England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT
Neutral Citation No. [2003] EWHC 26 (Comm)

		Royal Courts of Justice Strand, London, WC2A 2LL
		20 January 2003

Mr Justice Colman :

Introduction

1. The claim is on a policy of credit insurance issued on 16 October 1998. The defendant insurance company "CGI" specialises in this field. So does the claimant's broker, Mr Paul Humphreys, initially of Claverley Hyde Limited and subsequently of Paul Humphreys Credit Insurance Services Limited.
2. The claimants are wholesale suppliers of cycles and cycle accessories. In 1998, when this policy was issued, they had amongst their biggest customers two substantial retailers, Motorworld Limited ("Motorworld") and Blane Leisure Limited" ("Blane"). Until that time they had not insured against the insolvency of their customers and had no experience of credit insurance. They were advised to contact Mr Humphreys as a specialist in this field.
3. Credit insurance policies are of two basic kinds. Cover can be in respect of the whole turnover of a business with various Credit Limits applicable to a particular customer, the premium being calculated by reference to the amount of anticipated turnover. Or there can be the second type of cover which is much less common and protects against the failure of a particular customer to pay the insured's accounts due to that customer's insolvency. In 1998 the defendants, CGI, were one of the only three companies offering the latter type of specific account credit insurance in this country. Mr Humphreys had placed four previous risks with the defendants for specific account cover. Discussions between Mr Caunt, the Financial Director of the Claimants, and Mr Humphreys resulted in the claimants deciding to take out insurance on a specific account basis in respect of Motorworld and Blane. The policy inception date was 1 September 1998.
4. The policy provided for a Credit Limit of £100,000 in respect of Motorworld and £325,000 in respect of Blane. The premium was payable by means of an initial deposit of £5,000 and of subsequent payments calculated at the rate of 0.4 per cent of the turnover as declared in quarterly declarations of turnover to be provided to the insurers. The estimated turnover for Motorworld was given to the insurers as £1 million. The insurers were also informed that the current outstanding balance with that customer was £400,000, the terms of payment being end of month following the month of invoice and that the Credit Limit requirement of £600,000 was in order to accommodate the Christmas peak for orders. The policy required the insured to provide monthly declarations of overdue accounts.
5. There were a number of endorsements to the policy between its inception and July 2000. These in most cases related to a change in the Credit Limit for either or both of Motorworld or Blane. Endorsement No.9 dated 31 July 2000 provided for the Credit Limit applicable to Motorworld to be set at £2 million from 1 October to 31 October 2000 and at £2.5 million from 1 November 2000 to 31 March 2001 and thereafter to be £600,000, which was also the level from 1 March 2000 to the date of that Endorsement. It is common ground that under the terms of the policy the Credit Limit operated as a cap on the amount recoverable.
6. On 6 October 2000 Motorworld went into Administrative Receivership. At that date its outstanding debts to the claimants amount to £2,219,990.83 plus VAT. Following their customer's receivership the claimants were able to recover a total of £710,014.90 from the receivers in consequence of a management buy out which took over certain stock still in the receiver's custody which had been sold by the claimants subject to a retention of title clause. That left the claimants with a loss of £1,509,975.93 due in respect of outstanding debts. That was the amount originally claimed in these proceedings. The insurers however, admitted liability only in respect of £357,898, and they have paid this amount to the claimants since the commencement of the proceedings. The claimants therefore claim the balance of £1,152,077.93.
7. The fundamental and primary issue between the parties is whether the amount recoverable under the policy as amended by Endorsement 9 was, as the insurers contend, limited to the Credit Limit of £600,000 which was in effect before 1 October 2000 or, as the claimants contend, limited to the Credit Limit of £2 million introduced by Endorsement 9 with effect from that date. The claimants maintain that the effect of the terms of the policy as amended by Endorsement 9 is that the amount recoverable is capped by the Credit Limit in effect at the date of the happening of the insured peril, namely the date of insolvency (6 October 2000), whereas the defendant insurers contend that the amount recoverable is capped by the Credit Limit applicable at the dates when the goods which were never paid for were delivered to Motorworld. Except for goods to the value of £94,456.98, which were delivered between 1 and 6 October 2000, the whole of the balance of the outstanding indebtedness was in respect of goods delivered before the increase in the Credit Limit from £600,000 to £2 million on 1 October 2000. The defendant's case is that the words of the policy and of the Endorsement in their natural and ordinary meaning, as properly construed, have the effect that, if and to the extent that outstanding debts were incurred in excess of the £600,000 Credit Limit at the date of delivery to Motorworld, they are not covered by the policy. Alternatively, they contend that it is the custom of the trade that temporary increases in Credit Limits never operate retrospectively unless insurers expressly agree that they should.
8. The claimants advance an alternative case based on correspondence between Mr Humphreys and the defendant insurers which immediately preceded the agreement to amend the policy in terms of Endorsement 9. They contend that Endorsement 9 has to be construed by reference to letters dated 29 June 2000 and 7 July 2000 from Mr Humphreys to the insurers and a letter dated 11 July 2000 from the insurers to Mr Humphreys. The effect is said to be that the cap of £2 million introduced by the Endorsement was to operate in respect of the total outstanding indebtedness at the date of the insolvency and not at the date of delivery of the goods. Alternatively, it is said that the defendants are estopped from asserting the contrary.
9. Finally, the defendant insurers contend that they are entitled to avoid the variation of the policy advanced by Endorsement 9 by reason of the failure of the claimant to disclose certain material facts at the time when the variation was agreed. The facts alleged to be material are that as at July 2000 the claimants had already delivered and were proposing to deliver to Motorworld prior to 1 October 2000 cycles with a value substantially in excess of the existing Credit Limit of £600,000 then in force and to remain in force until 30 September 2000. Although, as the insurers acknowledge, this would not amount to a breach of policy terms, but would merely result in the excess over the Credit Limit being uninsured, had information as to the substantial excess been given to the insurers, they would have wanted to investigate why there should be this substantial increase in orders outside the Christmas peak period starting in October with a view to ascertaining whether this enhanced sales volume was the consequence of financial problems of Motorworld or other characteristics of that customer which raised questions as to its future solvency. In support of this submission the defendants relied on the expert evidence of Mr TFW Bayford. The insurers submit that if they had been given this information, they might not have agreed to vary the policy by agreeing to the Endorsement or might have increased the premium.
10. The claimants, while conceding that they did not disclose that the level of trading with Motorworld was and was anticipated to be substantially in excess of the Credit Limit, contend that this information would not have influenced the insurers' decision to agree to Endorsement 9. The insurers had failed to establish that they were induced to vary the policy by any material non-disclosure. Had this information been disclosed, the defendants would neither have insisted on an increased premium nor, if the claimants declined to agree to that, have refused to agree to vary the policy as requested by Mr Humphreys.

The Structure of the Policy

11. The policy is entitled "Credit Insurance Specific Account Policy" and is on the defendants' standard form. The following provisions are relevant.

"This Insurance Cover

Subject to the terms and conditions of this policy the Insurer will indemnify the Insured in respect of Insured Loss arising in respect of the Contract, comprising Work in Progress and/or Qualifying Debt, directly and naturally suffered by the Insured as a result of Insolvency of the Customer occurring within the period of Insurance.

Payment Under this Policy

The Insurer will pay to the Insured the amount of Insured Loss within thirty days of receipt by the Insurer of confirmation in writing that such Insured Loss has been admitted to rank against the insolvent estate of the Customer.

After the Insurer has settled any liability under this policy it will be subrogated to all rights and remedies, including Salvage, against the Customer.

Period of Insurance

The Period of Insurance under this Policy may be as is specified in the Schedule or otherwise shall continue until this policy is terminated in accordance with its terms.

Pre-Delivery and Credit Limits

The Insurer will determine at its discretion Pre-Delivery Limit and/or Credit Limit and such determination shall be on such terms as the Insurer may stipulate and which may vary or amend any provision of this policy.

Pre-Delivery Limit and/or Credit Limit will be automatically cancelled with immediate effect and without any requirement for notice upon Insolvency of the Customer.

Obligations of the Insured

The Insured shall:

(a) pay premium in accordance with the terms as detailed in the Schedule and where applicable submit to the Insurer signed Declaration of Turnover within 14 days of the expiration of each Declaration Period and on the date of termination of this policy declaring all Turnover

(b) notify the Insurer immediately and confirm such notice in writing:

(i) on having reason to suspect or on having knowledge that the Customer is unlikely to make any payment due under the Qualifying Invoice within the Payment Delay period;

(ii) in the event of failure by the Customer to pay any amount due under Qualifying Invoice after the Payment Delay Period;

(iii) on becoming aware that the Customer is in financial difficulty or is unlikely to honour its contractual obligations.

c) at all times.

(v) disclose all matters and circumstances that might in any way affect the Insured or the Insurer in respect of this policy and generally use utmost good faith.

The Insured shall not agree any postponement of Due Date beyond the expiration of the Payment Delay Period without the prior consent in writing of the Insurer.

Due payment of premium and observance of the terms of all Conditions of this policy are conditions precedent to any liability of the Insurer.

Policy Termination

This policy shall either:

(a) expire on the last day of the Period of Insurance, or

(b) may be terminated during the Period of Insurance by either the Insurer or the Insured by such means as may be specified in the Schedule (if any).

The Insured shall also retain for its own account and uninsured:

(a) any amounts in excess of Pre-Delivery Limit or Credit Limit respectively

(b) such amount of Aggregate First Loss (if any)."

The Schedule provided that the Contract was "the supply of cycles and accessories", that the Terms of Payment should be "the month following the month of invoice", that the Payment Delay Period should be 30 days and in respect of the Period of Insurance

"Commencing from 1^st September, 1998 and continuing thereafter until either the Insurer or the Insured gives written notice to terminate the Policy in which event the Period of Insurance shall expire ninety days after receipt of the said notice subject to the minimum period being twelve months from date of inception."

Crucial to the proper understanding of these terms are the "Definitions and Interpretations" incorporated into the policy. The relevant definitions are these:

"Aggregate First Loss:

The amount of Insured Loss, as specified in the Schedule, to be home by the Insured to be first deducted from Insured Loss in the determination of any liability of the Insurer under this policy.

Credit Limit:

The limit in respect of credit, as approved by the Insurer for the purposes of this policy, to be extended by the Insured to the Customer as specified in the Schedule.

Due Date:

Either the date upon which Qualifying Invoice shall fall due for the payment in accordance with Terms of Payment or such later date for payment as the Insured may agree with the Customer which agreement may be reached without notice to the Insurer so long as such later date shall fall no later than the date of expiration of the Payment Delay Period.

Insolvency:

The making of an order by the court for winding up under the Insolvency Act 1986, or any statutory modification thereof, or the passing of an effective resolution for voluntary creditors winding up (except a voluntary liquidation for the purposes of reconstruction or amalgamation) or the appointment of a receiver, administrative receiver, administrator or the like in respect of any of the assets of a company or any part thereof.

Insured Loss:

Such amount of Work in Progress as shall not exceed Pre-Delivery Limit and/or Qualifying Debt as shall not exceed Credit Limit as shall have arisen as a result of Insolvency of the Customer occurring within the Period of Insurance and shall be admitted to rank in the insolvent estate of the Customer.

Payment Delay Period:

The period following Terms of Payment as specified in the Schedule in which he Insured may postpone Due Date without notice to the Insurer but after which period the Insured must immediately notify the Insurer in writing of the Customer's default in payment of Qualifying Debt.

Period of Insurance:

As specified in the Schedule or otherwise until this policy is terminated in accordance with its terms.

Qualifying Debt:

Such amount of Qualifying Invoice, net of value added tax or any statutory amendment or modification thereof ("VAT"), as shall remain unpaid after Due Date.

Qualifying Invoice:

Invoice delivered to the Customer and being in respect of goods sold and services provided by the Insured to the Customer during the Period of Insurance pursuant to the terms of the Contract.

Terms of Payment:

The period of credit as specified in the Schedule deemed as extended by the Insured or the Customer under Qualifying Invoice for the purpose of this policy.

Turnover:

The sum total amount of Qualifying Invoice, net of VAT, in any given period."

Endorsement No.9 provided as follows:

"It is hereby agreed that with effect from 1 October 2000 the Credit Limit relating to the Customer detailed below shall be as stated:

Customer Period Credit Limit

Motorworld Ltd 1 October 2000 to 31 October 2000 £2,000,000

1 November 2000 to 31 March 2001 £2,500,000

and thereafter the Credit Limit shall be £600,000 (Six Hundred Thousand Pounds).

This Endorsement is issued subject to all other terms, conditions and definitions of the policy and to the Insured having disclosed all material facts relating to the subject of the policy at the time of the Insured's acceptance of this Endorsement."

By a previous variation evidenced by Endorsement No.7 dated 21 June 2000 the specified Terms of Payment applicable to Motorworld were amended from 60 days following the end of the month of invoice to 90 days from the end of the month of invoice which was to the rendered on the date of delivery. The result of this Endorsement was therefore to postpone the Due Date until 90 days after the end of the month in which the invoice was issued, that is up a maximum of four months in the case of invoices issued on the first date of the month.

The insuring clause thus provided:

(i) that the Insurer would indemnify the Insured in respect of Insured Loss;

(ii) that the Insured Loss must arise in respect of the Contract (that is the supply of bicycles or accessories to Motorworld).

(iii) that the Insured Loss must comprise Qualifying Debt (that is such amount of Qualifying Invoice .... as should remain unpaid after Due Date);

(iv) that the Insured Loss must be directly and naturally suffered by the Insured as a result of the Insolvency of the customer;

(v) that the Insolvency of the Customer must occur within the Period of Insurance.

Insured Loss was specifically defined in the Definitions and Interpretation Section. That definition added two further requirements relevant to the right of indemnity;

(i) the amount of loss in respect of which the policy provided an indemnity was such amount of Qualifying Debt as should not exceed Credit Limit; and

(ii) as should be admitted to rank in the insolvent estate of the customer.

It is the first of these additional features which is of fundamental importance in analysing the structure of the policy.

Qualifying Debt is specifically related in the Definitions to such amount of Qualifying Invoice as should remain unpaid after Due Date, which was in turn specifically defined as either the date when the Qualifying Invoice fell due under the Terms of Payment or such later date as the Insured might agree with the Customer but no later than the end of the Payment Delay Period.

It is clear, as indeed Mr Michael Ashe QC, on behalf of the insurers, concedes, that Insured Loss is defined by reference to an aggregate amount of Qualifying Debt, as distinct from one particular Qualifying Debt or separate Qualifying Debts. This is as one would expect in view of the insured peril. Upon the insolvency of the customer there is likely to be an accumulation of outstanding debts payment of which is prevented in whole or in part by the insolvency. It is that accumulation of which one would naturally speak as the loss insured against.

It is however, necessary to ascertain the effect of the words in the definition of Insured Loss "as shall not exceed Credit Limit". The key issue is whether, as the claimants contend, those words qualify the aggregate of the Qualifying Debts which are accumulated as the Insured Loss or, as the insurers contend, these words qualify the separate constituent debts thus accumulated to the effect that only if, and to the extent that (i) when the invoice giving rise to each such debt was issued and (ii) when the insolvency occurred, the amount of that debt when added to all pre-existing debt was no greater than the Credit Limit could that particular debt be accumulated as part of the Insured Loss.

It is to be noted that the definition of Qualifying Invoice introduces four requirements:

(i) that the invoice was delivered to the Customer;

(ii) that it was in respect of goods sold and delivered by the Insured to the Customer;

(iii) that the sale and delivery took place during the Period of Insurance; and

(iv) that the sale and delivery were pursuant to the terms of the Contract with the Customer.

There is however, no reference to any requirement that the amount of the invoice should not, when added to pre-existing unpaid invoices at the date of issue or of insolvency, be in excess of the Credit Limit. Indeed, to exceed the Credit Limit was not a breach of the policy conditions. These consequences are specifically dealt with under the policy exclusions to the effect that the Insured is to "retain for its own account and uninsured" any amounts in excess of the Credit Limit. Insurers therefore provide no indemnity in respect of such amounts in excess of Credit Limit. Mr Ashe QC submitted that this Exclusion indicated that the insurers were only insuring debts attributable to such invoices as were within the Credit Limit at the time when they were issued. I am unable to accept this submission. It is clear from the wording of the Exclusion,read as a whole, that the words "retain for its own account and uninsured" are at least equally capable of relating to the aggregate of losses at the time of the insolvency. Thus the same words are used with reference to "(b) such amount of Aggregate First Loss". The definition of Aggregate First Loss clearly indicates that it is a deductible from the Insured Loss which is an accumulation of loss quantifiable only following insolvency. In my judgment, this is a strong indication that just as the aggregate deductible is uninsured, so also is the aggregate excess over Credit Limit, as ascertained upon insolvency.

Had it been the purpose of the policy to limit the indemnity by reference to the relationship to Credit Limit of each separate invoice at the date of its issue one would have expected as a matter of ordinary drafting technique to find that the definition of Qualifying Invoice or possibly Qualifying Debt alluded expressly to this limit on the scope of the indemnity.

Further, one would not have expected to find that the effect on the indemnity of exceeding the Credit Limit was expressed only by reference to the accumulation of outstanding debt at the time of insolvency, as it is under the Exclusion and under the definition of Insured Loss. Nowhere in the policy wording is it expressed by reference to the amount of an individual invoice or to the date when such invoice was issued.

Moreover, if the policy has the meaning asserted by the insurers, there emerges a practical effect which it is hard to envisage that the insurers could have required for commercial reasons. Suppose that at the date of an invoice the Credit Limit had already been exceeded by pre-existing unpaid invoices and that during the period allowed for payment of that invoice under the Terms of Payment, many of those pre-existing invoices were paid, with the result that the total of all outstanding invoices later fell below the Credit Limit. If the customer then became insolvent, the level of indemnity could only be calculated by tracing back the running aggregate of outstanding debt to the date of the invoice and comparing that with the Credit Limit. That exercise would be required in respect of every single separate outstanding debt. That would have to be done not only in cases where the Credit Limit was not exceeded at the date of insolvency but also where it was, because there might be outstanding debts which originated from a period when the relevant invoices were for amounts which, when added to pre-existing outstanding debts, did not exceed the Credit Limit. If this had been the required methodology for the calculation of the Insured Loss, it is inconceivable that the policy would not have made some express reference to it, for it involves a potentially very cumbersome accounting exercise and investigation.

The contrast between that methodology and that which would result from the application of the Credit Limit at the date of insolvency is very striking. A relatively simple exercise would be required involving a comparison between the total outstanding Qualifying Debt unpaid after the insolvency and the Credit Limit. If and to the extent that the aggregate qualifying indebtedness unpaid after the insolvency then exceeded the Credit Limit, it would be uninsured and the insurers would be liable only for the balance up to the Credit Limit. It is also more consonent with the apparent purpose of having a Credit Limit with reference to the financial liability of the customer that the limit should be applied upon insolvency and not at the date of each invoice. One would have thought that what would matter to the insurer would be the level of credit which the assured had permitted to accumulate by the time when the customer collapsed and the insured peril had occurred and not the historic level of credit which might be much reduced by the time of insolvency. It is also relevant that the insurers received monthly statements of overdue accounts and quarterly statements of turnover which, although not giving a day to day total credit analysis, did provide a broad view of the value of invoices and the level of compliance with the terms of payment by Motorworld. The consequence, that at least in theory, the insurers might incur no liability whatever, even though at the time of the insolvency, the aggregate payment outstanding was well below the Credit Limit, is one which is so intrinsically improbable as at least to put in question the construction which leads to it.

In my judgment, this policy in its standard form provided for the Credit Limit to be applied only to the aggregate Qualifying Debt at the time of insolvency and not also to the aggregate outstanding indebtedness arising under all earlier Qualifying Invoices at the date of each of the Qualifying Invoices still outstanding upon the happening of insolvency.

Endorsement No.9

The circumstances leading up to this Endorsement were as follows.

By Endorsement No.6 the Credit Limit had been increased to £1 million from 1 November 1999 until 29 February 2000. It was then to revert to £600,000, provided in the Schedule to the policy. On 29 June 2000 Mr Humphreys informed the insurers that, looking forward, the estimate of turnover with Motorworld was £4.5 million and that "the balance will be as high as £2,000,000 once substantial deliveries are made in October, November and December". He added "Bearing in mind that the terms of payment are 90 days the credit will need to be increased to cover this seasonal peak". With reference to Blane, Mr Humphreys then continued:

"…. On Blane Leisure the forecast is £1,550,000, currently the outstanding balance is £440,000 against a Credit Limit of £325,000. Will you please look at a permanent increase to £500,000, which will give them some headroom now and also cover the seasonal peaks in the summer and at Christmas?"

On 30 June 2000 the defendants requested clarification as to the exact level of cover required together with the period of peak exposure.

On 7 July 2000 Mr Humphreys sent a fax in the following terms:

"In respect of Motor World I have spoken again to our clients who have advised that the business is going to be unusually large in October, November and December, which based on the 90 day terms of payment means that they are going to in fact have a peak Credit Limit requirement of £2,000.000 in October and £2,500,000 from November through to March when these higher outstanding balances will be paid and the Credit Limit can be subsequently reduced. The additional business that they are expecting is on top of their normal sales and the exact time really depends on when deliveries are made but fundamentally they would like to see the increased Credit Limit available to cover these large deliveries. To give you some idea of the increased volume they are delivering 70,000 extra bikes in October alone.

In respect of any Credit Limit increase could you just confirm what the relevant date is here, is it the fact that the Credit Limit was in place at the time of deliveries or does the Credit Limit need to be in place at the time of insolvency."

On 11 July 2000 Mr Pugh an assistant underwriter with the defendants sent to Mr Humphreys an email message in which he stated that because there had been a change in the ownership of Motorworld, further enquiries would have to be made before any increase in the Credit Limit could be confirmed. The message continued:

"Turning to the question of the cover provided by the Policy this does relate to the date of insolvency and as such the Credit Limit should mirror the likely exposure at any time to include funds outstanding between the Buyer and the Insured. Clearly it is important therefore for you to liaise with your client to ensure the Credit Limit is set at a realistic level. I leave you to return to me if necessary. However, as matters stand I assume the uplift required is for the increase in October, 2000 to £2 million and thereafter from November 2000 to March 2001 for a Credit Limit of £2,500,000. At the end of this period the Limit will reduce to the existing level of £600,000 until further notice."

The defendants' credit committee then approved the increase in the Credit Limit to cover the short term uplift required due to unusually large orders in the last quarter of 2000. At that time the maximum credit the subject of insurance by the insurers under all policies in relation to the group of which Motorworld was a member was approved by the credit committee at £3 million. As there were no other extant policies covering that group in addition to that of the claimants, the £2.5 million requested was well within the approved group limit.

On 31 July 2000 the insurers issued Endorsement No.9

On 3 August 2000 Mr Humphreys enclosed that Endorsement with a letter to Mr Caunt of the Claimants in which he stated:

"You will see that the Motor World Limited has been increased to £2,000,000 for the period up to 31 October 2000 and to £2,500,000 to the 31 March 2001, thereafter the limit will reduce to £600,000. In order to avoid any doubt or confusion the dates on this policy relate to the date of the failure and the Credit Limit at the time of a failure will govern the size of the claim."

The Effect of Endorsement No.9

It is argued on behalf of the claimants that the Endorsement had the effect of raising the pre-existing Credit Limit of £600,000 with effect from 1 October 2000 to £2 million and with effect from 1 November to £2.5 million until 31 March 2001 after which it would be reduced to £600,000. Thus if, during that period, the customer became insolvent, outstanding invoices up to that Credit Limit would be covered in so far as the debts were irrecoverable by reason of the insolvency. The Endorsement went no further than to temporarily increase the Credit Limit with the same effect, at an increased level, as the policy previously had.

In the alternative the claimants say that the exchange of correspondence had the effect of investing the words of the Endorsement, when construed in the light of the background negotiations, with a meaning to the effect that the Credit Limit was relevant and applicable only to the aggregate of outstanding debts at the date of the insolvency and not at the dates when the separate invoices were issued. The claimants say in the further alternative that the letter of 11 July 2000 from Mr Pugh of the insurers gave rise to an estoppel by representation or convention to the effect that the policy was to be construed as operating by reference only to the Credit Limit at the date of insolvency.

The defendant insurers challenge the claimants' construction of the Endorsement and the message of 11 July 2000. They submit that the true meaning of the policy is that the invoice giving rise to the outstanding debt must have been within the Credit Limit, when added to all other outstanding debts, at the date of its issue and all the debt in question must not exceed the Credit Limit at the date of insolvency. Accordingly, the response of Mr Pugh in his email of 11 July 2000 said nothing different from that, namely that because the cover also depended on the Credit Limit at the date of insolvency, the Credit Limit should reflect the insured's exposure to default at any time while the debts were likely to be outstanding. It was thus addressing the question raised by Mr Humphreys in his letter of 7 July 2000 as to whether it was necessary to increase the Credit Limit up to the end of the 90 days period in the Terms of Payment, as distinct from the end of the peak trading period ending in December by which time all the invoices would have been issued. Accordingly, the message was in effect that, and only that, the increased Credit Limit needed to be in place at the date of insolvency and did not address itself to the enquiry as to the date of the invoice. It therefore did not operate as a representation that the insurers were looking exclusively to the Credit Limit at the date of the invoice.

Analysis

I have already held that, properly construed, the defendants' policy did not require that at the date of each relevant invoice the total indebtedness of Motorworld should be no greater than the Credit Limit and that it was necessary only that the accumulated Qualifying Debts should be within the Credit Limit at the date of insolvency. Accordingly, the entering into of the variation of the policy expressed as Endorsement No. 9 did no more than substitute for the previously continuous Credit Limit of £600,000 temporary Credit Limits which would take effect only during the agreed period of 1 October 2000 to 31 March 2001. The state of outstanding indebtedness at the dates when particular invoices were issued which remained outstanding after the commencement of this period of temporarily increased credit limits would be as irrelevant to the level of indemnity upon an insolvency during that period as they would have been to the level of indemnity had Endorsement No.9 never been agreed to. I therefore conclude that, apart from effecting a temporary variation in the Credit Limit, Endorsement No.9 did not otherwise have the effect of varying the terms of the policy and that the exchange of messages between Mr Humphreys and Mr Pugh did not affect that conclusion.

The submission advanced by Mr Ashe QC on behalf of the insurers that not only must the relevant invoice have been within the Credit Limit at the date of issue but that the aggregate of the outstanding debts including that attributable to the invoice must have been within the Credit Limit at the date of insolvency is, in my judgment, unsustainable. Whereas, as I have indicated, the policy wording is apt to relate the Credit Limit to the aggregate of the outstanding debts at the date of insolvency, it is certainly not apt to relate to the Credit Limit to the particular debt both at the date of the invoice and at the date of insolvency. If the latter were intended, one would expect that this would be introduced into the definition of Qualifying Invoice as well as of Qualifying Debt Insured Loss. More particularly it would be quite extraordinary for there to be a double requirement of compliance with the Credit Limit at two separate points of time while introducing no similar requirement for the intervening period. The aggregate outstanding indebtedness might be higher or lower than the Credit Limit during that period even if it were below that limit at the date of issue of the invoice. The logical requirement would thus be that a debt would only be a Qualifying Debt if throughout the time from the issue of the relevant invoice to the date of insolvency the aggregate of outstanding debts was within the Credit Limit, rather than at two separate points of time. If that latter were the requirement, the policy would have had to be worded in an explicit manner so that the insured could be expected to appreciate that the right of indemnity was lost in respect of any debt which at the time of the invoice or at any subsequent time up to insolvency was part of an aggregate which exceeded the Credit Limit.

Mr Hollington QC on behalf of the claimants submitted that at worst the effect of Endorsement No.9 on the terms of the policy was ambiguous and that the policy ought to be construed contra proferentem, that is to say in favour of the construction advanced by the claimant.

I do not consider that either the policy wording or the effect on it of Endorsement No.9 gives rise to anything approaching an ambiguity. It is, in my judgment, quite clear that the words of the policy and Endorsement do not have a range of meaning in their natural and ordinary sense which is equally capable of the construction advanced by the claimants and that advanced by the insurers. The natural and ordinary meaning of the words used supports the construction advanced by the claimants and not that of the insurers, a conclusion strengthened by the intrinsic commercial improbability of the insurers' meaning.

For these reasons it is unnecessary to express any concluded view on the estoppel argument. However, had it been necessary to decide this point, I consider that Mr Pugh's response to Mr Humphrey's specifically expressed question represented that the insurers accepted that the only relevant date for application of the Credit Limit was the date of insolvency. Mr Humphreys phrased his question by reference to two distinct and alternative dates. Mr Pugh referred only to the date of insolvency and did not do so in such a way as to suggest that the date of the invoice also mattered. His response was sufficiently unequivocal to give rise to a representation sufficient to found an estoppel by convention, namely that so far as the insurers were concerned, the policy operated on the basis that the Credit Limit at the date of insolvency alone controlled the right of indemnity. Had they indicated that the date of the invoice or both dates were relevant, it is to be inferred that the claimants would have taken steps to increase the Credit Limit with effect from a much earlier date than 1 October. On that basis, it is probable that the claimants' estoppel argument would have succeeded.

It was further contended on behalf of insurers that, even if their primary case on the construction of the policy were wrong, it was implied by a custom of the credit insurance trade that temporary increases in Credit Limit are never retrospective unless expressly agreed to by the underwriters. The term said to be implied by custom is pleaded at paragraph 6.1 of the Amended Defence as follows:

"in the definition of Insured Loss, the Credit Limit provides a ceiling to the Qualifying Debt (ie the invoices delivered). It is the Defendant's case that the natural and ordinary meaning of these words is that the Insured Loss is limited to the Credit Limit in force at the time that the Qualifying Invoices were delivered. In the alternative such a construction is implied by trade custom;"

The expert evidence in support of this trade custom was given by Mr Bayford, who had many years of experience as an underwriter and broker in the specialist field of credit insurance. Having referred to the fact that the specific account policy used in the present case had been in its current form for many years, he went on to state in his expert report:

"Specialist Brokers know that the Credit Limit provides a ceiling (maximum amount) to the insured debt; that it covers goods sold, delivered and invoiced during the period of the limit. The ordinary meaning of this is that the Insured Loss is limited to the Credit Limit in force at the time the goods were sold, delivered and invoiced. The Policy document issued by HCG to ML confirmed this in relation to the definition of Insured Loss (page 4). Further, it is implied by Trade Custom that these terms only mean what HCG specify them to mean. This Trade Custom has never been varied during the 41 years I have worked in the UK Credit Insurance Market. Specialist Brokers know that temporary limits issued by Credit Insurance Underwriters cover only what the Underwriters have stated they cover. Temporary limits are not retrospective and if the amount outstanding under a permanent limit is in excess of the level of this limit, the excess will not be indemnified retrospectively unless the Underwriter agrees in writing to insure such excess."

In the course of his evidence Mr Bayford strongly expressed the view that in its ordinary and natural meaning the policy working required that the Insured Loss consisted only of debts attributable to invoices issued within the Credit Limit at the date of issue. That was the starting point. He then based his evidence relating to temporary increases in the Credit Limit on this assumption, stating that when the limit was increased it was treated by those in the industry as operating only in relation to debts due to invoices issued during the period of increase, unless the insurers expressly agreed otherwise. This was broadly consistent with the passage in his report quoted above. He relied on a policy wording issued by Euler Trade Indemnity produced by the claimants' expert, Mr Cheal, that stated in terms that the amount of the invoices must be within the Credit Limit. This wording, however, as he conceded, was normally used for whole account and not specific account cover. Mr Cheal, although his experience had been confined to facultative reinsurance of credit risks, had not encountered a custom to the effect contended for and was unable to find any reference to it in such practitioners' books as he had consulted.

The assumption on which Mr Bayford's evidence was based - namely that the policy had the meaning which he ascribed to it - naturally leads to the result as a matter of simple contract law that, if a temporary increase in the Credit Limit were agreed to, it would operate in the same way as the unamended Credit Limit. If the latter operated at the date of the invoice, so too, inevitably, would the increased Credit Limit, unless the insurers expressly agreed that it should not. It is unnecessary to deploy a custom of the trade, as Mr Bayford did, to reach that conclusion. Once, however, one starts from the position that the true meaning of the unamended policy is, I have held, that the Credit Limit operates only at the date of insolvency and not at the date of the invoice, Mr Bayford's evidence takes the matter no further. His so-called custom is inapplicable because the basis on which he founded his analysis does not apply. He does not seek to assert that the custom overrides the express terms imposed by the insurers. Nor would that be an argument open to the defendant because it would involve implying by custom something that was contrary to the express terms of the contract, given that Endorsement No.9 was expressed to be "subject to all other terms, conditions and definitions of the policy".

Accordingly, I conclude that the insurers' submissions based on a trade custom must be rejected.

Non-Disclosure

The defendants' case on materiality rested substantially on the evidence of Mr Bayford, which can be summarised as follows.

His evidence was that information that at the time when an increase in the Credit Limit was requested the outstanding invoices already substantially exceeded the existing Credit Limit would be such as would be taken into account by the insurer in deciding whether to agree to the increase and, if so, whether at increased premium and/or on other additional terms, because it would raise questions as to the financial strength of the customer; not only in relation his ability to pay the assured's outstanding invoices, but also those of any other creditors. It might emerge that the insurer's exposure to the customer's trade sector would be unacceptably high. Whereas an insurer might be willing to agree to a seasonal increase in the Credit Limit on a temporary basis, information that an assured was continuously extending to the customer out of the seasonal period credit at a level far in excess of the existing limit might well cause an insurer to decide to decline to increase the Credit Limit even on a temporary seasonal basis.

Mr Bayford expanded on his report by saying that for as long as he could remember it had been the practice in the credit insurance industry to disclose the current level of indebtedness of the customer when requesting an increase in credit limit. He stated that, if it emerged that the indebtedness exceeded the existing limit, the insurers would want to investigate why the assured no longer wished to carry the excess risk of insolvency of the customer.

The essence of the materiality was therefore that the high level of trading outside the peak period for which increased cover had been requested raised serious questions as to the continuing financial strength of the customer which an insurer would want an answer before agreeing to an increase in cover.

The claimants' expert, Mr Cheal, prepared an expert report which was totally silent on the question of materiality. Accordingly, it was unnecessary for Mr Ashe on behalf of the insurers to cross-examine him on that matter or to put to him Mr Bayford's evidence on it. The court is therefore left with the unchallenged evidence of Mr Bayford.

Since that evidence is tenable in the sense of not being intrinsically irrational, it must be accepted that information that by 31 July 2000 turnover had already substantially increased and was expected further to increase to a level similar to that which was stated to be reached only in October, was material to be disclosed to the insurers in the sense that it was information which would have an influence of sufficient substantiality on the mind of a prudent insurer in deciding whether to accept the increased cover and, if so, on what terms: see generally Pan Atlantic Insurance Co Ltd v. Pine Top Insurance Co Ltd [1995] 1 AC 501. It is not disputed that the duty of disclosure applies to a variation of the policy involving an extension of cover, even for a limited period: see Manifest Shipping v. Uni-Polaris Ins Co [1997] 1 Lloyd's Rep 360 at page 370.

Materiality was strongly challenged by Mr Hollington QC on behalf of the claimants on the basis that the policy contained express provision for disclosure of turnover every quarter. This was required to enable premium to be calculated. There was no other requirement for turnover or ledger balance to be disclosed to the insurers. In these circumstances, it was not open to the insurers to assert that additional information about turnover or ledger balances was material. They were content that, in accordance with the terms of the policy, they should receive premium calculated on turnover alone regardless of the relationship between turnover and Credit Limit, knowing that their liability was capped by the Credit Limit, however much greater the ledger balance might be. If they required yet further information about turnover or ledger balances, they should have asked for it as a term of the policy. Their omission to require further information on the same subject-matter as that specifically provided for in the policy therefore operated as a waiver: see McGillivray, 9th Edition, paras 17-14 to 17-16. Those last passages deal with questions in the proposal form prior to the entering into of the policy. The test put forward at para 17-16 and approved in Hair v. Prudential Assurance Co Ltd [1983] 2 Lloyd's Rep 667 per Woolf J. at page 673 is "would a reasonable man reading the proposal form be justified in thinking that the insurer had restricted his right to receive all material information, and consented to the omission of the particular information in issue?" It is submitted that the terms of the policy and the requirement for quarterly declarations of turnover are analogous to the questions in a proposal form and that accordingly the insurers had waived their right to disclosure of anything more than the quarterly declarations.

This argument, although superficially attractive, does not stand up to analysis on the facts of this case for two reasons.

Firstly, the purpose of the questions in a proposal form is explicitly to enable the insurer to decide whether to underwrite the risk. It is therefore not hard to infer as a matter of construction that if specific questions are asked on a particular subject-matter the insurer has no interest in other information about the same subject-matter. The omission to ask operates as a representation that such information is immaterial. The position under the terms of this policy is very different. The purpose of the quarterly declarations of turnover is exclusively for the calculation of the instalments of premium. The information is not to be provided as part of the antecedents of the policy but merely to quantify on-going premium. It is thus specifically unrelated to risk assessment. Nor does such information state anything about turnover either at an intermediate stage in a particular quarter or in relation to anticipated future deliveries. Further, it gives no information about current ledger balances. In these circumstances the whole basis for the inference which might be drawn by the reader of the proposal form disappears. Upon a request for a temporary increase in Credit Limit there is no reason whatever for a reasonable specialist broker to assume that underwriters are prepared to treat as immaterial other material information relating to turnover and ledger balances, both current and as currently anticipated to develop in future.

Secondly, although on the face of it, the insurers' defence is one of the non-disclosure of material facts, the circumstances are in substance closer to misrepresentation, albeit innocent in so far as Mr Humphreys was concerned. The reason that he put forward for a temporary increase in the Credit Limit is set out in his letters to Mr Pugh of the insurers of 29 June and 7 July 2000. The substance of both letters was that the increased turnover to be anticipated in October would produce a ledger balance as high as £2 million after such increased deliveries had been made and for that reason the present Credit Limit would then need to be raised. This involves an implicit representation that the current turnover and ledger balance and that anticipated up to the beginning of October were such that the Credit Limit did not need to be raised until then, that is to say that the ledger balance was in line with the Credit Limit of £600,000. That the words of the 29 June letter would be understood in this way is made even more obvious by the reference to the need to increase the Credit Limit for the claimants' other customer, Blane Leisure, because the ledger balance for that customer substantially exceeded the present Credit Limit. The letter would clearly be read as meaning that no similar problem arose in relation to Motorworld. The letters were therefore in substance an implicit misrepresentation of the true position.

The waiver doctrine thus has no part to play in relation to the claimant's case. It is concerned with the scope of specific questions directed to the presentation of the risk and would in any event be displaced if the questions were answered in such a way as to amount to a misrepresentation by disclosing only part of the true state of things.

Accordingly, the only substantial issue on non-disclosure is whether the defendant insurers were indeed induced to enter into the variation expressed in Endorsement No. 9 on the terms on which they did so by a belief that there had not been and that there was not to be any substantial increase in turnover leading to substantial excess of the existing Credit Limit before 1 October 2000. The defendants, who have the burden of proof, rely on the evidence of Mr Wirth and Mr Pugh. It was, however, Mr Wirth who was responsible for underwriting decisions within limits.

Mr Wirth was the defendants' underwriting manager. He explained that when in November 1998 the claimants had requested an increased Credit Limit up to £850,000 to cover the increased turnover during the Christmas peak trading period, he had asked for a meeting with the Financial Director of the Finelist Group, the owners of Motorworld at the time, in order to obtaining a financial briefing as to the Group's current financial position and its future financial viability. There had been rumours in the financial press that Finelist had defaulted on agreements with its bankers. Mr Wirth wanted to investigate the position further with Finelist. Only after such meeting had he been able to recommend to the defendants' Credit Committee that a total of £3 million limit should be in place for all risks involving members of the Group, including Motorworld. Relying on the financial information as to the Group so obtained and on the fact that there was a trading pattern between the claimants and Motorworld involving increased deliveries in the final quarter of each year to provide for the Christmas trade, the defendants agreed to the temporary increase in Credit Limit recorded in Endorsement No.2.

Mr Wirth described how in the following year - 1999 - Mr Humphreys had made two requests for an increased Credit Limit under the claimants' policy, the first in August 1999 up to £800,000 for the period 1 August 1999 to 31 January 2000, recorded in Endorsement No.5 and the second in October 1999 for a further increase to £1 million from 1 November to the end of February 2000, recorded in Endorsement No.6. In his letter of 18 October 1999 Mr Humphreys explained the need for a further increase stating that the claimant had done more business with Motorworld than expected and that invoices were already £30,000 in excess of the Credit Limit.

I interpose that the reference to the excess over the existing Credit Limit is of some significance because it shows that Mr Humphreys, as a specialist broker in this field felt it appropriate to explain the need for the increase by reference to currently exceeding the Credit Limit.

It is further to be observed that on neither occasion did Mr Wirth ask for another meeting with Finelist to review their financial viability.

On 14 April 2000 the Finelist Group was sold to Europe Auto Holding SA through a newly formed UK subsidiary, Europe Auto Distribution Ltd. These were privately owned corporations and financial information was much less accessible to the insurers. When Mr Wirth recommended on 26 July 2000 that the Credit Committee should agree to £2 million and £2.5 million he stated that he did so by reference to the relatively short period involved and to the seasonal pattern of trading.

Mr Wirth stated:

"If I had known at that time that the claimant was already trading at a level in excess of the then agreed Credit Limit and indeed at a level close to the Credit Limit which we had been told would not be required until 1 October 2000, I think that I would for all the reasons set out above, have insisted on a meeting with Finelist Plc as a pre-condition to approval being given."

It is to be observed that, although Finelist had been sold to new French owners, Mr Wirth did not ask for a meeting with them or ask for a letter of comfort in spite of the massive increase in the Credit Limit requested.

In the course of his cross-examination Mr Wirth emphasised repeatedly that it was information as to the departure from the regular pattern of trading that was important to him and would have caused him, had he been told about it, to seek an explanation.

Mr Wirth also stated in re-examination that had he been told about the higher level of sales in June and the prospect of very much higher sales in July, August and September, then assuming that the requested increase in the Credit Limit starting on 1 October would apply to debts up to that limit but attributable to pre-October invoices, he would have "carried out an overall review and certainly asked questions of the broker". That review would have involved trying to update the press comment as to the financial condition of Finelist and probably a meeting with the company. He would certainly have wanted an explanation from the broker as to why there had been a change in the pattern of trading.

The claimants attacked this evidence because, they submitted, it was inconsistent with the insurers' other conduct in relation to this policy. In particular, they relied upon the fact that although Endorsement No.9 provided for an increase in the Credit Limit to a level of £2.5 million which was more than four times the permanent policy level and which was far in excess of the previous highest level requested (£1 million - Endorsement No.6), Mr Wirth had at no time asked for a meeting with Finelist or its new owners before making his recommendations to the Credit Committee about the £3 million Group Credit Limit or in request of the request for increase under this policy. Nor had the insurers asked for any letter of comfort from the new owners, Mr Wirth's explanation being merely that, being French, they were most unlikely to disclose any useful information. Nor had the insurers asked for any such meeting when the terms of payment were increased to 90 days from the month of invoice under Endorsement No.7 in June 2000. Further, insurers had then sought to increase the premium from 0.4 to 0.48 per cent of turnover but had immediately withdrawn that requirement in response to Mr Humphreys' message of 19 June 2000 which merely stated that the claimants were "not very happy" at having to pay a higher premium. This reflected the fact that this was, as Mr Wirth agreed, a highly competitive market. Moreover, the extended Credit Limit of £2.5 million was within the defendant's Finelist Group Credit Limit of £3 million and this was apparently the only major account in respect of the Group.

Finally, the defendants could see from the three-monthly declarations of turnover dated 29 June and 12 September 2000 that in the course of the period 1 June to 31 August there had been an increase in turnover on Motorworld transactions from £705,015 to £1,288,984, an increase of 83 per cent. Given that the payment period was 60 days up to 21 June and 90 days thereafter, although the defendants would not be able to ascertain the running credit levels on outstanding invoices from those figures, they could at least appreciate that it was highly improbable that by September the actual ledger balance was within the Credit Limit of £600,000. Yet, on receiving the 12 September declaration on 28 September, the defendants raised no query or objection to the considerable increase in turnover which had occurred prior to the autumn trading season.

Before considering this evidence it is necessary to have in mind three matters which are important in answering the question whether the omission to make disclosure of the actual and anticipated turnover relative to the Credit Limit induced the insurers to agree to Endorsement No.9. These are as follows:

(i) Non-disclosure only arises for the decision of this court if the insurers' construction of the policy is wrong and that put forward by the claimants is right. Accordingly, the issue of inducement has to be treated on the basis of an actual failure to disclose the facts identified as material having regard to the true construction of the policy, but on the factual basis that, as the evidence clearly shows, the insurers through Mr Wirth firmly believed that the policy had the meaning for which they have contended in these proceedings.

(ii) In the field of non-disclosure inducement is to be tested by ordinary principles of the law of misrepresentation: see Pan Atlantic Insurance Ltd v. Pine Top, supra, per Lord Mustill at page 550. That involves that, if the undisclosed fact had been disclosed at any time up to the defendants becoming bound to the Endorsement on 31 July 2000, it would have materially influenced their decision to agree to the increase, but not that it was the sole cause of their decision: see Edgington v. Fritzmaurice (1885) 29 Ch D 459, per Cotton LJ. at p481.

(iii) Where that which is not disclosed is a fact which it is claimed would have led underwriters to require further information or to investigate further the magnitude of the risk, it will ordinarily be sufficient for the purpose of establishing inducement for the underwriter to establish that, more probably than not, he would have called for such further information or conducted such further investigation of facts material to the risk before agreeing to accept the risk. Ex hypothesi the undisclosed fact is material, in as much as it would have influenced the decision of a prudent underwriter and its very materiality will in most cases be at least some evidence that if it had been disclosed the underwriter in question would indeed have wanted further information before agreeing to underwrite the risk: see Pan Atlantic Insurance Ltd v. Pine Top, supra, per Lord Mustill at page 549.

The evidence of Mr Wirth does present certain problems. Although he was quite insistent that if the information as to the actual and anticipated increased turnover had been disclosed to him, he would have wanted to investigate why such a substantial increase was taking place in the summer months inconsistent with the established trading pattern, he seemed unable to articulate why he believed such further information might be relevant to the magnitude of the additional risk insurers were being asked to assume as from 1 October 2000. Moreover, as he admitted, the insurers had at no time investigated the level of trading maintained between Motorworld and other suppliers and had no knowledge as to the extent to which an increase in the turnover during the summer months between Motorworld and the claimants also represented an overall increase in Motorworld's total turnover with all its suppliers. It is however, fair to say that, not surprisingly, Mr Wirth did not find it easy to deal in evidence with the hypothetical situation that would have arisen both if he had been told of the increase in turnover and if the policy had a meaning different from that which he had assumed it to have.

That said, considerable weight has to be attached to the terms in which on 26 July 2000 Mr Wirth presented his credit report to the Credit Limit Committee. He wrote:

"Acceptance of the new Group approval of £3 million (same as Finelist) is recommended to cover the short term uplift requirements thereafter any increases above £600,000 only to be considered with a meeting with Finelist."

Thus, having been asked to assume a temporary increase in cover to accommodate only a short term period of unusually large orders, Mr Wirth considered it necessary to have a meeting with Finelist if any subsequent increases of the basic Credit Limit were requested. It is quite obvious that his thinking was that he should again investigate the financial viability of the Group by means of a meeting such as that in 1998 if the insurers were again asked to increase cover. I infer that the reason why Mr Wirth considered that he would have asked for a meeting with Finelist had the increased level of summer turnover been disclosed was that, as Mr Bayford explained, there was in his view a serious possibility that such a surge in orders might be the consequence or precursor of financial instability of Motorworld and that this ought to be looked into if yet further cover was called for.

Although Mr Wirth was not a very articulate witness, having heard his evidence, I consider that he held the honest belief that he would indeed have called for a further meeting with Finelist before agreeing to Endorsement No.9 if the material facts had been disclosed. Indeed, I consider it more likely than not that he would have done so in view of the effect of the proper construction of the policy, had that been explained to him. In that case he would have appreciated that the unseasonable increase in turnover might lead to a greater likelihood that the total of Qualifying Debt would rise towards the increased Credit Limit earlier in the period starting on 1 October than would have been the case if turnover had not increased. That would have involved a potential increased risk of loss within the policy. He would further have had in mind the very recent increase in the payment period to 90 days which had been agreed to without disclosure of a significant increase in turnover. This increase in potential exposure to loss by reason of an unseasonable increase in turnover would probably have led Mr Wirth to investigate the reason for the unseasonable increase had that been disclosed to him in the context of a requested increase in the Credit Limit. However, the crucial question is whether he would have taken the same course having regard to the fact that as I have found, his belief was that the insurers were not on risk in respect of indebtedness attributable to invoices issued at a time when the current Credit Limit of £600,000 had been exceeded. He would therefore assume, on being informed of the surge in turnover during June and July and anticipated in August and September, that, unless the Credit Limit were commensurately increased for those months, these additional deliveries would have no impact on the magnitude of the risk of loss on insurers in respect of the period after 1 October: his assumption would be that such additional turnover would be uninsured if and to the extend that total turnover before 1 October exceeded £600,000.

Moreover, the insurers would have the benefit of an increased premium calculated on turnover which was not matched by an increased Credit Limit. Would Mr Wirth in those circumstances and on that assumption have been happy to agree to the increased Credit Limit as in Endorsement No.9 without further investigation if he had been told of the substantial increase in turnover current and anticipated?

It will be observed that in Mr Humphreys' 29 June 2000 letter to the insurers, having referred to the need to increase the Credit Limit for Motorworld to accommodate a balance as high as £2 million in October/December, he went on to request a permanent increase in the Credit Limit for Blane because the current ledger balance (£440,000) exceeded the current limit (£325,000). If the insurers had been told at the same time that the substantial deliveries to Motorworld had already started but that the claimants only wanted that Credit Limit increased from 1 October there can, I infer, be very little doubt but that the insurers would have asked Mr Humphreys for an explanation, not only for the unseasonable increase in turnover but for the fact that, unlike Blane, it was not matched by an increase in the ledger balance for which an increase in Credit Limit would be required for a further three months. The fact that the Claimants were apparently prepared to act as their own insurers for a substantial part of the Motorworld account whereas they were not prepared to do that with the Blane account would almost certainly have caused the insurers to ask for an explanation of the early increase in turnover. In spite of the fact that no increase in the Credit Limit was being requested and therefore no increase in the insurers' risk, I consider it highly probable that insurers would have wanted to know why such an increase in turnover had occurred or was projected and, although this is a somewhat lesser probability, more probably than not, that they would have asked to discuss with Finelist's new owners why this situation had arisen. In any event, they would, I infer, have been highly unlikely to have accepted the risk without further investigation.

The omission of any complaint following the defendants' receiving the June-August quarterly declaration of turnover is unsurprising. The insolvency of Motorworld occurred 8 days later and it was the defendants' belief that in accordance with their understanding of the meaning of the policy, they had been on risk above £600,000 only in respect of deliveries made after 30 September, an eventuality which, given the very short period of time, would appear very improbable. Thus, investigation of the circumstances giving rise to Endorsement No.9 would not have been regarded as relevant to the claim.

Accordingly, the absence until the amended defence of any such complaint about non-disclosure is not evidence which suggests any lack of inducement.

On balance, the defendants have, in my judgment, established that, even if they would not immediately have demanded an increased premium or refused outright to agree to the increase in Credit Limit, they would at least, more probably than not, have declined the increase without first further investigating the financial viability of the Group. In this manner they have established that they were induced to agree to Endorsement No.9 by a material non-disclosure.

Accordingly, unless, as the claimants contend, the insurers affirmed the variation evidenced by Endorsement No.9, the insurers are entitled to avoid it.

Affirmation

It is submitted that the defendants affirmed the Endorsement by accepting the premium calculated by reference to the substantially increased turnover indicated in the quarterly declaration of turnover received on 28 September 2000. This level of turnover was for the quarter ending on 31 August. As I have already indicated, it represented an increase of over 80 per cent in the turnover for the previous quarter. It does not expressly indicate that the ledger balance during this period was at any particular level nor in particular that it exceeded the Credit Limit by a significant margin. However, the sharp increase in turnover by comparison with the previous quarter could suggest to someone who was comparing those figures that the ledger balance might by 31 August already have exceeded the permanent Credit Limit which had applied during the previous quarter when the turnover had been only £705,015.

On 6 October 2000 Mr Humphreys sent a fax to the insurers (Mr Pugh) in which he informed them that Motorworld had gone into Administration and that the outstanding balance was "just over £2,500,000" together with an unpresented cheque for £600,000.

It was thus obvious that the ledger balance was "well above" the current Credit Limit of £2 million, a point recognised in an internal report prepared for the defendants immediately after the claim had been notified to them. It must therefore have been appreciated at this stage that by the end of September the turnover must already have been considerably increased above that commensurate with a ledger balance of £600,000. On 12 October 2000 Mr Caunt of the claimant sent to the insurers an analysis of sales ledger balances for Motorworld for the period October 1999 to September 2000 inclusive. That analysis showed that by April 2000 the balance had reached £948,972, inclusive of VAT. It then rose steadily until by July 2000 it had reached £2,366,793. In August it dropped slightly to £2,166,456 but in September it rose again to £2,557,804. These figures are inclusive of VAT. Reference back to the Declarations of Turnover from March to May 2000 and for June to August 2000 and comparison of those figures with the rising level of ledger balance shown in the Analysis could leave little doubt even on a very cursory examination that from May onwards there had been a rise in turnover so steep that it must have been very substantially in excess of the levels prevailing in the first three months of the year. In other words, had the insurers troubled to give any serious thought to the figures, they would have ascertained that the increase in turnover foreshadowed by Mr Humphreys in his presentation of the risk as commencing at the beginning of October was already well under way at the very time when he was requesting the increased Credit Limit in June/July 2000.

On 20 October 2000 Mr Malcolm Jamieson, a qualified lawyer who was an Underwriting Executive with the defendant insurers, wrote at length to Mr Humphreys rejecting the claim based on outstanding invoice up to the Credit Limit of £2 million at the date of the insolvency. His fax included the following:

"I have also pointed out to Mr Caunt the importance of establishing the levels of unrecoverable outstandings under invoices delivered both before and after 30 September, 2000 (after in each case taking into account any goods successfully recovered by virtue of ROT) bearing in mind that the last temporary increase in Credit Limit, from £600,000 to £2 million was only effective from 1 October, 2000. Your clients are therefore aware that we are of the view that our maximum exposure under the subject policy is the aggregate of that first £600,000 in respect of credit extended to the Customer under invoices delivered prior to 1 October 2000 plus whatever cannot be recovered under invoices delivered on or after 1 October, 2000 up to the date of the Joint Administrative Receivers' appointment."

In the course of a fax message to Mr Humphreys dated 24 October 2000, Mr H T Brown, the Managing Director of the defendants, wrote:

"This whole situation has arisen because all requests relating to the increased Credit Limit related to Christmas deliveries from 1 October, 2000 and to compound this during all of the period of the relevant correspondence the Insured was trading in excess of the Credit Limit without any disclosure to us. For example, the Declaration of Turnover received by us on 28 September, 2000 states inter alia that "all material facts relating to the subject of the Insurance have been disclosed." It now appears that at that time the Insured's outstandings were more than three times the Credit Limit."

In their letter of 22 November 2000 the defendants' solicitors wrote to the claimants's solicitors explaining the insurers' position. The letter included the following:

"The Credit Limit up to the 30 September 2000 was £600,000, (see endorsement 6). Endorsement 9 stipulates that the Credit Limit in relation to the Customer be increased from 1 October to 31 October to £2,000,000. Accordingly,

(a) All deliveries made and invoices raised to the 30 September 2000 fall within the terms of endorsement 6, that is, within our client's maximum exposure of £600,000; and

(b) all deliveries made and invoices raised from 1 October to 31 October 2000 fall within the terms of endorsement 9, that is, within our client's maximum exposure of £2,000,000.

There is no provision contained in the policy for a form of aggregation of Credit Limit coverage, nor can the increase in Credit Limit contained at endorsement 9 be applied retrospectively. If you seriously contend otherwise, please tell us upon what basis that contention is made."

The particulars of claim were served on 16 May 2001. In paragraph 5 it was pleaded as follows:

"The Credit Limit in force with effect from 1 October 2000 for the period 1 October 2000 to 31 October 2000 was £2,000,000 and for the period 1 November 2000 to 31 March 2001 was £2,500,000 as contained in or evidenced by endorsement No.9 to the Policy dated 31 July 2000."

In paragraph 8 it was pleaded:

"Wrongfully the Defendant (including within a letter from their solicitors dated 22 November 2000) has asserted that:-

(a) the Credit Limit for the Insured Loss pleaded at paragraph 4 above only applied to Qualifying Debt if the Qualifying Invoice was an invoice raised from 1 October to 31 October 2000 in respect of deliveries made during that period;

(b) all Qualifying Invoices raised up to the 30 September 2000 are subject to an earlier Credit Limit which was expressed within endorsement number 6, which recorded that it was agreed for the period 1 November 1999 to 29 February 2000 (both dates inclusive) that the Credit Limit was £1,000,000 and thereafter £600,000."

The Defence was served about 25 June 2001. It had been settled by counsel. By paragraph 3 it was pleaded:

"Paragraph 5 is admitted. Further, by virtue of Endorsement No. 6 and Endorsement No. 9 to the Policy for the period from 1 February 2000 until 30 September 2000 the Credit Limit in force was £600,000."

Referring to the Sales Ledger Debt of £2,607,414.80 set out in paragraph 6 of the Particulars of Claim, it was pleaded in paragraphs 6 and 7 of the Defence:

"6. On the sales ledger debt set out at paragraph 6 only £94,456.98 plus VAT was in respect of Qualifying Invoices delivered on or after 1 October 2000 (when the applicable Credit Limit was £2m). The balance of the outstanding Qualifying Invoices were delivered on or before 30 September 2000 (when the applicable Credit Limit was £600,000).

(a) The Defendant contends that:

Prior to recoveries/salvage the total Insured Loss for which it was liable to indemnify the Claimant were (i) £600,000 in respect of invoices delivered on or before 30 September 2000, plus (ii) £94,456 in respect of invoices delivered on or after 1 October 2000;"

With reference to paragraph 8 of the Particulars of Claim it was pleaded that it was denied that the assertions (in the Defendants' solicitors' letter of 22 November 2000) were wrongful. That pleading put forward no alternative defence of avoidance for non-disclosure.

The Amended Defence was served with the permission of the court on 8 November 2001. It raised for the first time the defence of non-disclosure which I have already considered.

There can, in my judgment, be no doubt that, at the latest, by the terms of their original defence the insurers represented that they were treating Endorsement No.9 as binding on them. The positive assertion, not only in their solicitors' letter of 22 November 2000 but in paragraphs 6 and 7 of their pleading, presents itself to me as an unequivocal statement that the insurers remained bound by that Endorsement. On their construction of the Endorsement set out in that pleading their liability in respect of invoices issued after 1 October 2000 could arise only if the Credit Limit in force after that date was higher than £600,000, that is £2 million as pleaded. That admission of liability for £94,456 in paragraph 7 of the defence is explicable only on the basis that Endorsement No.9 is being treated as binding on the insurers. I therefore conclude on this point that the defendants "unequivocally" represented an intention to affirm the Endorsement in the sense required by the authorities on affirmation such as China National Foreign Trade Corporation v. Evlogia Shipping Co SA [1979] 1 WLR 1018.

The question is therefore whether the defendant insurers thereby affirmed Endorsement No. 9 or irrevocably elected to treat it as binding.

For there to be an affective affirmation or election the insurer must have knowledge of all the facts relevant to his right to avoid the Endorsement: see The Kanchenjunga [1990] 1 Lloyd's Rep 391.

In the present case, as is conceded on behalf of the insurers, at the time when the amended defence was served, they knew of no additional facts relevant to their alleged right to avoid for non-disclosure to those of which they had knowledge when the original defence was served. Accordingly, the defence of non-disclosure could just as readily have been pleaded on the facts known in June 2001 as it could have been on the facts known in November 2001 when the point was taken for the first time.

It is stated in authorities binding on this court that a second requirement for there to be a valid election is that the party said to have elected must have had full knowledge of the various rights amongst which he can elect: see Evans v. Bartlam [1937] AC 473 at 479 and Peyman v. Lanjani [1985] 1 Ch 457.

The burden of proving both aspect of the state of knowledge of the party said to have elected rests on the party alleging election. However, with regard to the electing party's knowledge of the legal rights amongst which he can elect, in the absence of evidence to the contrary, such knowledge may be inferred from the fact that the party had legal advice: see Peyman v. Lanjani, supra, at page 487 per Stephenson LJ. May LJ. agreed with the judgment of Stephenson LJ. in general. So did Slade LJ. Although both gave full judgments, neither suggested that Stephenson LJ's observations as to the basis of that inference were wrong.

Accordingly, given that the defendant insurers had the benefit of advice of Mr Jamieson, of their solicitors and of counsel when the original defence was served, I have to consider whether it is appropriate to infer that there was knowledge of the right to avoid for non-disclosure at the time when that defence was served.

For this purpose it can be assumed that Mr Jamieson, the defendants' solicitors and their counsel were, at the time when terms of the defence were agreed upon, fully conversant not only with the facts, but also with the principle of entitlement of an insurer to avoid for non-disclosure of material facts. On that assumption the omission to plead non-disclosure could have been due to a number of causes, in particular that the point was overlooked, that it was considered and rejected or that it was considered and a decision taken to research it further before re-amending the defence later if necessary.

In Peyman v. Lanjani supra, Stephenson LJ. attached very considerable weight to the inference to be drawn from access to legal advice: see page 487 D and G:

"When a party has legal advice, he will be more easily presumed to know the law and evidence or special circumstances may be required to rebut the presumption, as in this case.

and

"The plaintiff can therefore rely on his own unchallenged ignorance of the law, unless he is precluded from doing so either by what he has done or by his solicitor's knowledge of the law."

Now it has to be recognised that, given that the burden of proof of the constitutents of an election, including knowledge by the party concerned of the facts and knowledge by him of the right which could have been, but has not been exercised, rests on the party alleging election, the burden of proof may in practice be very difficult to discharge if legal advice has been taken by the party alleged to have elected. If, as in the present case, that party has been advised by solicitors and counsel in particular to pursue the conduct which unequivocally represents that the right in question is not relied upon, it would, in most cases, be quite impossible to prove that the lay client had chosen to given up rights of which he had knowledge, without access to evidence as to all the legal advice which he had received relating to the matters in issue. That advice would normally be inaccessible because it was privileged. Lord Pearson raised this problem as a powerful objection to the need to establish knowledge of the legal right said to have been waived in his dissenting speech in Kammins Ballrooms Co Ltd v. Zenith Investments (Torquay) Ltd [1971] AC 850 at pages 877-878, a passage cited in Peyman v. Lanjani, supra, by Stephenson LJ. at page 485.

If the solution to this problem is that the law imposes on a party who seeks to establish that an unequivocal statement of abandonment of one right as distinct from another amounts to an election the burden of proving knowledge of the right by the party said to have elected, this would usually be impossible to discharge in a case where there had been legal advice unless the fact of that advice were normally treated as switching the evidential burden to the party said to have elected. In that event, it would be for that party to prove that his advisers never told him of his choice and that therefore he did not know that he had a choice. That was the solution which appears to have appealed to Stephenson LJ. in the passages from his judgment already cited. However, if that solution is not adopted, the test of election identified in Evans v. Bartlam, supra, becomes unworkable in cases where there has been legal advice unless the legal adviser's knowledge of the law is to be imputed to the client.

The evidential problems that arise are exemplified by the judgment of Mance J. in Insurance Corporation of the Channel Islands and Royal Insurance (UK) Ltd v. The Royal Hotel Ltd [1998] Lloyd's Rep IR 151 in which the insurers' solicitors, with knowledge of all relevant facts, decided for tactical reasons that the insurers should not take a non-disclosure point open to them on those facts and probably communicated that decision to their client at some stage after practically all the affirmatory conduct had taken place. At page 172 of his judgment, Mance J. appears to have considered that the knowledge of the insurers' solicitors of the right to avoid as distinct from the knowledge of the insurers themselves would be sufficient to ground an affirmation. The facts are somewhat complicated, but it seems that Mance J. would have held that conduct of the solicitors amounting to an unequivocal reliance on the policy which took place before they had explained the right to avoid for non-disclosure to their client insurers would have operated as an election to affirm the contract. However, it is unclear from the judgment whether the last of the affirmatory conduct relied upon occurred after the insurers had been told of the right to avoid. It appears that it may well have done. What is clear is that the insurers' solicitors were alive to the point and for tactical reasons did not take it for many months before they explained it to their client.

In my judgment, in a case where the party said to have elected has been represented by solicitors and counsel whose conduct is relied upon as amounting to an election, it is normally to be inferred that such conduct has been specifically authorised by the client and has been the subject of legal advice. If, on the evidence before the court it is established that either the legal advisers or the client had knowledge of the facts giving rise to the right said to have been waived at the time when the affirmatory conduct took place, there must be the further inference that the party has been given legal advice as to his rights arising out of those facts. If that inference is to be displaced, there must be evidence of the advice, if any, that was given by solicitors and counsel and of the extent to which the party concerned was aware or was made aware of the right which he appears to have abandoned.

In the present case, it is beyond question that the insurers were advised as to the contents of their defence by solicitors and counsel. I further infer that, even without that advice, they were generally acquainted with the law of avoidance for non-disclosure and that if, as they now allege and I have held, the facts which had not been disclosed to them were material, it must have been within their contemplation that there was at least an arguable point to be taken that they were entitled to avoid Endorsement No.9. In these circumstances, it is for the insurers to adduce evidence to displace those inferences. They have not done so.

Accordingly, I have come to the conclusion that the defendants must be held to have elected to affirm Endorsement No.9 and that they are thereby disentitled to avoid it for non-disclosure.

The result is that the defendants, having lost on the construction issue but won on the issues of materiality of the undisclosed facts and of inducement, are not entitled to avoid the Endorsement. There must therefore be judgment for the claimants in an amount which the parties ought to be able to agree.