Italian version of that letter which we have seen shows that it was received by SACE on 3rd December 1991, which was after SACE accepted Article 14.2 cover, which (as stated earlier) was 20th November.  SACE did not subsequently comment upon the above passage in the letter and, in our view, it represented its state of mind at about that time.
221.	By fax of 20th November SACE communicated to MG its acceptance of Article 14.2 cover in respect of Hungary I, although for some reason it did not refer to the reservation.  MG accordingly declared the loan agreement and supplemental agreements effective, which it would not have done but for SACE’s agreement.  Drawdowns began in early December.  On 19th December SACE sent MG a proposta in respect of Hungary II and an amended proposta was sent for Hungary I on 3rd January 1992.  Both proposte were in the same form and were accepted by MG.  The first funds were advanced under Hungary II on 11th February 1992.  
222.	Both covers were thus in place by early February at the latest.  No-one suggests that the status of EC had changed for any relevant purpose between November 1991 and February 1992.  The question is therefore whether EC was an epe for the purposes of Article 14.2 cover and Law 227 at, say, the beginning of February 1992.
223.	In the light of the conclusions we expressed earlier as to the relevant criteria we turn to consider the indicia relied upon by Avv Gioscia and by Professor Gambino which, for reasons already given, we regard as relevant.  We say at once that we have reached the conclusion that, when the contracts (and indeed the first drawdowns under them) were made, EC was an epe within the meaning of Article 14.2 of Law 227 and thus of Article 4.2 of the contract.
224.	We have reached that conclusion for a number of reasons.  First, it is not in dispute that EC was a state body under Hungarian law at that time.  In any event, in the light of the legal position set out in the agreement between the two Hungarian law experts and summarised above and having regard to the evidence provided by the various Hungarian authorities during 1991, which SACE obtained and to which we have referred, it would not be arguable that EC was not a public or state body.  It was certainly not a private entity under Hungarian law.  SACE’s opinion to that effect in 1991 was objectively justified.
225.	Secondly, quite apart from the legal status of EC, the role in fact played by the state points to the conclusion that EC was an epe.  We have already set out the relevant material, derived both from the agreement of Dr Sandor and Dr Forgo and from the documents obtained by SACE from Hungary in 1991.  In short, EC was founded by the state and was wholly owned by the state throughout the period with which we are concerned at present.  The state also provided EC’s capital and owned its assets.  Moreover, the state exercised all the founder’s rights until 1990, when some of them were taken over by AVU, which was the state entity expressly charged with privatising some state bodies.  Through its founder’s rights the state had significant control over EC including the right of termination if the book value of its assets fell by 20 per cent and the power to appoint a director.  AVU expressly decided in July 1991 that EC should remain in the state sector and not be privatised.  The position had not changed by the end of 1991 or early 1992.  In our judgment, the judge was right to accept Avv Gioscia’s evidence that a sufficient number of the indicia which he identified under sub-paragraph (b) quoted in paragraph 157 above was present to justify the conclusion that EC was an epe for the purposes of Law 227.
226.	Indeed, in the circumstances set out above, it seems to us to be very difficult to reach any other conclusion.  Neither Professor Gambino nor Mr Boswood suggested that there was any category of entity within the meaning of Law 227 other than an ente pubblico and an ente privato.  The particular factors relied upon by Mr Boswood as supporting the conclusion that EC was a private entity were that it was a manufacturer of aero parts, tin cans and the like, the fact that it could be put into insolvent liquidation and the fact that the state would not stand behind it in fact or law.
227.	As to the first, Mr Boswood submitted with force that such manufacture is not a state but an ordinary commercial activity.  That is of course in one sense so, but we accept Avv Gioscia’s evidence (summarised in his indicium (a) quoted in paragraph 157 above) that an Italian court would have regard to whether EC took care of public interests in a broad sense, that is for state purposes or purposes considered by the state at either national or local level to be ancillary to its own.   On the basis of the evidence of Avv Gioscia Mr Dehn submitted that the evidence of fact shows that the reason why the state was interested in the activities of EC was that it operated in an area of high unemployment in which the state had a direct interest in stimulating manufacturing and therefore employment.  We accept the submission that the state did indeed have such an interest, as evidenced for example by a letter dated 12th March 1993 written by the Ministry of Industry and Trade to the effect that what it described as the EC investment programme would make a significant contribution to solving the economic problems arising in the Borsod region.  This factor would not, of course, by itself be sufficient to lead to the conclusion that EC was a public entity, but, for the reasons advanced in argument by Mr Dehn, we do not think that it would lead an Italian court to hold that it was an ente privato estero and not an epe for the purposes of Article 14.2 of Law 227. 
228.	As to the liquidation point, Professor Gambino originally suggested that EC was not an epe because it could be made insolvent or put into liquidation.  In fact the position was that it could be put into insolvent liquidation, but it could not dissolve itself.  Professor Gambino later recognised that that test could not be determinative of the status of an entity such as EC which was set up at a time before the privatisation process had proceeded very far if at all.  He also accepted that the same was true of the fact that the state of Hungary was not legally responsible for its debts, because the law governing EC expressly deployed the usual formula in ex-soviet bloc countries, namely, (as it was put in the Scifoni memorandum) “the State is not liable for the body’s obligations”.
229.	Thus Professor Gambino’s evidence was ultimately that EC was not an epe because the state would not in practice stand behind it.  We have already expressed the view that that could not, by itself, be sufficient to determine the matter, in part because of the unsatisfactory and unworkable nature of the test.  In the instant case, the agreement of the Hungarian law experts shows that, at any rate in the period up to the end of 1990, “the state would often provide financial assistance to such enterprises”.  Thus there is no suggestion that EC was treated differently from other such enterprises so that the position is that, at least until the end of 1990, the state could be expected “often” to provide assistance to EC.  
230.	There is no evidence that that position changed before the covers were granted in early 1992 at the latest.  Indeed, even much later, the state was willing to provide at least some financial assistance to EC because it later provided funds amounting to over £10 million.  On the other hand, as appears from the documents evidencing the approach of the Hungarian state which we have quoted, it was recognised that there was a risk that an entity like EC would be put into insolvent liquidation and that the state would not in practice discharge its debts.  
231.	In all these circumstances we do not think that that factor is sufficient to lead to the conclusion that EC was not an epe for insurance purposes.  On the contrary we have reached the conclusion that SACE’s decision to accept it as such was objectively correct.  In reaching that conclusion we have tried to assess the evidence, including both what may be called the Hungarian and the Italian evidence objectively and (in the first instance) without regard to the views expressed by SACE at the time.  We have approached the problem first on that basis because we recognise that the question is not whether SACE acted reasonably in an English administrative law sense but simply whether, applying the relevant criteria, an Italian court would have held that EC was an epe at the relevant time.  
232.	Like the judge, we have reached the conclusion that it would.  We have done so by considering afresh the issues under this head because we have approached the evidence of Avv Gioscia and Professor Gambino somewhat differently from the judge.  Our conclusion is, however, essentially the same as his.  
233.	We have however also considered the same question in the light of the opinions expressed by SACE in 1991 in the various documents to which we have referred, especially the appunto of 8th November 1991.  By 1991, SACE had gained a great deal of experience in determining the status of foreign bodies for the purposes of granting cover under Article 14.2.  
234.	In making that determination in November 1991 SACE essentially applied the criteria identified in the Scifoni memorandum.  It did so on the basis of advice from the legal department in the appunto on 8th November which also applied the same criteria.  We can see no reason why an Italian court should not take those facts into account in deciding whether EC was in fact an epe in November 1991.  Indeed we think it much more likely than not that it would do so.  In rejecting a submission that what SACE knew and did at the time was irrelevant the judge said that it was an attempt to ignore reality.  We agree.
235.	It follows that, whether the opinions and actions of SACE are taken into account (as we think they should be) or ignored, our conclusion is the same, namely that when the covers were granted (and when the first drawdowns were made) EC was an epe for the purposes of Law 227.  
236.	In these circumstances Mr Boswood’s question 4 does not arise because it is based on the assumption that EC was not an epe at the time the covers were granted.  It also follows that it is not necessary (or indeed desirable) for us to consider the scope of Article 1895 of the Civil Code, which provides that a contract of insurance is void if the risk has never existed or has ceased to exist before the contract is made.  There was, for example, much interesting evidence and debate as to whether the status of EC was a part of the risk which it is not necessary for us to consider.
Did the Status of EC Change?
237.	The issue under this head is potentially relevant to two questions.  The first is  whether the risk ceased to exist after the contracts were entered into within the meaning of Article 1896 of the Civil Code because, if it did, the contracts were terminated under that Article.  The second is whether, as SACE submits, it is not liable by reason of the specific reservation in both Hungary I and Hungary II contracts.
238.	It is common ground that these defences fail if EC was an epe at all relevant times.  That is plainly so under Article 1896.  As to the reservation, although we quoted it earlier, we set it out again here for convenience.  It provides:
“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.
239.	The agreement between Dr Sandor and Dr Forgo again summarised the legal position in Hungary.  In 1992 the Permanent State Property Act and the Temporary State Property Act were enacted.  They were Acts LIII and LIV of 1992 respectively.  We shall call the former the “AVRt Act” and the latter the “AVU Act”.  The purpose of the legislation was to define and separate entities which were to remain fully or partly in permanent state ownership from those which were due to be privatised.  When that legislation came into force it was no longer possible to establish wholly new state enterprises.  The AVRt Act established AVRt as a new joint stock company in order to administer state enterprises or commercial companies which were to remain wholly or partly in state ownership.
240.	One of AVRt’s primary tasks was to transform state enterprises which were to remain wholly or partly in permanent state ownership into companies.  The AVRt Act provided that the state enterprises falling within AVRt’s portfolio must submit their transformation plan to AVRt within six months of the Act coming into force.  AVU continued in being and was charged by the AVU Act with administering state enterprises and commercial companies which were to be privatised.  The new legislation provided that all existing state enterprises should be transformed into companies, irrespective of whether they were to be privatised or to remain in state ownership.  The procedure to be adopted depended upon whether the entity was within AVRt’s portfolio, in which case it was governed by the AVRt Act, or within AVU’s portfolio, in which case it was governed by the AVU Act.
241.	By a decree dated 28th August 1992 the Hungarian government promulgated a list of entities to remain permanently in state ownership.  EC was not on the list.  Accordingly the provisions of the AVU Act were applicable to it, with the result that it belonged to AVU.  Since AVU’s basic task and obligation under the AVU Act was the transformation and privatisation of entities which it owned, it follows that, if it remained within AVU’s portfolio, EC would in due course be privatised.  It was EC’s duty to prepare and lodge transformation documentation with AVU by 31st December 1993 at the latest.
242.	EC had not initiated its transformation by 30th June 1993, with the result that, by section 61(2) of the AVU Act, EC was to operate under the supervision of state administration rather than an enterprise council.  This had the effect of increasing state control, albeit through AVU.  Thus, for example, EC’s activities and the activities of its management were now subject to state evaluation and control.  Subsequently, by decree 185/1993 dated 31st December 1993, EC was placed on the list of companies to remain partly or wholly in permanent state ownership.
243.	Thus, with effect from 1st January 1994 EC was transferred into the ownership of AVRt and, as the judge put it, was no longer heading for privatisation, which never took place.  Under the AVRt Act at least 5 per cent of EC had to remain in state ownership.  At a board meeting of AVRt on 30th May 1994 AVRt decided to transform EC into a joint stock company.  If EC had been transformed into a joint stock company and if, as was at that time envisaged, AVRt had retained at least 75 per cent of the shares in it, AVRt would have become liable for its debts by reason of section 328 of the Companies Act 1988.  In the event, by a resolution dated 26th September 1994, AVRt withdrew its earlier decision to transform EC because of its lack of assets and EC was never transformed into a joint stock company.  It simply remained in AVRt’s ownership until it was put into insolvent liquidation.  The order of the court commencing the liquidation procedure was published on 8th December 1994.         
244.	Those facts are taken from the experts’ agreement.  Applying Avv Gioscia’s criteria or indicia, the judge held that the status of EC never changed.  SACE submitted on this appeal that he was wrong so to hold.  In the course of his submissions Mr Boswood placed some reliance on the approach of the parties at the time.  He did so in support of his submission that the situation in Hungary was changing (as he put it) on the ground.  In short his submission (if we have understood it correctly) was that, whatever the position in early 1992 when the covers were granted, by the summer of 1992, alternatively during 1993 and in any event by August 1993 when SACE decided to exercise its right of withdrawal under the contracts, the position was that the state of Hungary would not in practice stand behind EC financially with the result that it was no longer an epe (if it had ever been).  Mr Boswood further relied in particular upon the fact that when, on 28th August 1992, the Hungarian state issued a decree which set out a list of entities to remain in state ownership, EC was not on it. 
245.	Mr Boswood submitted for example that MG was not unaware of the changes in Hungary on their transactions.  That is true because in an internal note relating to a proposed Hungary III transaction Mr Lazzaroni of MG noted that they understood that there would be some change in the ownership of EC at the end of the year and that, once notified of it, they must immediately suspend advances on Hungary III and await to hear from SACE as to whether any change to their cover would result.  He added that that would also apply to Hungary I and II.
246.	SACE continued to make enquiries of Hungary from time to time in order to see what was happening.  It sent a somewhat curious message (written by Dr Scifoni) to the Italian Embassy in Budapest asking whether, in view of the privatisation process, the assumptions it had made earlier remained correct.  They were put in this way:
“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.”
247.	On 25th August 1992 a Deputy Secretary of State at the Hungarian Ministry of Industry and Trade, in response to a request by EC, issued a certificate which included the following:
“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.  
248.	The last part of the certificate seems to contemplate that EC would or might be transferred to AVRt and be transformed into a company the shares of which would be owned by AVRt.  However, as stated earlier, three days later, on 28th August 1992, the Hungarian government promulgated by decree a list of entities to remain in state ownership and, for some reason, EC was not on the list.  On the other hand, it is common ground that the state could add names to the list if it wished.  A certificate or letter in similar terms to that dated 25th August was sent to SACE under cover of a letter of 10th September 1992.  SACE interpreted the certificate as meaning that the state had no intention of adding EC to the group of companies due to be privatised.  In our judgment, that was and is a reasonable conclusion.  
249.	Further enquiries were made in the course of 1993 and in May 1993 a meeting took place between San Marco, MG and SACE at which the status of EC was discussed.  As a result San Marco contacted both EC and the Ministry of Industry and Trade.  It obtained a copy of a letter from an under-secretary at the Ministry to EC dated 28th May 1993 which stated that EC was at that time managed by an enterprise council and had “not yet been transferred under the Act LIII of 1992 but the necessary procedures have been started by the Ministry”.  The letter thus contemplated a transfer to AVRt.
250.	On 28th May 1993 a Hungarian lawyer, Dr Peter Koves, wrote to MG expressing his opinion based on the above documents.  His view was that the Ministry had initiated the procedure to include EC in AVRt’s portfolio and that he had been informed that the state intended that AVRt should maintain 100 per cent ownership of it.  On 2nd June the same under-secretary at the Ministry wrote to confirm that the Ministry was indeed taking such steps.
251.	On 29th July 1993 Dr Pernozzoli and SACE’s Director General Dr Rubino signed an appunto entitled “re-examination of the legal status” of EC for consideration by the Management Committee.  It referred to the reservation in the contracts and to two particular matters which were regarded as important.  The first was the confirmation from the Italian Embassy in Budapest of “the stated wish of the Hungarian State not to give any guarantees concerning obligations assumed by Hungarian bodies both publicly and privately owned”.  The second was the reference to the certificate of 25th August 1992 to the effect that EC was completely controlled by the Hungarian state and that the state had no intention of adding it to the group of companies due to be privatised.     
252.	The appunto made the following recommendation to the Committee:
“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.
253.	By letter dated 12th November 1993, SACE sought to explain its decision to MG.  It did so by saying that the withdrawal of cover was a “direct consequence of the privatisation of Elzett Certa” and that in making its decision of 5th August it took note of the privatisation.  There was much debate at the trial as to whether SACE believed that EC had been privatised since the proposta of 14th November 1991.  For reasons which we have set out in Annex C when considering the evidence of Dr Pernozzoli and Dottoressa Calcagni, we consider that SACE was and is vulnerable to the criticism that there was no intelligible basis either for the appunto of 29th July or for the letter of 12th November 1993.  However, it is sufficient for present purposes for us to decide whether EC in fact ceased to be to be an epe after, say, the end of 1991.
254.	It is not necessary for us to recount the remaining events of 1993 and 1994: there were many exchanges between the parties.  For example on 10th August 1994 SACE reinstated cover as from 12th May 1994 on the basis that it had public legal status as part of AVRt’s portfolio.  However, it is not necessary for us to describe these events in detail because there can, in our judgment, be no doubt that, whatever the position before the end of 1993, EC was an epe from the time it came within AVRT’s portfolio as a result of the decree 185/1993, namely 1st January 1994.
255.	We return to the question whether EC ceased to be an epe at any time between, say, the end of 1991 and the end of 1994.  In our judgment, the answer to that question is plainly no.   It is important to note that the question here is whether there was any change in the status of EC after, say February 1992, on the assumption that EC was an epe at that time.  That is because this question only becomes relevant on the assumption that SACE’s case that EC was not an epe when the covers were granted has failed.  Given the reasoning and conclusions which we set out earlier on that question, the question is whether there was such a change that an Italian court would reach a different conclusion in respect of the position in, say, August 1992 as compared with the position in, say February 1992.
256.	We have already given our reasons for concluding that EC was an epe in early 1992.  As at that time EC was a state enterprise and was not one of the companies selected to come within the portfolio of AVU.  Indeed AVU decided in July 1991 that it should not be privatised.  Thereafter EC remained a state body under Hungarian law.  It was at no stage privatised.  The highest that SACE’s case can be put as at the end of August 1992 is that when, on 28th August, the Hungarian government published a list of entities to remain as state entities and to become part of AVRt’s portfolio, it did not put EC on the list.  As a result, as Mr Boswood put it in the course of his reply, EC fell under the aegis of AVU and was thus among the companies which were to be privatised.
257.	That argument undoubtedly has some force, but the problem with it is that EC was not in fact privatised and the decree was dated only three days after the date of the certificate which we have quoted, viz 25th August 1992, which, in our judgment, made the government’s position quite clear.  Its position was not only that EC was not on the list of companies to be privatised, but that it would remain state property until the “execution of the programmes guaranteed by SACE” and that, if or when it was transferred into a company limited by shares, the shares would remain the property of the state.
258.	In so far as there is conflict between the certificate of 25th August and the fact that EC was not included on the AVRt list and thus became a body apparently due to be privatised, it seems to us to be much more likely that the certificate correctly stated the position.  Thus the intention of the state at that time was that EC should remain a state body until the Hungary contracts were completed, and that in due course it would be put on the AVRt list and be transformed into a company owned by AVRt and thus state owned.  If and when that occurred AVRt would be liable for its debts under section 328 of the Companies Act, but in the meantime we can see no basis upon which it could sensibly be held that it ceased to be an epe.
259.	Even if the effect of the promulgation of the list without EC’s name on it was a beginning of the privatisation process, we do not think that it could fairly be held that by that fact alone EC became an epe.  The experts agreed that, not having been included on the list, EC belonged to AVU.  However, no steps were taken thereafter to transform it into a private company.  On the contrary, as stated above, the effect of EC’s failure to take any steps to that end by 30th June 1993 was that it was then to operate under state administrative control, with the result that state control increased, albeit through AVU.
260.	As stated above, SACE decided to exercise its rights under the reservation clause in both contracts on 5th August 1993 and notified MG to that effect on 14th September.  In our judgment it was not entitled to do so because EC had not ceased to be an epe by that date.  Indeed the particular matters referred to in the appunto of 29th July 1993 are evidence of that fact, as is the increase in state control referred to above.      
261.	Finally, EC was placed on the list by decree dated 31st December 1993.  It thereafter became, in effect, owned by AVRt and was no longer intended for privatisation.  Although on 30th May 1994 AVRt resolved to transform EC into a joint stock company of which it was envisaged that AVRt would own more than 75 per cent of the shares, by a further resolution dated 26th September the earlier decision was reversed because of EC’s parlous financial condition and EC was subsequently put into insolvent liquidation.
262.	In all these circumstances we can see nothing in the change of legal status of EC or indeed in the change in attitude of the Hungarian state to EC’s legal status to lead to the conclusion that it ceased to be an epe.  
263.	In so far as it was suggested that the Hungarian state had by some date in 1992, 1993 or 1994 decided not to assume de facto financial responsibility for EC and that it was not therefore an epe, we have already expressed our view that the attitude of the state to financial support to an entity like EC was no more than a factor to take into account and not (as Professor Gambino said) conclusive.  The state had indicated at the outset that it would not provide a guarantee and it was appreciated that there was a risk of such an entity being put into insolvent liquidation with the result that the state would not discharge its debts.  That remained the position throughout, although there were times when the state in fact provided some support for EC and times when it intended that it would become liable for EC’s debts as a result of being transformed into a joint stock company owned as to more than 75 per cent by AVRt.  It seems to us that those were the very risks against which MG was insured under this cover.  None of those considerations leads, in our judgment, to the conclusion that EC ceased to be an epe at any relevant time. 
Conclusion
264.	EC was an epe when the covers were granted, when the drawdowns were made and throughout the period until it was put into liquidation at the end of 1994.  It follows that we agree with the judge that all SACE’s defences based on the status of EC fail.  In these circumstances none of the questions posed by Mr Boswood as questions 4 to 9 set out above arises for decision.  We therefore say nothing about them.  We also add by way of postscript that because of the conclusions which we have reached, it has not been necessary to consider in any detail the state of mind of the parties or the exchanges between them in 1993 and 1994.
X.	GOODS OF NON-ITALIAN ORIGIN
Introduction
265.	At the trial, it was common ground that a substantial proportion of the goods supplied to Hungary were not of Italian origin.  The precise amount and value of the goods in question were in issue.  It was submitted on behalf of SACE that there was no insurance cover in respect of those parts of the loans that were applied by EC to the purchase of goods that did not in fact originate from Italy.  MG’s case was that it was a sufficient condition of cover that the intended purpose of the loans was to finance the purchase of goods of Italian origin, even if some (or all) of them were not actually used for that purpose. It was common ground that the issue of principle was a question of construction of the contract terms, against the background of Law 227.  The judge accepted MG’s argument. Since he rejected SACE’s defence in principle, he did not make any findings as to the amount or value of the goods of non-Italian goods that were in fact purchased.  It has been agreed that, if we hold that the judge was wrong, then the disputed question of what part of which loan was applied by EC to the purchase of non-Italian goods should be referred to another court for determination.  It is accepted by SACE that, so far as MG was concerned, at all material times the purpose for which drawdowns were made was in order to purchase goods of Italian origin.
Law 227 and the Contractual Documents
266.	So far as material, Article 16 of Law 227 provides:
“….[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…”
267.	As to the contractual documents, we shall refer only to the Hungary I documents, since it is common ground that there are no material differences between Hungary I and II in this respect.  The starting point is the supply contract dated 23rd June 1991 between San Marco and Arrow as supplier and EC as buyer. The total contract price was DM49 million.  Article 3 provided that the contractor would carry out “the supplies and transport of equipments and materials ex Italy and erection of the Project”.  Article 6.1 provided for EC as buyer to make an advance payment of DM8.65 million for “the local services and works that will be realised by the Buyer under the Contractor’s supervision”.  The Article continued:
“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”.
268.	The next relevant document is the application form which was sent by MG to SACE on 2nd July 1991.  In box B on the form, MG specified the “object of the loan” (“destinazione del finanziamento”), as “the loan of up to 85% of the value of materials and equipment of Italian origin”.  Box D contained a description of the “commercial transaction” and a breakdown of the supply.  The breakdown showed a total value of exports of Italian origin of DM40.350 million (82.35 per cent) of the total, and the value of local expenditures of DM8.65 million (17.65 per cent).
269.	Next comes the amended loan agreement dated 28th September 1991.  It recited that San Marco and Arrow had agreed to supply certain equipment and materials “from Italy”, and that MG had agreed to make available to EC a loan in the sum of up to DM 44 million “for the purpose of financing up to 100% of the cost of the Italian materials, equipment and services to be supplied to the Borrower…”.  Clause 1 defined “disbursement notice” as meaning “a notice substantially in the form of Schedule 1”.  Clause 2.1 provided for MG to make loan advances “by way of disbursement for the account of the Supplier following receipt by the Bank of a Disbursement Notice”.  Clause 2.3 provided that “upon receipt of a Disbursement Notice complying with the terms of this Agreement, the Bank shall….make the monies in respect of each loan available to the Borrower in accordance with the instructions contained in the Disbursement Notice”.  The form of notice in Schedule 1 contained alternative provisions for documentary proof of supply in relation to Italian materials, equipment and services.  Clause 3A of the schedule provided that, in relation to payments under Article 6.2(B) of the supply contract (making up to 70 per cent of the DM40.35 million), the documentation required for the purposes of the disbursement notice included inter alia one copy of the certificate of origin issued by the Chamber of Commerce.  Clause 3B of the schedule stated:
“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.
270.	The  proposta is dated 1st October 1991.  It recited that the “destinazione del finanziamento” (translated as “the purpose of the loan”) was “the payment of approximately 82.35% of the value” of the supply contract.  It then provided as follows:
“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.
271.	Finally, the policy itself.  Article 1 (containing the definitions) defined the loan as “the amount of the loan….extended by the Guaranteed Parties to the Borrower to be used to finance the export of Italian goods and services executed by the Italian Supplier…”  The Italian original used the words “L’importo del finanziamento…..e destinato al finanziamento di esportazione italiane….”  
The Evidence of the Experts
272.	In his second report, Avv Gioscia said that the phrase “destinazione del finanziamento” meant “the intended purpose of the loan” and not “the actual use of the loan”.  This distinction between intended and actual use was reflected in each of the documents to which we have just referred.  He found support for this interpretation in Article 4.2 of the policy which was in these terms:
 “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.”
273.	He said that the requirement as a condition of cover that the loan should in fact be used to pay for the supply of Italian goods services was inconsistent with Article 4.2 of the policy.  He also said that his interpretation was consistent with Article 16 of Law 227.  Finally, he said that SACE’s interpretation did not make good commercial sense, since MG would not know whether there was cover in relation to a loan until after drawdown had taken place.   In his oral evidence, he maintained the position taken up in his report.
274.	Professor Gambino touched on the point at paragraph 34 of his first report, but dealt with it more fully at paragraph 9 of his second report.  He said:
“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”.  
275.	His reference to the Corte di Cassazione was to two decisions on purpose loans.  We shall return to them shortly.  In his report, Professor Gambino took issue with Avv Gioscia.  In his view, there was no warrant for interpreting “destinato” as meaning no more than “intended”: the word “intention” was introduced by Avv Gioscia “but does not appear either in the law or in the policy”.  Nor did he accept that any assistance was to be derived from Article 4.2 of the policy.
276.	Professor Gambino was closely cross-examined on the issue.  He said that from a linguistic point of view, the word “destinato” can have a number of different meanings: the relevant meaning here had to be determined from the legislative and contractual context in which the word was used.  He was asked whether the word where it appeared in Article 16 of Law 227  was the same “for practical purposes” as where it appeared in the contract documents. He agreed that it was.  He was then asked about the meaning of the word “destinato”.  He agreed that it “included” the concept of “purpose”, but said that it meant “actual use” and had been so interpreted by the Corte di Cassazione.  When pressed, he said that he did not recall whether the word “destinato” was actually used by the court, but he seemed to recall one case which he had cited in his report relating to a guarantee for goods and added that there were also some other judgments.  These other judgments were purpose loan cases, and the case about a guarantee for goods turned out to be one of them which he had indeed cited in his second report.  See further paragraph 3 of Annex A. 
The Judgment
277.	The judge decided that “destinato” meant “intended”, so that the fact that some of the goods used were not in fact of Italian origin afforded no defence to SACE.  He accepted the evidence of Avv Gioscia.  He held that his interpretation of “destinato” in the contract documents was confirmed by Article 16 of Law 227, and was “underlined” by the “practicalities”:
“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.
Discussion
278.	Mr Boswood subjected the relevant language of the contract documents to a close linguistic analysis, and submitted that the word “destinato” means far more than merely “intended”.  It means something that is definite, settled, irrevocable and preordained. He sought to derive support from the meanings of the word to be found in Zingarelli’s dictionary.  The definition of “destinato” (the past participle of “destinare”) is given is: “che ha un determinato scopo” (ie “which has a fixed aim or purpose”).  Examples are given: “edifici destinati ad abitazione” (“buildings which are to be used for habitation”); “un vano destinato all’equipaggio” (“a space set aside for the crew”); “essere destinato a avere come esito irrevocabile” (“to have an inevitable conclusion”); and “tentativi destinati al fallimento” (“attempts bound to fail”).  Mr Boswood also examined the definitions of the verb “destinare”.  These include “assegnare” (“to assign”) and “Indirizzare a un luogo o a una persona: il pacco e destinato a Roma”. These last words mean: “the package is destined for Rome”.  
279.	In our view, Professor Gambino was clearly right to say that the word “destinato” has a number of shades of meaning, and that the applicable meaning depends on the legal and contractual context in which it is used.  In our judgment, the dictionary definition of “destinato” does not assist Mr Boswood’s argument.  The essential meaning of “destinato” (like “destined”) is that it is looking to the future and describing the prospect of a particular result being achieved.  It does so with varying degrees of predictive conviction.  It often (but not always) carries a connotation of the purpose or intention of the person whose thing is “destinato”.  Thus, take the Zingarelli examples of a building that is “destinato” for habitation or a space that is “destinato” for the crew.  In these contexts, there is a high probability that the building will be used for habitation and the space will be used for the crew.  But other uses are no doubt possible, and neither outcome is certain.  But it is also implicit in the use of word “destinato” in these contexts that it is the intention or purpose of the person who has decided that the building and space are “destinato” respectively for habitation and the crew that this is what they should and will in fact be used for.  
280.	In other contexts, the word “destinato” may be more or less strongly predictive of an outcome and may not carry with it a connotation as to anybody’s intention or purpose.  Thus, an attempt that is “destinato” to fail may in some circumstances be almost certain to fail and in others no more than very likely to fail.  But to say that an attempt is bound to fail is to say nothing about anybody’s purpose or intention.  To say of a young man or woman that he or she is destined to become a leading politician is usually not strongly predictive of his or her likely success, and carries no implication as to whether the speaker intends such an outcome, if only because he or she rarely has the ability to influence events so as to bring about such a result.  Sometimes the connotation of purpose or intention is very strong.  Indeed, the basic definition in Zingarelli of “destinato” as something which has a “fixed aim or purpose” emphasises this aspect of the word.  What is clear is that “destinato” is not a performance or result word.  It is not part of the meaning of the word that what is “destinato” will in fact be achieved.  It is true that in some contexts, the word “destinato” is used after an outcome has been achieved.  Thus it might be said of Winston Churchill when he became Prime Minister that he “was always destined to lead his country”.  But “destinato” is not being used as a performance or result word in this context.  It is referring back to the time before the predicted result was achieved, and saying that it was strongly predictable at all times before he became Prime Minister that he would do so.
281.	The question in the present case, therefore, is what shade of meaning should be accorded to the word “destinato” in Article 16 of Law 227 and the contract documents. We can see no reason to hold that it is a performance word.  The natural meaning of  “destinato” and “destinazione” is that they are words used to describe the purpose or object of the loans.  That would accord with the agreed English translations to which we have already referred.  Thus the object or purpose of the loan is that it is to be used to pay for goods of Italian origin.  Just as it is not certain that a package “destinato a Roma” will in fact arrive in Rome, so it is not certain that a loan whose “destinazione” is payment for goods of Italian origin will in fact be used to pay for goods of Italian origin.  If it had been intended to provide that it was a condition of cover that the loans should in fact be used to purchase goods of Italian origin, it would have been very easy to say so in clear and unequivocal language.  Instead, those who drafted Law 227 and the contract documents chose to express themselves in terms of the object or purpose of the loan. 
282.	As we have said, Professor Gambino relied on two decisions of the Corte di Cassazione on purpose loans in support of his interpretation of the word “destinato”.  These were cases where a loan had been made for a specific purpose, and that purpose had been spent or failed in some way. It is only necessary to refer to one of them.  In Binello v Maugeri (12th April 1988 No 2876), a husband had lent his wife some bearer bonds for the purpose of providing security for his obligations under a bank guarantee. His obligations under the guarantee came to an end.  He claimed the return of the bonds.  The claim succeeded on the grounds that the bonds had been lent for a specific purpose, and that once that purpose had been achieved the borrower was obliged to return them.  In section 4 of the judgment, the court spoke of a “loan (“mutuo”) whose aim or object (“scopo”) or destination (“destinazione”) was preordained, and could not be applied for any other purpose”. In his oral evidence (T3/24/52), Professor Gambino said of this decision “what is relevant here is that when you have a destination with a purpose, the purpose needs to be achieved, and then the legal consequences of the lack of achievement will be derived from the contract or from the law”.  His argument was, therefore, that just as in the case of purpose loans the destinazione of what is lent is preordained, so too the destinazione of financing is preordained in the case of insurance of credits whose purpose is to finance the export of Italian goods.  
283.	We do not consider that these decisions assist SACE’s argument as to the meaning of “destinato” in the present case.  In Binello the bonds were lent for the purpose of providing security for the obligations under the guarantee.  Once those obligations were discharged the bonds should have been returned and that was the basis of the decision.  In such a purpose loan case, the loan has in fact been applied for its intended purpose and the question is what happens when that purpose is spent or fails.  But looking at the position before a loan has been applied for any purpose, it cannot be right to say that the fact that it is designated for a specific purpose means that it will necessarily be applied for that purpose.  So too in the present case, the loan was made for the purpose of the purchase of Italian goods, but it did not follow that it would in fact be so used.  
284.	We turn to Article 16 of the Law.  The critical words are “provided that the purpose of such loans is to pay for Italian exports…”.  The draftsman could have used the words “provided that such loans are in fact used to pay for Italian exports…”, but did not do so.  In our view, the natural meaning of Article 16 is that the words “siano destinati” are purpose words and not performance or result words.  The word “destinato” appears in other sections of Law 227.  Headings IV and V (which contain Articles 18-27) deal with the powers of Mediocredito Centrale (the Central Institute for Medium Term Credit).  Article 26 provides that the Finance Minister may authorise Mediocredito Centrale  to grant to governments, central banks or public bodies of developing countries “subsidised loans for the purpose of (“destinato”) improving the economic and financial condition of those countries…”  (we quote from the agreed translation).  It is clear that in this context, the word “destinato” is a purpose word and not a performance word.  If the Finance Minister was empowered to authorise the grant of subsidised loans only where it was certain that the economic and financial condition of developing countries would in fact be improved, then it is likely that he would rarely feel able to exercise the power.  But it is clear that the power may be exercised to enable subsidised loans to be made for the purpose of improving the condition of developing countries, even if that object is not achieved in the event.  
285.	Mr Boswood submitted that it was self-evidently not the purpose of Law 227 to empower SACE to make credits available to be used for the purchase of non-Italian goods.  It was undoubtedly true (and common ground) that the purpose of Law 227 was to promote exports from Italy by encouraging export credit deals with the assistance of finance from banks enjoying the benefit of SACE insurance.  In our view, this general purpose was not subverted if loans were made for the purpose of financing the purchase of Italian goods even if they were not always in fact used for that purpose.  We accept the submission of Mr Brindle that the introduction into this system of an element of uncertainty for the banks as to whether or not the SACE insurance will respond if and when called on, depending on the actual origin of the goods supplied, does not assist to achieve this aim.  Accordingly, we see nothing in the underlying purpose of Law 227 which casts doubt on our view as to the proper meaning of Article 16.
286.	What then is the relevance of Article 16?  In his report (paragraph 11) Avv Gioscia relied on the fact that his interpretation of “destinato” in the contract documents was “consistent” with the provisions of Article 16. At paragraph 9.1 of his second report, Professor Gambino said:
“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.  
287.	We accept that there would be no objection in principle to “destinato” bearing a narrower meaning in the contract than it bears in Article 16.  But in the absence of clear words we see no reason to hold that “destinato” bears a different meaning in the two contexts.  First, it was common ground between the experts and the parties that the word had the same meaning in the Law as in the contract.  It is true that the question is one of construction, but the Italian law as to the construction of statutes and contracts is not the same as English law.  In those circumstances, an English court should be very slow to adopt a construction which is contrary to that espoused by the two Italian law experts.  Secondly, it seems to us inherently unlikely that SACE intended to adopt a narrower construction of “destinato” than that which is to be found in the empowering legislation.  At all events, we have been shown no evidence of such an intention in the voluminous material that has been placed before us.  Thirdly, we note that the language of Article 16 is reproduced almost precisely in the various contract documents to which we have referred. That is a very strong pointer to the parties having intended the Article 16 meaning to apply.  This is no more than one would expect.  We conclude, therefore, that the word “destinato” bears the same meaning in the contract documentation as it does in Article 16.
288.	It follows that the material that we have considered so far points strongly to the conclusion that the word “destinato” is used in the purpose sense and is not a performance word.  In our view, this conclusion is reinforced by a consideration of the practical and commercial implications of acceding to SACE’s construction.  As Mr Dehn pointed out, if that construction were right, it would mean that MG was at risk of losing the benefit of SACE’s cover by reason of events over which it (MG) would have no control and of which it might well have no knowledge.  If MG had to concern itself with the actual use rather than the intended purpose of the loan, it would not know whether all of its loan was insured until after all the loan instalments had been drawn down and their actual use had been ascertained with certainty.  The notion of the lending bank having to police the actual use to which the proceeds of the loan were applied by checking the origin of the goods “on the ground” throughout the duration of the project would be inconsistent with the nature of Article 14.2 buyer credit transactions and commercially absurd.  It would be inconsistent with the expert evidence of Mr Scallon (paragraph 33 of his supplemental report) that the lending bank pays against documents, and that it is not the role of the bank to carry out site investigations.  It would also be inconsistent with what was contemplated by the loan agreements between MG and EC which provided:
“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”
289.	The unchallenged evidence of Pamela Manisier, MG’s officer responsible for credit administration of the drawdown procedure, was that despite these clauses, MG did check that the disbursement notices satisfied the requirements for drawdown, by checking that the documentation accompanying the notice complied with the contract requirements.  But the checking was confined to an examination of the documents.  It will be recalled that the form of disbursement notice in Schedule 1 to the amended loan agreements contained alternatives one of which was that the notice should be accompanied by a certificate of origin issued by the Chamber of Commerce, and that it was agreed that the alternative of a copy invoice and certificate by the buyer would be adopted.  Mr Boswood makes the point that SACE’s construction would not require MG to police the proceeds of the loan to ensure that they were applied to purchase Italian goods.  The bank’s commercial interests would have been sufficiently protected if it had insisted on the production of a certificate of origin issued by the Chamber of Commerce as a condition of drawdown as was originally contemplated by the loan agreements.  It is true that, on SACE’s construction, MG could have achieved a degree of protection if that course had been followed.  But it could not have provided complete protection. 
290.	In our view, these commercial considerations strongly support the construction for which MG contends.  They provide no support at all for SACE’s construction.  As we have said, SACE’s construction inevitably means that there is introduced into the system an element of uncertainty for the bank as to whether or not the risk of non-payment is covered by the insurance.  All will depend on whether the origin of the goods supplied is or is not Italian.  This is a matter which is beyond the bank’s control.  Such uncertainty is inimical to the achievement of the aim of Law 227, which is to promote exports from Italy by encouraging export credit arrangements backed by Italian insurance.
Conclusion
291.	For all these reasons, we consider that on the material before him and the arguments that were addressed to him, the judge reached the correct conclusion on the non-Italian goods issue.  Like the judge, we have not taken Article 4.2 of the policy into account in arriving at our decision, but Article 4.2 is entirely consistent with the conclusion that we have reached.
SACE’s New Case
292.	It is now, however, necessary to consider the new arguments advanced by Mr Boswood for the first time to this court based on the sentence in the proposta which we set out again:
“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”.
293.	It is convenient to refer to this as “the new clause”.  It should be borne in mind that DM8.65 million was the amount of the advance payment payable by EC under Article 6.1 of the supply contract.  MG did not finance any part of this 17.65 per cent figure.  This part of the cost of the project, therefore, fell outside the scope of the insurance.  Nevertheless, it was common ground that it was important to SACE that EC should make the advance payment, since it was a term of the OECD Consensus that participants required purchasers of exported goods and services to make cash payments “at or before the starting point to a minimum of 15% of the export credit value”.
294.	When opening the appeal, Mr Boswood submitted that the new clause strongly supported his construction of “destinato”.  The “amount indicated for local expenses” was a reference to the balance of 17.65 per cent in basic assumption (B) in the proposta to which we have earlier referred.  The figure of 17.65 per cent (DM8.65 million) was the total of the non-Italian items shown in the breakdown of supply set out in the application form.  The sole component of the non-Italian items was “local expenditures” which were to be applied to the infrastructure work.  He submitted that the words “any foreign disbursements above the amount indicated for local expenses” referred to sums actually paid by EC for the purchase of local services.  The new clause was, therefore, concerned with the effect on SACE’s cover of payments actually made for local services exceeding the DM8.65 million figure: this showed convincingly that the parties intended that the cover would only apply to the extent that goods of Italian origin were actually supplied.  In the first version of the argument Mr Boswood relied on the new clause to support his construction of “destinato”, and not because it was SACE’s case that disbursements for local services had actually exceeded DM8.65 million.
295.	It may be that during his opening Mr Boswood touched on a second version of the argument, but it was only developed towards the end of his reply.  This submission was that the cover would be reduced if the amount expended by EC on non-Italian goods exceeded the 17.65 per cent figure even if the excess expenditure was not incurred on local services. Thus, the cover would be proportionately reduced if the percentage of the contract price for non-infrastructure works that was expended on Italian goods was less than 82.35 per cent, even if the expenditure on local services did not exceed 17.65 per cent.  Since it is agreed that the proportion of the contract price that was expended on Italian goods was less than 82.35 per cent, on this argument SACE would be able without more to rely on this clause.
296.	What is remarkable about both versions of these arguments is that they surfaced so late.  The new clause was not mentioned by either of the experts.  Neither argument was advanced or mentioned in the court below, or indeed in any of the written material that was lodged with the court for this appeal.  It is particularly striking that Professor Gambino, who supported many of SACE’s numerous arguments, did not refer to or rely on the new clause.  We think that it is most unlikely that he would have overlooked the new clause, since it was the only clause that expressly referred to circumstances in which SACE could reduce the insurance cover.  It seems very likely that he considered the clause and decided that it was irrelevant to the issues in this case. 
297.	Mr Brindle dealt with the first version of the new argument as follows.  He submitted that “foreign disbursements” were payments by MG, and not payments by EC.  The concept of a foreign disbursement by EC was meaningless: banks make disbursements, but buyers do not.  He suggested that the new clause was or might be a standard clause which had no application in this case, although he admitted that there was no evidence either way on the point.  Alternatively, he suggested that (whether or not it was a standard clause) it could have some application in the sense that, if MG made any disbursements for local services in excess of the “amount indicated for local expenses” (ie nil), then there would be a proportionate reduction in cover.  Neither Mr Brindle nor Mr Dehn addressed the court on the second version of Mr Boswood’s argument, since it was only developed during the course of Mr Boswood’s reply. 
298.	The central question raised by the Italian goods issue is one of construction of contract.  But we have to construe the contract in accordance with the principles of Italian law.  These differ to some extent from English law.  We accept the assertion by Mr Boswood (not dissented from by Mr Brindle) that an Italian court might not apply precisely the same principles as those laid down by Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912-913. The reports of Avv Gioscia and Professor Gambino both contained sections containing summary expositions on the Italian law of interpretation of contract.  Professor Gambino (paragraph 8.1 of his first report) said:
“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”.
299.	What is not clear is whether an Italian court (unlike an English court) would admit evidence as to the negotiations or the parties’ subjective intentions. This does not seem to have been explored in the evidence.  The experts were not asked about the clause.  The result is that we do not know what they would have said about it.  Furthermore, it is plain that neither the genesis of the clause, nor what was said about it in the course of negotiations, nor what the parties’ subjective intentions were in relation to it was explored with any of the witnesses of fact, since it was not thought to be relevant to the issue of construction.  The argument before us showed that the meaning and rationale of the clause are obscure and difficult to ascertain.  It may well be that light would have been shed on the intention of the parties and the meaning of the clause if evidence had been directed to it at the trial.  
300.	It would be wrong for us to take these new arguments into account in deciding the central question of construction unless we could reach a conclusion as to how an Italian court would interpret the new clause.  Since it is far from clear to us how an Italian court would interpret the clause, the primary basis on which we decide this issue is that the new clause should be left out of account.  Nevertheless, because we heard argument on the effect of the new clause, we feel that we should also express our views as to its meaning and effect.   For the reasons that we set out in Annex D, on the limited material available to us, and recognising that we have not had the benefit of the opinions of Italian lawyers on the point, we would reject both versions of Mr Boswood’s construction of the new clause.
XI.	CONCLUSIONS
301.	We have found this in some ways a difficult and troublesome case and we are much indebted to counsel and solicitors on both sides for their assistance throughout.  We have not agreed with some of the reasoning of the judge, including his evaluation of some of the oral evidence.  In particular, he was, in our judgment unduly critical both of two independent experts, Professor Gambino and Dr Simonelli and of a number of SACE’s witnesses of fact: see Annexes A, B and C.  We have therefore considered each of the issues in the case afresh, in so far as it has been necessary to do so in order to determine these appeals.  
302.	Having done so we have reached these conclusions:
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.

(Order not part of approved judgment)

ANNEX A
PROFESSOR GAMBINO
A. THE JUDGE’S CRITICISMS
Academic with No Relevant Experience
1.	Professor Gambino admitted that he had a lack of professional and personal experience in export credit insurance transactions.  His background and qualifications were mainly academic.  It was not in issue that he is a distinguished academic in the field of insurance law.  By contrast, Avv Gioscia is a practitioner who has considerable experience in the insurance and banking aspects of export credit transactions.  The judge was entitled to say that Professor Gambino lacked practical experience, but it was not disputed that he is a distinguished academic.
No Grasp of Commercial Practice
2.	The judge gave as his sole example of lack of grasp of commercial practice that Professor Gambino did not understand the point that, in calculating premiums, SACE took no account of the financial condition of the borrower or the viability of the project.  When cross-examined (T3/21/16-18), he explained that in the case of political (as distinct from commercial) risks, repayment was regarded as certain, so that the premium was not sensitive to the financial condition of the borrower.  This was a wholly inadequate foundation on which the judge could base the sweeping conclusion that Professor Gambino had no grasp of commercial practice.
Not on Top of Source Materials
3.	The judge said that Professor was not on top of his source materials because he claimed that the Corte di Cassazione had interpreted “destinato” as actual use.  This arose in relation to the “non-Italian goods” issue, and we make further reference to Professor Gambino’s evidence when dealing with that issue at paragraph 276 of the judgment.  He did at first rely on the decision of the Corte di Cassazione as showing that “destinato” meant “actual use”, but when pressed said several times that he could not recall whether the word “destinato” was actually used in the decision.  The judge was entitled to criticise him for his reliance on an authority which did not support the proposition that he was putting forward.  But this appears to be the only example of “not being on top of source materials”.  Since Professor Gambino gave evidence for four days, this was an inadequate basis for an assertion that he was not on top of the source materials, if that was intended by the judge to be of wider application.  
Put Forward Views that were Obviously Absurd and “simply to assist SACE”
4.	Even if his views were “absurd”, it was never put to Professor Gambino that they were put forward simply to assist SACE , ie effectively in bad faith.  The statement that the views were put forward simply to assist SACE was not justified.  The judge gave the following examples:
(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.
5.	Appendix 1 of the EG policy provided:
 “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.  
6.	The views expressed by Professor Gambino in his report were not supported by his own oral evidence, and were disowned by SACE when it abandoned any reliance on escussione preventiva. The reliability, though not bona fides, of Professor Gambino’s evidence can, we think, justifiably be criticised on these grounds.
 (2) MG’s failure to exercise a right to refuse to allow drawdowns to continue was a variation of the policy (sic)
7.	In his first report (paragraph 22), Professor Gambino stated that MG was in breach of Article 7.1(ii) of the Hungarian policies in consenting to a modification of the loan agreements without the prior consent of SACE when it continued to allow drawdowns after it became aware of EC’s financial difficulties and subsequent liquidation.  On the basis of this opinion, SACE pleaded that it was entitled to withdraw cover.  This defence was abandoned late in the trial. During his cross-examination, Professor Gambino was asked whether MG’s conduct amounted to a variation of the loan agreements.  He said (T3/22/60) that, relying on the facts that had been given to him, the waiver of the right to refuse to make a series of payments amounted to a “tacit agreement” (T3/22/61). 
8.	The judge was not justified in saying that Professor Gambino withdrew his analysis “immediately he was challenged” or at all.  On the basis of the facts given to him, he maintained his analysis.  He may or may not have been right to do so as a matter of Italian law.  But his view was not absurd.
 (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.
9.	In his first report (paragraphs 16.33-16.35), Professor Gambino said that these were the only persons whose knowledge was relevant, since they alone were statutory representatives of SACE under Article 6 of Law 227.  It was only during cross-examination (T3/22/12) that he stated that he had been asked to assume that no-one else at SACE had authority to represent it in relation to the insurances in question.  During his evidence (T22/11-18), he accepted first that knowledge could be imputed to the chairman by presumption, and later (after being shown authorities referred to in Avv Gioscia’s report) that the question of who was a representative for the purpose of knowledge depended on the facts of the case. 
10.	The judge was entitled to criticise Professor Gambino’s evidence on this issue, on the ground that he did not indicate in his report that he had been asked to assume that no-one other than the statutory representatives had authority to represent SACE in relation to the insurance contracts.  The judge was also entitled to describe the extreme view that Professor Gambino expressed in his report as “absurd”.  But it was unfair not to refer to his position as it was finally explained in the course of his oral evidence.
 (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.
11.	It was common ground that if the insured event occurred before SACE acquired knowledge of fact(s) which entitled it to avoid cover, or during the three month period allowed by the second paragraph of Article 1892 of the Civil Code, then SACE had a defence to the claims under the Hungary policies.  It was SACE’s case that it was under no obligation to pay MG under these policies, because the “insured event” occurred during the three month period.  SACE first notified MG of its intention to claim annulment of the policies by service of its Points of Defence on 6th September 1996.  It was SACE’s case that the three month period started to run in mid to late June 1996 when EC was put into liquidation and the Hungarian State refused to accept responsibility for its debts.  MG’s case was that an insured event occurred each time EC failed to make a repayment of a loan instalment.  
12.	In his first report (paragraph 16.39) Professor Gambino said that the insured event was “not mere insolvency” but “the so-called political insolvency”: the insured event was not simply the non-repayment of a loan instalment; rather, it was the non-recovery of the sums lent (as was believed) to an epe, its status being part of the risk.   At paragraph 16.42, he said that the insured event occurred once EC was formally put into liquidation and a statement was issued by the liquidator that the loan would not be repaid at more than 0-5%.  
13.	In cross-examination (T3/22/20-22), Professor Gambino accepted that an insured event occurred every time there was non-payment of an instalment,  but he continued to maintain that the overall inability of EC to pay its debts, being the “overall loss” was also an insured event.  He said: “one thing does not rule out the other”.  
14.	The judge said that the only possible reason for choosing “mid to late June 1996” as the date of the insured event was that it was within three months of service of SACE’s Points of Defence (the date of purported annulment).  In our judgment, this suggestion was not warranted by the evidence.  Professor Gambino’s views on this issue were heavily influenced by his opinion that the status of EC as an epe was part of the risk.  Even if he was wrong, his view was tenable.  It was not put to Professor Gambino by Mr Brindle that he did not honestly believe in the June 1996 date, and that he had chosen it solely in order to assist SACE’s case.  Even if this suggestion had been put to Professor Gambino, we doubt whether the judge would have been justified in adopting it.
EC Directive 70/509 
15.	In his first Hungary report (paragraph 8.11), Professor Gambino said that, although it had no direct application in Italy, the Directive was relevant to the meaning of epe in Law 227.  It was “immediately binding for the Italian State and any subsequent law which is in conflict with a Directive would be unconstitutional…”  He said that Law 227 was passed several years later, took the Directive into account “and could not derogate from it whenever it touched the same subject”.  Accordingly, the Directive was a “source of interpretation of Law 227”. In his second report (paragraph 2.4) he confirmed that the Directive was “directly applicable as internal law”.
16.	Article 1 of the Directive provided that, subject to the provisions of Annex D, Member States should adopt the measures identified in the “common policy” in Annex A.  Annex D contained provisions for the introduction of the common policy.  Article 2 of the Directive required Member States to ensure that organisations such as SACE should insure transactions covered by the common policy in accordance with the terms laid down by the policy.  It was common ground that the common policy was not adopted by the Member States. 
17.	In cross-examination (T23/21-26), Professor Gambino accepted that, since the steps envisaged by Annex D had not been carried out, the Directive was a “dead letter”.  Nevertheless, he said, “these principles have to be immediately applied even if the Directive is not ratified by the States”, and the Directive “is an important source of interpretation”. 
18.	The judge criticised Professor Gambino for being motivated by “anxiety to support SACE’s position”. He regarded the point that the Directive had never been implemented as decisive, and thought it was “not without significance” that Professor Gambino did not produce a copy of the Directive.  These criticisms were not justified, nor was he given an opportunity during his cross-examination to comment on the suggestion that his motivation was as found by the judge. As we explain at paragraph 191 of the judgment, Professor Gambino’s view that the Directive was relevant to interpretation was correct, and the suggestion that he deliberately withheld the Directive to conceal its contents was unfair and should not have been made. 
The Framework Case
19.	At paragraphs 16.13-16.17 of his first report (Hungary), Professor Gambino dealt with the relevance of the questions contained in the SACE application form to the scope of MG’s duty of disclosure.  At paragraph 16.15, he stated that Italian case law “has asserted that the questionnaire does not cover all of the information which the contracting party must provide to the insurer”.  He then cited a passage from a decision of the Corte di Cassazione, which was referred to as “the framework case”.  He quoted as follows:
“[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”.
20.	He omitted the following words (apart from those in square brackets): “….the insurer’s duty of co-operation is essential…he [may] (and must) in compliance with the rule of correctness [prepare a framework of the circumstances that he wishes to know about]…”.  His citation from the case was in support of his view that the insured must “provide the insurer not only with the information requested, but also with all information that may not have been explicitly requested but that, in good faith and with the use of due diligence, would be considered objectively pertinent for the insurer”.  The omission of the words was deliberate.  The framework case was the only authority cited by Professor Gambino in this part of his report, and it was plainly an important decision.  He explained the reason for his omission (T3/21/61) as being that he was dealing with a different topic in this part of his report, namely whether the questionnaire defined exhaustively the information that the insured had to provide to the insurer.  This was an unconvincing explanation.  It is true that this is the subject that Professor Gambino was dealing with.  But it was material to that subject that the Corte di Cassazione had said that the insurer was obliged to prepare a framework to the insured, and not that it was simply a matter for the insurer’s discretion whether to do so.
21.	The judge said that it was apparent that Professor Gambino was fully aware of the importance of the case, “and disingenuously sought to distance himself from it”.  In support of this conclusion, the judge relied on the fact that Professor Gambino said that (a) he first learnt of the alleged importance of the decision when he heard the evidence of Avv Gioscia, and (b) the decision was not “of central importance” and was not “useful”.   It is not credible that he thought that the decision was of little or no importance until he heard the evidence of Avv Gioscia.  It was the only authority on which he relied in his first report.  Nor has it been suggested to us by Mr Boswood that it was a case of little significance.  In our view, the judge was entitled to criticise Professor Gambino in the way that he did.  The omission from the citation gave a misleading impression of the import of the case.  It is true that it was not put formally to Gambino that he was being disingenuous, but he was given ample opportunity to explain himself.  We make further reference to the evidence of Professor Gambino in relation to the framework case at paragraph 80 to 91 of the judgment.
Removal of Sentence from First Report in Hungary Action
22.	The English version of Professor Gambino’s first report in the Hungary action contained a sentence which did not appear in the original Italian text: it dealt with the continuing liability of insurers in respect of losses occurring before the withdrawal of cover under Article 1898 (withdrawal of cover for increased risk).  The sentence appeared in both the original and translation in the EG action.  The judge said that no satisfactory explanation was given for the removal of the sentence from the Italian text in the Hungary action.  He referred to the fact that Professor Gambino had said in evidence that he had “willingly cancelled” the sentence.  
23.	According to the transcript of the translation of the evidence that was made during the trial, Professor Gambino first said (T3/22/41) that he “willingly cancelled it” for reasons that he could no longer recall.  Later on the same page he said that the sentence might have been “omitted in the computer” because it was relevant.  But at pages 42 and 43, he said that the sentence was irrelevant.
24.	It is now clear that there was an unfortunate mistranslation at trial.  What Professor Gambino actually said was that he could not recall whether he had willingly cancelled the sentence.  In the result, he offered two possible hypotheses to account for the removal of the sentence, but (T3/22/46) he strongly repudiated the suggestion when it was made that he removed it because it appeared to be favourable to MG.  
25.	The mistranslated words “I willingly cancelled it” influenced the judge’s approach to this issue.  To the extent that he relied on them, his criticism was not well-founded.  But there is force in the points made by MG that Professor Gambino’s explanations for the removal of the sentence were not convincing.  Moreover, he contradicted himself as to the relevance of the sentence.  The fact remains, however, that the sentence was included in both Italian versions and the EG English version.  In our view, the judge was not justified in attaching the significance to the removal of the sentence that he appears to have done.

B.  OTHER POINTS RELIED ON BY MG
Non-Italian Goods
26.	In his first report (paragraphs 10.22-10.226) Professor Gambino advanced the argument that it was part of the risk (for the purposes of Article 1895) that the goods be of Italian origin.  He also argued (paragraphs 24.1-24.2) that, if MG failed to exercise due diligence to ensure that the goods in fact supplied were of Italian origin, then SACE had a complete defence to the claims.  SACE abandoned these defences.  The arguments were plainly bad: if correct, they would have availed SACE even if only a small part of the goods was in fact of non-Italian origin. That would have been a remarkable result especially in view of the fact that the origin of the goods was irrelevant to the risk of non-payment by the borrower.  The fact that Professor Gambino was prepared to advance such arguments casts some doubt on his competence and/or impartiality as an expert witness. 
Alleged Post-contractual Duties of MG
27.	On the basis of certain assumed facts, Professor Gambino supported SACE’s pleaded case that (a) MG was in breach of the duty under Article 1898 to make post-contractual disclosure of facts which tended to increase the risk, and (b) by virtue of Article 1900, SACE was not liable for the losses since they were caused by MG’s gross negligence.  The pleaded gross negligence was allowing drawdowns to be made, but in his oral evidence, the gross negligence asserted by Professor Gambino was that MG should have known that the projects were not viable.  SACE eventually abandoned (a) completely and (b) substantially.  Professor Gambino also sought to derive from Articles 1176 and 1375 (dealing with principles of good faith) various additional monitoring duties.  There is force in MG’s contention that these attempts were “extravagant”.  Although the arguments in (a) and (b), which were based on assumed facts, may have been ambitious, we do not consider that they could properly be described as “absurd”, nor do they raise doubts as to his impartiality.
Ignorance of Fundamental Facts Relevant to Disclosure and Status Issues.
28.	Professor Gambino did not elicit from SACE that it did not take into account the financial condition of the borrower or the viability of the project in determining the premiums.  His evidence was that the financial condition of an epe was relevant because it affected the risk of non-payment (first Hungary report paragraph 16.6) and the premium was calculated by reference to the probability of repayment (T3/21/18).  He should have elicited the basis on which premiums were calculated.
29.	He did not know that SACE had assessed and satisfied itself that EC was an epe despite the fact that neither of his two criteria was met.  In his first Hungary report, he said that he understood that SACE applied the same meaning when assessing whether an insured was an epe for the purposes of Article 14/2 (paragraph 8.13), and that it formed its judgment on objective criteria.  And yet he never discovered what meaning SACE had in fact applied.  He should have done so.
Other Instances of Suspect Presentation or Selective Translation
(1) Suspect treatment of authorities on mistake as to personal characteristics
30.	In his first report (paragraph 13.4 ff) Professor Gambino said that, on the assumption that MG acted imprudently in relation to the EG transaction, SACE was entitled to avoid the contract on the grounds of its mistake as to a personal quality of MG.  In his second report (paragraph 11.2), he relied on a decision of the Corte di Cassazione (19th January 56 No 166 Riv Dir Comm 1956 II page 289) “which identified in the previous behaviour of one of the two parties in a previous contract a sufficient element to identify for that party a quality sufficient for the purposes of Article 1429 [of the Civil Code]”.  It was MG’s case that this decision was about a mistake as to the identity of the contracting party.  The facts were that the seller of goods was mistaken as to the identity of the buyer.  Knowing that the seller would not have agreed to sell to him, the buyer concealed his true identity.  The court held that the seller’s error as to the identity of the buyer was of an “essential nature” and that the seller was entitled to annul the contract.  During cross-examination, Professor Gambino explained the decision on the basis that the identity of the contracting party was a quality, namely his total unreliability in that he was trying to conceal his true identity.
31.	Professor Gambino’s evidence was unconvincing on this point.  There is no support in the reasoning of the court for his interpretation.  The decision was based on a plain error by one contracting party about the identity of the other. 
(2)  Selective translation of authority on gross negligence for Article 1892 
32.	The English translation of Professor Gambino’s report in the Hungary action (paragraph 16.2) quoted from Professor Donati’s Treatise on the Law of Private Insurance (1954) vol II page 311 on gross negligence as follows:
“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”.
33.	These words were not omitted from the Italian original of Professor Gambino’s report.  The translation was done by a professional translator and a lawyer from SACE’s solicitors’ Milan office.  It was checked by Professor Gambino.  In the course of cross-examination, he was unable to explain why the words had been omitted from the English translation. 
34.	MG contended that the omission was sinister, since SACE knew that the absence of any question in the questionnaire about the financial state of EC or the viability of the project was strongly relied on by MG in relation to the issue of materiality.  
35.	The omission indicates a failure to recognise the significance of the questionnaire in Italian law, but a conclusion of bad faith on the part of Professor Gambino is not warranted.  Such an allegation was not put to him, and it was not the subject of any finding by the judge.  Professor Gambino can, however, properly be criticised for failing to recognise the potential significance of the framework case in Italian law: see further paragraph 91 to 95 of the judgment.
Postscript
36.	There are other aspects of Professor Gambino’s evidence which have been subjected to scrutiny during the course of the appeal, some at least of which are referred to in the judgment.

ANNEX B

THE BANKING EXPERTS

1.	As explained in paragraph 114 of the judgment, we consider here the evidence of the two banking experts, Mr Scallon and Dr Simonelli.  
2.	The judge summarised Mr Scallon’s evidence as follows:
“(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. ”
3.	In giving his reasons for preferring Mr Scallon’s evidence to that of Dr Simonelli, the judge started by saying that Mr Scallon appeared a competent and sensible witness, who dealt in specifics not abstractions and that his analysis of the position was convincing and in line with the evidence given by MG’s witnesses, Mr Thomas and Mr Narten.  He also described Mr Scallon as having many years experience of export finance, as having from 1990 onwards handled buyer credits supported by ECAs other than the Export Credit Guarantee Department (“ECGD”) and as having been concerned in the execution of a number of SACE transactions.  On this, we comment in parenthesis that Mr Scallon’s oral evidence only disclosed involvement by his bank, BZW, in four or possibly five SACE transactions, all apparently taking place after he moved from Barclays to BZW in 1992 and in only one of which BZW was the arranging bank; and that Mr Scallon left BZW to become responsible for export finance at a UK company with exports of about £200 million a year in May 1997, and so, presumably, had no experience of export credit insurance, as opposed perhaps to ECGD guarantees, since then.  
4.	The judge said that Dr Simonelli on the other hand had no recent experience of lending covered by SACE insurance, or indeed of mainstream banking of export credits.  We again interpose that Dr Simonelli’s experience with buyer credit transactions appears, although less recent, to have been long-standing; it derived from the period when he worked for Istituto Mobiliare Italiano (“IMI”), which was from about 1972 to 1986, and between 1974 and 1976 he was a member of the committee which drafted Law 227 which in 1977 established SACE.  Dr Simonelli also attested to some indirect contact with SACE in his current role with Finest, a company set up by the Italian government to develop Italian business internationally, especially in Eastern Europe.  His curriculum vitae showed him to be a man of considerable distinction, and he was the President of the Italian Chamber of Commerce in London.  This is important, in so far as he also attested to conversations with and information received from other major banks participating in the export credit market and obtaining export credit insurance from SACE.
5.	The judge went on, however, to say that his preference for Mr Scallon went “much deeper than a mere contrast of the past experience of the two …”, and gave a series of reasons for discounting Dr Simonelli’s evidence.  It is necessary to examine these in some detail.  First, the judge said that:
“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.”
6.	Although this passage was not the subject of any specific criticism in SACE’s submissions before us, our reading of Dr Simonelli’s evidence reveals a different picture.  In his report, Dr Simonelli made repeated reference to distinctions.  We refer to pages 3, 7, 8, 9, 13, 20 and 27.  To give examples, he said:
•	“‘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)
7.	In his oral evidence (T3/26/150), he was asked whether he agreed that in terms of banking practice different levels of due diligence are applied depending upon whether a transaction is a political or a commercial risk.  His answer was:
“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.
8.	Then the judge said that Dr Simonelli “asserted that MG, had they acted prudently, would not have entered into the loan transaction in Equatorial Guinea”, and continued:
“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.
9.	The judge then said that:
“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.
10.	The judge’s next observations confirm our view about the unsoundness of the judge’s approach to and conclusions about Dr Simonelli.  He said this:
“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.  ….”
11.	The limitations and character of Dr Simonelli’s English are again apparent.  But, whatever problems of comprehension they may cause, these factors offer no possible basis for criticism.  Expert (and other) witnesses should be and are encouraged to express themselves in their own words “uninfluenced as to form or content by the exigencies of litigation”: see Whitehouse v Jordan [1981] 1 WLR 246, per Lord Wilberforce at p 256; The Ikarian Reefer [1993] 2 Lloyd’s Rep 68, per Cresswell J at p 81 in a passage approved in the Court of Appeal at [1995] 1 Lloyd’s Rep 455 at p 496.  That applies as much to oral evidence as to expert reports and witness statements.  The rehearsing of witnesses, whether as to their manner of expression or as the substance of their evidence, is and must remain anathema in the English system.  Modern experience remains, however, that the “exigencies” of litigation, or the desire to present as strong and attractive a case as possible, lead, too often, under permissible English procedures for the taking of witness statements by legal advisers, to what the judge elsewhere in his judgment (in relation to Dr Scifoni) described as “carefully crafted” witness statements.  At the worst such statements obscure the truth; at best their unravelling often take disproportionate time in cross-examination.  It would be a very sad day, if what might (to insular eyes) appear as linguistic quaintness by a foreigner expressing himself in his own English called for quotation with the apparently adverse significance that the judge attached to Dr Simonelli’s phrasing.
12.	Dr Simonelli’s evidence that he had discussed due diligence with banking contacts (according to his report not merely in Chase Manhattan, but also in the past in meetings with Banca Commerciale Italiana, the Italian bank with the largest international activity) was in our judgment in no way unlikely and was, furthermore, unchallenged in cross-examination.  Mr Scallon was unable to comment, one way or another, on the practices of the other banks identified in Dr Simonelli’s appendix 3 (T3/26/60).  The thrust of Mr Brindle’s cross-examination of Dr Simonelli was not that he did not have such contacts or that he had not discussed the concept of due diligence with them.  It was that he had given “inadequate attention to the fundamental distinctions between political, commercial and project finance risks” (see eg T3/27/46).  The judge, as we have observed, transmuted this into an unjustified finding that Dr Simonelli drew no such distinctions at all.  There was in our view no adequate basis on which the judge could simply sweep the whole of appendix 3 away, “attach[ing] no credence to it”.
13.	The judge also said that, in so far as appendix 3 to Dr Simonelli’s report contained details said to be based on his personal experience of Finest, “he contradicted himself as to Finest’s degree of involvement in buyer credit transactions, and was obviously implausible”.  Paragraph 5 of Dr Simonelli’s report does seem to us to be open to the (minor) criticism that it put forward the whole of appendix 3 as “a review that I have undertaken through my contacts, of examples of due diligence investigations for export financing transactions”, whereas that was only true of five out of its six sections (relating to IMI, HSBC, BCI, Citibank and Chase Manhattan).  In the sixth section Finest was quoted expressly to prove that “even a small Italian bank performs professional due diligence”, but it was only Dr Simonelli’s oral evidence that clarified that Finest had not actually participated in export banking and had only had peripheral involvement as a potential intermediary.  Apart from this, reading Dr Simonelli’s oral evidence, we are not satisfied that it is fair to criticise him as having contradicted himself orally on Finest’s degree of involvement in export credit transactions.
14.	Lastly, the judge said that he was far from satisfied as to Dr Simonelli’s impartiality.  He gave three reasons: first, that when “inconvenient” passages in SACE’s manuals were put to him, Dr Simonelli said “I am against manuals in general because they do not help”, secondly, that “in one of his lengthy answers he revealed that the first General Manager of SACE was “a very good friend of mine” and, thirdly, that “it also emerged that he had gone on “roadshows” with that same individual, the purpose of which was to promote the potential resources of international markets for financing Italian exports.  He was thus cooperating with SACE to publicise their services.” The judge on this basis concluded: “I do not accept that he was truly independent of SACE”.
15.	As to the first reason, Dr Simonelli was asked in the witness box to read SACE’s manuals.  He had not previously seen them in connection with the litigation, although he had, he said, seen “some of the manuals in the past that change (sic)”.  He was shown the 1988 and 1990 manuals and asked to comment on the distinctions between the treatment in them of political risks (including Article 14.2 risks), commercial risks (including Article 14.9 risks) and project financing risks.  He said:
“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.  
16.	A mistrust of manuals, because they tend to omit the one relevant detail, does not suggest lack of independence.  We note that Mr Scallon said of due diligence:
“… 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.
17.	As to the second and third reasons, Dr Simonelli volunteered the fact that the first General Manager of SACE, Mr Giananni, was a very good friend, and that Dr Simonelli and he were party to discussions advocating the use of international banks (under Article 16 of Law 227) (T3/27/39).   The friendship related to the time when Dr Simonelli was advising the Ministry of Foreign Trade for export financing and related problems (T4/27/127).  Dr Simonelli also volunteered that he had participated in “roadshows, … in other words going round with people at SACE to different parts of Italy to publicise the services of SACE” (T3/27/28).  When he was asked further about this, he said that he had “maybe … used the wrong definition” and made clear that he had, as an expert in export financing, given lectures with Mr Giananni on the three or four occasions in various Italian cities on the potential resources of international markets for financing Italian exports, that their roles were different, although coinciding in the sense that he was publicising the international market while SACE was publicising the domestic services.  This occurred in 1979/80 and he said that he was totally independent of SACE, had never worked for SACE or had anything to do with it, apart from knowing about it and about export finance.  We think that this evidence was an insufficient basis for a conclusion that Dr Simonelli’s evidence as a whole was unreliable on the grounds of lack of impartiality or lack of sufficient independence to give honest and objective evidence on the matters of banking practice on which he was called.
18.	It follows that we are unable to accept the judge’s reasons for discounting Dr Simonelli’s evidence and preferring that of Mr Scallon.  We of course accept that Dr Simonelli made a generally unfavourable impression on the judge, and was in the judge’s view “a most unimpressive witness”.  But the judge was bound to give some particulars justifying this conclusion, and sought indeed to do so.  We conclude that the particulars given by the judge cannot be supported, so much so that we consider that the general impression that the judge formed must itself be regarded as highly suspect.  We find ourselves in the unenviable position of having to make our own re-assessment of the two experts’ evidence.  This must necessarily be based in the main on an analysis of their evidence, taken from the transcript, with reference to its inherent coherence and plausibility.  No-one has suggested that we should consider ordering a fresh trial of this case.
19.	That different considerations play a part in relation, on the one hand, to commercial transactions and project financing and, on the other hand, to transactions where the other party is a foreign state or public entity is clear; and, as we have explained, was accepted by Dr Simonelli.  On both parties’ cases, in relation to commercial transactions, banks were expected to assess the project’s viability and borrower’s standing, and (at the least) to respond to any export credit agency’s questions in this area.  By contrast, in political risks insurance, both sides agreed that it was for an export credit insurer to make its own inquiries into the “country” risk.   (Professor Gambino maintained that it was for MG to do this in the EG case, having regard to the collateral guarantee to provide commodities to back repayment – but this opinion turned on a special clause and is vulnerable to criticism – see Annex A paragraphs 5 and 6.)  That the political aspect of such risks was left to the relevant ECA to investigate does not of itself indicate that all aspects of the risk were left to the ECA to investigate.  Political risks are self-evidently special and a main function of ECAs is to insure against them.  That no enquiries were, however, made by SACE, either itself or of the bank, in relation to the commercial risk is a factor on which MG understandably places great reliance.  But, as we have pointed out, it does not, necessarily, exclude the possibility that SACE assumed that the bank was undertaking its own inquiries in this area.  Nor does it exclude the possibility that ordinary banking prudence required such inquiries.
20.	We note certain features of Mr Scallon’s evidence, which are in our view of particular importance:
(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?
A.  Yes.
Q.  And in doing so it therefore would have to investigate the creditworthiness of the borrower and satisfy itself as to that?
A.  No.
Q.  I am sorry?
A.  No.
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.
21.	Our overall conclusions on the evidence of the banking experts are summarised in paragraphs 115 to 119 of the judgment.

ANNEX C

WITNESSES OF FACT

1.	As explained in paragraph 114 of the judgment, we consider here the judge’s approach to SACE’s witnesses of fact.  We consider each witness in the same order as the judge.
Mr Mauro
2.	The judge recognised his long experience as a banker and his success as the “new broom” in reducing SACE’s losses.  He did, as the judge said, venture opinions as to what his predecessors would have done if they had known that MG did no checks, for which he had no basis, and he only eventually admitted this.  But we think that the judge’s criticism that there was inconsistency between Mr Mauro’s evidence that banks should do due diligence and the changes that Mr Mauro introduced (positive vetting of projects by SACE) is unsound.  Similarly, the changes were not inconsistent with Mr Mauro’s denial that he disapproved of SACE’s previous practice.  Checking by SACE ensured SACE’s position; SACE may still previously have believed that it was the banks’ role to do such checks.  Anyway, neither these nor the fact that Mr Mauro was argumentative about the meeting of 28th May 1995 in relation to EG appear to us to represent major reasons for criticism.  Overall, the judge found Mr Mauro an unimpressive witness, but this judgment is itself suspect when particular criticisms made do not stand.  Mr Mauro could not properly speak to SACE’s state of mind, but, although he was called as a factual witness, his evidence as an experienced banker does, as we have indicated in paragraph 116 of the judgment, provide some support for the conclusion we would anyway reach on the basic issue of banking due diligence.
Mr Costa
3.	He was a Treasury representative on SACE’s committee, attending his first meeting only in May 1994.  His witness statement evidence, as to the steps that he and the committee “would have expected the bank to take as part of the normal due diligence” and as to their unwillingness to grant cover had they known no such steps were taken, was therefore open to the criticism that he was not qualified to speak to the committee’s attitude at any relevant time.
Dr Quarta
4.	He was head of section III underwriting department to January 1993 when he took over section II (which had underwritten the Hungary policies) from Dottoressa Paciarelli.  As head of section II he was responsible for communicating SACE’s Management Committee decision to withhold public status from EC in the summer of 1993.  He maintained that banks’ assessment of a transaction was very important to SACE and that in his opinion banks knew that, and said that he was sure that, had SACE known that MG exercised no due diligence, his predecessors would not have agreed to cover.  The judge said of Dr Quarta that he “was unable to give a satisfactory explanation of the letter he wrote to MG on 18th November 1993 ….” regarding the withholding from EC of public status.  This criticism seems to us amply justified by the transcript, making all due allowance for its ex post facto alteration, at T1/9/56-59.  
5.	Contrary to MG’s submissions, the judge did not criticise Dr Quarta for the appunto of 29th July 1993.  On the other hand, although it may have conflicted with SACE’s case on box E, we do not think that Dr Quarta’s evidence could be undermined by the irrelevance, in Dr Quarta’s view, of SACE’s questionnaire in circumstances where MG had done no due diligence.  Further criticisms are made by MG, not mentioned by the judge, relating to answers by Dr Quarta in cross-examination.  We do not think that Dr Quarta did accept that due diligence was only expected in project finance transactions, but he did accept at one point that, in the case of “a purely political risk” (in which, according to the paragraph in SACE’s 1990 manual which was being put to him, “the central aspect is the evaluation of the country”), the viability of the project was “not a significant element”.  The further criticism of him that he at one point suggested that SACE would have required more than one guarantee from the Hungarian state before providing cover, if it had known of EC’s financial condition, appears to us to be based on a misreading of the transcript.  The upshot is that there was some basis for criticism of Dr Quarta’s evidence, although not on all the grounds given by the judge.
Dottoressa Paciarelli
6.	She graduated in law in 1967 and was head of section II when the Hungary risks were accepted.  Her witness statement asserted that she expected MG to be doing due diligence, and would not otherwise have underwritten the risk.  She strongly reinforced that message in oral evidence.  The judge described her as having “perhaps the largest axe to grind”, and said that it was no doubt for this reason that she gave evidence as she did.  He then said that she doggedly insisted on avoiding the obvious, namely that the SACE application form contained nothing to direct the insured to give information about project viability or borrower standing.  Having read with care the passages said to support this conclusion (T1/9/107-9 and T2/10/1-5) we do not see in them a sound basis for it.  She said in the latter passage that the proposition was only partly true, because of (what she viewed as) the general warning below box E and/or the general duty of disclosure and because MG was a professional.  She may have been wrong in law on these points, but that does not go to her general credit on the factual issue of SACE’s or her own state of mind.  
7.	Likewise, so far as the judge’s criticism of her for making allegations without the faintest idea whether or not they had any proper basis was based on her assertion of a “wholly untenable” duty under Italian law on MG to monitor the progress of the project, she indicated that she was relying on the provisions of the Civil Code requiring mutual good faith, the provisions of the policy (clause 7(3)(d)) and the contractual contemplation that drawdowns should match the progress of the project (clause 5 and 6).  Whether she was right or wrong, we do not see that this evidence justified the judge’s strong condemnation or any general conclusion as to credibility on issues going to SACE’s state of mind.  On the other hand, so far as the judge relied on her stated “awareness” or “understanding” about what MG had known or should have known, the judge’s comments appear to us well-founded.  She could not in oral evidence explain what basis she had for such statements.  The judge further said that her “technique” was to give lengthy answers in order to avoid giving direct answers.  Having read the transcript with care, we cannot see any justification for this conclusion about her genuineness as a witness.  They appear to us more consistent with an understandable desire to be exhaustive – and when she actually said “But I need to be exhaustive when I reply”, no-one suggested otherwise.  On the contrary, Mr Brindle said: “Yes, I appreciate that.  Please continue then.”  (See T2/10/4-5.) 
8.	Dottoressa Paciarelli is therefore another witness about whom it appears to us that the judge took too harsh a view.  Having said that, there was, as we have indicated, clearly some room for positive criticism of her evidence, and from a general viewpoint it faced the difficulty that, despite indications in it that SACE was interested in “every type of information” (witness statement pages 6, 7, 8 and 16 and T1/9/96-103), SACE never received or asked for any information about or manifested any internal interest in project viability or borrower standing before or after granting political risks insurance under Article 14.2.  As we have said previously, it is difficult to suppose that SACE can have believed over the course of so many transactions or proposals for transactions with MG that MG had undertaken any detailed investigations into such matters and never discovered anything which was of sufficient interest to be communicated to an insurer with any interest in such matters.  
Dottoressa Bartolucci
9.	As a subordinate in section II she was, in the judge’s words, “insufficiently senior to have an axe to grind”.  The judge made only muted criticism of her for seeking “by implication” to give box E a wider scope than it had.  In cross-examination she both accepted that she was wrong on this, and that SACE did not look at project viability or borrower standing.  That was not her function when underwriting a risk.  She did, however, add that, had she been told that, for example, there were outstanding insolvency proceedings against EC, she would have informed Dottoressa Paciarelli or her immediate superior Dr Recchione (although he was frequently absent due to illness).  The judge’s description of the “eliciting” through her cross-examination of evidence on SACE’s approach to premium calculation was factually accurate, though it may carry a note of the judge’s own scepticism about the objectivity of SACE’s approach to the litigation.
Dottoressa  Calcagni
10.	Section II was reorganised in July 1992, when Dr Calcagni joined it and took over responsibility for triangulare transactions in Eastern Europe from Dr Recchione.  The judge said that, for partisanship, she fell into almost the same category as her superior Dottoressa Paciarelli.  We think that a considerable number of the judge’s reasons for saying this do not stand scrutiny.  First, he said that her statement (witness statement para.  17) that box E was an invitation to an applicant bank to provide any relevant information regarding the transaction “was contradicted by the form itself”.  We think that the contrary was a respectable viewpoint, and find the judge’s criticism purist.  He said that she gave unsatisfactory answers in cross-examination.  In so far as this was meant to refer to her answers on box E, it is true that she did not strictly answer the questions put – but asserted that banks owed general duties of diligence and disclosure.  We do not find it unsurprising or reflecting on her credit that she explained herself in this way.  In so far as it referred to the next point that the judge specifically made - namely that she “was at one stage driven to asserting the logical absurdity that a bank coming to SACE for political risks cover had to do more due diligence than a bank coming for commercial risks cover” - the judge erred.  She in fact expressly refuted that proposition (T2/11/35-36), and we add that we do not accept MG’s contention that her case nonetheless implicitly involved it.  
11.	We accept however that her very explicit evidence as to why SACE did pose questions and did positively interest itself in respect of project viability and borrower standing in cases of commercial risk cover and about its general attitude to political risks cover does highlight the difficulty of SACE’s case that it made any conscious assumption about these aspects, or about their satisfactory investigation by MG, in cases of political risks cover.  Inter alia, she drew attention to SACE’s belief that in the long term loans to foreign states or public entities will be recoverable, if necessary after rescheduling under the Paris Club Agreement.  Finally, the judge criticised her for her part in SACE’s letter dated 12th November 1993 attributing the withholding of recognition of EC as a foreign public entity to its privatisation, “when in fact the decision had been made by the Committee on the basis of the appunto of 29th July 1993 which said that nothing had changed”.  But Dottoressa Calcagni had not seen that appunto, when (contrary to MG’s submissions) the judge’s criticism in this respect implies that she had.   It does however seem to us a fair criticism of her evidence in this area that she assisted in drafting the letter dated 12th November 1993 without understanding what (if anything) had changed in EC’s status and how (see T2/11/62-65 and MG skeleton pararagraph  91.5).
Dr Pernozzoli
12.	He was head of SACE’s legal department from 1977 to September 1996, and thereafter a general manager.  The judge expressed sympathy for him because he had consistently advised SACE that it was liable on the EG policy, but criticised him in other respects.  Dr Pernozzoli cannot in our view be regarded as a central witness, but, in so far as his evidence did touch on central matters, we do not consider that the judge’s assessment of its helpfulness or reliability is disturbed by SACE’s submissions before us.  First, the judge rejected Dr Pernozzoli’s statement (witness statement paragraph 6) that “the sort of information that we would expect to be disclosed in box E” would include information regarding borrower solvency and project viability.  It seems to us that the judge was entitled to find, on all the material before him, that SACE had no such positive expectation (quite apart from any question regarding Dr Pernozzoli’s ability to speak to such matters, as a member of SACE’s legal department).  Second, the judge was correct to record that Dr Pernozzoli admitted that the logical sequence of the appunto of 29th July 1993 was questionable and could not explain it satisfactorily in cross-examination.  In his re-examination, to which the judge also referred, he ventured an intelligible account, with reference to documents to which he was directed, but the judge did not accept that this or they featured in his thinking at the time.  Having considered this evidence, the documents and Dr Scifoni’s evidence about the appunto, we do not consider that there is any basis on which we would be justified in interfering with the judge’s criticism of Dr Pernozzoli in this area.  Its direct relevance, at least to the issues as they ultimately stood, is less clear, but it was on any view capable of going to credit generally.  
13.	Next, we mention that the judge referred to Dr Pernozzoli as making “the important admission” that the contracts of insurance were based on the framework established between insured and insurer as to material matters.  That was an important admission, although the significance of such a framework is a matter for Italian law, on which we have already given our conclusions.  We add that Dr Pernozzoli also admitted that “towards the end of the 1980s SACE began to have some suspicions” about banks’ lack of interest in evaluating transactions when they had 100% cover (T4/31/14).  This is to our mind of some interest, in that SACE still took no apparent step whatever to check what had been done or ask questions to enable itself to make any evaluation.  Dr Pernozzoli’s explanation that no such steps would have been taken in respect of MG because of its high standing (“you do not teach the gospels to the Apostles”) would be more convincing if there was any evidence or likelihood that SACE took any such step in relation to any bank before the mid-1990s.  Finally, the judge considered that Dr Pernozzoli was “embarrassed” when cross-examined on his own radical recommendations in early 1995 that banks should be required to produce evaluation documentation.  This was pre-eminently a matter for the judge to assess.  Despite the respects in which we cannot follow the judge, we do not consider that it is open to us to reach any different conclusion on this point.  It is not in any event critical to our view that the judge was justified in rejecting Dr Pernozzoli’s evidence about SACE’s state of mind regarding banks, due diligence, project viability and borrower standing at the time the relevant insurances were underwritten.
Dr Scifoni
14.	He was a lawyer in SACE’s legal department, reporting to Dr Pernozzoli until September 1996, and since then to the new head Avv Ruffini.  As we have said elsewhere, he was the author of the memorandum of 1983 on the criteria for recognition as an epe, and the judge focused on his evidence in this area, about which the judge was scathing.  The judge was not criticised in this respect by Mr Boswood.  Dr Scifoni’s witness statement did also venture comments on SACE’s attitude to project viability and borrower standing and also box E.  The former was not within his sphere of responsibility and the latter was a matter of Italian law fully covered with other witnesses.  For these or other reasons, he does not appear to have been cross-examined on these aspects, and in any event the unchallenged rejection of the rest of his evidence destroys any possibility that his evidence on them could have been or be thought to have any weight.
Dr Petrella
15.	He was a long-standing SACE employee, with it appears only limited experience on its underwriting side.  His main work had been in claims, of which he became head in 1995.  The judge again took a sharply critical attitude.  First, he referred to Dr Petrella’s statement that he wanted “to make absolutely clear” that even before SACE adopted its new procedures (in early 1996) it “considered it to be the precise duty of the applicant bank to ensure that the project was feasible and that the borrower was able to meet its obligations and the exporter had the ability to perform the commercial contract”.  The judge described this as “an obvious piece of special pleading” having regard to the KPMG report dated 25th November 1994.  That antithesis is itself, as we have observed in paragraph 109 of the judgment, open to the response that the KPMG report is not actually inconsistent with an assumption that banks would be doing due diligence.  However, Dr Petrella’s qualifications and any basis for such a statement are both very open to question.  Further, in assessing whether to give this statement any weight, the judge was entitled to bear in mind Dr Petrella’s general attitude to MG’s claims.  The judge considered that “he was looking for any excuse not to pay MG”, and on this, having read the evidence, we see no reason to disagree.  He deducted 10% from indemnities approved for payment by SACE’s committee, and he stopped MG’s third instalment claim in respect of EG going to committee at all.  He raised unreal objections based on the 25% deductions from drawdowns that MG had, to SACE’s knowledge, arranged to cover itself.  He was also wrong to suggest in evidence that KPMG’s first report at the end of 1993 did not relate specifically to the MG claims.  So far as his evidence could have had relevance, we think that the judge was justified in most of the criticisms that he made of it.  
Dr Gentile
16.	He was a lawyer with INA who sat on SACE’s committee from 1986 onwards, and so might have given directly relevant evidence as to SACE’s committee’s attitude.  In fact, however, his evidence contained very little to shed light on what SACE may have considered or been concerned about at the underwriting stage.  Most of it went to the later claims stage.  So far as it had relevance, the judge discounted it generally as unreliable, giving a number of instances of “assertions in his witness statement which were contradicted by events or by the documents”.   He took first Dr Gentile’s statement that SACE would not have paid the first two EG instalments (in August 1992 and January 1993) had it known of the EG government’s concerns about the project.  The judge viewed that as contradicted by SACE’s decision to pay the third instalment in June 1995.  But, as Dr Gentile pointed out, SACE by then was very concerned about its potential liability for interest (it had been the subject of public scrutiny for incurring interest liabilities), and was also advised that payment could, if it later proved not to be due, be recovered.  In 1992-92 it would have been easier to withhold payment pending further enquiries.  
17.	Secondly, the judge said that Dr Gentile’s assertion that the contract was voidable was “directly contradicted” by his “lack of dissent” at the February 1996 committee meeting when Dr Pernozzoli explained that MG’s lack of due diligence was insufficient to justify non-payment.   We think that Dr Gentile’s assertion (that MG failed to perform any due diligence and did not inform SACE of that failure: see paragraph 14 of his witness statement in respect of EG) is to be read as an assertion in the light of his knowledge when making the witness statement.  But he did imply that it was based on his extensive previous experience.  In contrast, Dr Pernozzoli’s appunto signed also by Mr Mauro and Dr Petrella and put before the committee in February 1996 indicates that SACE could not rely on any lack of due diligence by MG because SACE could have made but did not make any enquiries itself.  All Dr Pernozzoli felt able at that stage to say was that, if MG participated in a fraud, the insurance would be voidable, or, if MG knew of matters which it should disclose, Article 1892 could apply – not that it should have done due diligence or disclosed any failure in that regard.  So the fact that Dr Gentile did not then put forward what he later sought to imply that he always considered as a lawyer of long experience, was and is capable of affecting his credit, as the judge thought.  
18.	Finally, the judge’s comment that Dr Gentile’s statement that a company which could be made subject to insolvency proceedings could not be an epe was incorrect and “revealed his total lack of understanding of the case” was in our view justified.  It is true that counsel only cross-examined on this point after the judge directed attention to it, but this in turn was only because counsel thought that it had already been covered sufficiently with other witnesses.
Absent Witnesses
19.	The judge was in our view justified in drawing attention to SACE’s failure to call either its director-general at the time of the insurances, or the underwriter of the EG insurance.  He also commented on the failure to call Dr Rubino, despite the service of a witness statement from him.  He was director-general from April 1993 to 1995, the period during which the decision to withhold cover from EC was formed.  It is said that his evidence would not have been relevant, but he could have been expected to have had something to say at least on the continuing issue of EC’s status; in the areas of due diligence and disclosure we accept that it could have had little relevance, even though, as we have observed, SACE called a number of other witnesses whose views in those areas were also marginal. 

ANNEX D
THE NEW CLAUSE
1.	As explained in paragraph 300 of the judgment, we set out here the conclusions which we have reached as to the true construction of the new clause as a matter of Italian law.
2.	The new clause raises the following questions: (a) are the “foreign disbursements” disbursements by EC or MG? (b) are “foreign disbursements” disbursements in respect of local expenses or in respect of non-Italian goods generally? (c) what is “the amount indicated for local expenses”? and (d) are “foreign disbursements” disbursements actually made for the purchase of goods, or are they merely disbursements intended for the purchase of goods?   Mr Boswood’s answers to these questions are: (a) the disbursements are by EC; (b) they are in respect of local expenses (version 1 of the argument) or non-Italian goods generally (version 2); (c)  the “amount indicated” is DM8.65 million, the 17.65 per cent figure referred to in basic assumption (B) in the proposta; and (d) the disbursements must be actually made for the purchase of goods.  Mr Brindle submits that (a) the disbursements are by MG, (b) they are in respect of local expenses; (c) there is no “amount indicated for local expenses”; and (d) the disbursements need only be intended, and not necessarily used, for the purchase of goods.
3.	Before considering these questions, we should seek to find the rationale of the new clause.  Two situations may be postulated: (i) the sum expended on local services exceeds DM8.65 million, but the sum expended on Italian goods is DM40.35 million as originally intended; and (ii) the sum expended on local services is DM8.65 million, but the sum expended on Italian goods is less than DM40.35 million, the balance of the goods being non-Italian.  On the first version of Mr Boswood’s argument, there would be a reduction of cover in the first, but not the second situation.  That is because on this argument the only trigger for a reduction in cover is an excess in actual expenditure for local expenses over the amount indicated, ie 17.65 per cent of the value of the supply contract.
4.	In relation to the first situation, it is not obvious why SACE should have an interest in ensuring that the sum paid by EC in respect of local services did not exceed DM8.65 million, and why, therefore, it should have wished to reduce the cover simply because the amount spent on local services exceeded the sum of DM8.65 million.  Mr Boswood suggested that the rationale might be that, if the buyer spent more than the amount stipulated for, this might reduce its ability to repay the loan or might cast doubt on the viability of the project.  We do not find this a very convincing reason, especially in view of the extensive protection afforded to SACE by Article 7.3 of the policy.  Nevertheless, we accept that it provides a possible rationale.
5.	This rationale could not however assist SACE directly in the second situation.  On the contrary, since the overall cost of the project is unchanged, there is nothing to cast doubt on its viability or therefore to call for any reduction in insurance cover.  The first version of Mr Boswood’s argument can therefore, at most, offer indirect support for SACE’s case, if and in so far as it is right to treat the new clause as concerned with the actual, rather than intended, use of disbursements – a point to which we return. 
6.	We turn to the second version of the argument.  On this version, the “foreign disbursements above the amount indicated for local expenses” are not limited to disbursements on local expenses.  They include actual expenditure on any non-Italian goods or services.  Here, there would be a reduction in cover in both of the situations that we have postulated, since in each case the sums actually expended on non-Italian goods and services have exceeded the amount indicated for local expenses.  On this version of the argument, the rationale for the new clause would simply be that no more than DM8.65 million should be spent on non-Italian goods, and no less than the balance of DM40.35 million should be spent on Italian goods.  We regard this as a more plausible rationale for the new clause than any which Mr Boswood could tender for the first version of his argument, although once again it leaves open for consideration the critical issue whether the clause is concerned with the actual or the intended use of the relevant disbursements. 
7.	With that introduction, we return to the four closely-related questions.  In our view, the “foreign disbursements” must be those of the bank, and not the buyer.  That is consistent with the language of the loan agreements, clause 2.1(a) of which provides for loan advances to be made “by way of disbursement for the account of the Supplier following receipt by the Bank of a “Disbursement Notice”.  In support of his argument that the disbursements are those of the buyer, Mr Boswood submitted that the “amount indicated for local expenses” refers back to assumption (B) and that, since that assumption is that a sum be paid by the buyer, this shows that it was intended that the disbursements in the new clause would also be made by the buyer.  But we do not consider that the phrase “the amount indicated for local expenses” does refer back to basic assumption (B).  That assumption is dealing with the making of the advance payment by the buyer.  It is true that the amount of that payment happened to be the same as the amount of the anticipated contract value of the local services and that it was not to be the subject of the loan by MG, but assumption (B) does not “indicate” the amount for local expenses. That is not why the assumption is included in the proposta.  It is so included because it was a matter of considerable importance to SACE, having regard to the provisions of the OECD consensus, to ensure that EC made an advance payment of at least 15 per cent of the contract value.  The place where the amount indicated for local expenses is indicated is in the application form. 
8.	As for the meaning of “foreign disbursements”, we think (particularly in the light of what we have said about the likely rationale of the clause) that this phrase most naturally refers to non-Italian goods generally.  As a matter of ordinary language, “foreign disbursements” is wider than “local services”. 
9.	The final and crucial question is whether, it is sufficient to trigger the reduction in cover that “foreign disbursements” by MG (as we have held) are actually used for the purchase of non-Italian goods, or whether it is necessary that the disbursements should (or should also) have been intended for the purchase of such goods.  If the new clause were read in isolation from the rest of the proposta, the remaining contract documents and Law 227, there would be much to be said for Mr Boswood’s argument that all that is required is that the disbursements were actually used on non-Italian goods.  However, we think that it would be wrong to read the clause in this way.  In our view, it is possible to read the phrase “foreign disbursements” as meaning “disbursements intended for non-Italian goods”.  Such an interpretation is consistent with the view that, for the reasons that we have already given, the cover is for disbursements which, so far as MG is concerned, are intended to be used for the purchase of Italian goods.  The bank is concerned with the apparent destination of the advances, and not with what actually happens.
10.	It may well be that light would have been shed on the intention of the parties if evidence had been directed to the point at the trial.  We should add that we have considerable doubt about Mr Brindle’s submission that the new clause is a standard clause that has no relevance to this contract.  It seems to us to be more likely that the clause was tailored to this transaction; the reference to “local expenses” is particularly telling. 
11.	For all these reasons, on the material before us, if it were necessary for us to resolve this question, we would conclude that as a matter of Italian law the new clause does not assist Mr Boswood’s argument.