England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		09/02/2011

MR JUSTICE BLAIR:

1. The claimant company, Sharon's Bakery (Europe) Ltd, seeks an indemnity from the defendant insurers in respect of loss and damage caused by a fire at their wholesale bakery in North London on 8 June 2008. Cover under the policy commenced on 15 February 2008. It is not in dispute that the fire was accidental. The disputes as to quantum are relatively minor. The insurers avoided the policy on 27 February 2009, and defend the claim on two grounds: (1) that there was a non-disclosure of material facts relating not to the insurance itself but to a financial leasing transaction entered into by the claimant with Lombard North Central Plc in March 2008; such conduct, the defendants say, constitutes a "moral hazard" which was material for insurers to know; and (2) that following the fire, the claimant submitted a document in support of the claim which amounted to "fraudulent means or devices" in aid of its claim, the submission of which, the defendants say, discharged them from liability. In respect of both defences, the case turns largely on certain documents which the defendants say were false. On their part, the claimant says that they and their directors acted honestly throughout, that they have been the subject of unsubstantiated and false allegations against them, and that there is no defence to the claim which the insurers are liable to pay.

The trial

2. The parties produced a helpful agreed chronology at the beginning of the trial indicating where they are in dispute, and many of the facts are in dispute. The claimant called five factual witnesses. The first were the main actors on the part of the claimant, who at the material time were directors of, or who ran the business, namely Mr Bension Nassim and Mr Eli Caplin. The other witnesses of fact were Mr David Smart of JD Smart Ltd which supplies equipment to the baking industry and who arranged the transfer of bakery equipment, Mr Alan Harris of Harris Balcombe LLP the loss assessor who dealt with the insurance claim which was made following the fire on behalf of the claimant, and Mr Freddie Takom a book-keeper employed by a firm called Chin & Co who kept the claimant's books at the material time.
3. The defendants served witness statements from seven witnesses, namely Mr Moshe Levy, Mr Martyn Freeman who was employed by Lombard at the time, Mr Mark Maskell the loss adjuster for the insurers, Ms Anna Broadhurst a forensic investigator employed by Hawkins, two underwriters from Primary General Insurance Ltd (cover holders for the defendants who underwrote the insurance) namely Ms Tina Atkins and Mr Tom Keefe, and Mr Upinder Singh (known as Michael) Rana. During the trial, the defendants said that five of these witnesses were not going to be called. In respect of Mr Maskell, Ms Broadhurst and Ms Atkins, this was to be expected, since their evidence was either duplicative or unnecessary in the light of the way the issues had developed. However Mr Levy and Mr Rana (particularly the former) were on the face of their statements potentially important witnesses, and the claimant (by way of further witness statements of Mr Nassim and Mr Caplin in particular) had been obliged to deal at length with the matters set out in the witness statements of Mr Levy and Mr Rana.
4. The parties called expert evidence as follows. The experts on the question of materiality for underwriting purposes were, for the claimant, Mr John Mott, and for the defendants, Mr Stephen Coates. The experts on the question of valuation of bakery machinery and equipment were, for the claimant, Mr David Dunne, and for the defendants, Mr Philip Davies. At the trial, the parties cooperated to ensure that the ambit of the expert evidence in dispute was as focused as possible, for which I am grateful. The quantum of the claimant's business interruption claim did not arise for determination at the trial, it having previously been ordered that this issue should be split to be determined, if appropriate, at a later assessment hearing.
5. It is necessary to keep in mind that, as the claimant submits, allegations of fraud by the defendants must be clearly substantiated, the burden of proof in this respect and generally (because of the nature of the defence) being on the defendants (see the principle stated in Re H [1996] AC 563 at 586D-H, Lord Nicholls).

The facts

6. The facts as I find them are as follows. In 1992, Mr Bension Nassim established a Kosher bakery business, with both wholesale and retail customers. His company, Sharon's Bakery (Wholesale & Retail) Ltd was incorporated in 1999, and I shall refer to is as "it". It was based in premises in Tottenham at 3 Fountayne Road, London N15. Wholesale had insured the plant and machinery which it used at those premises for a total of £662,248 on a reinstatement basis, most of it having been purchased through or via Mr Smart's company. Mr Eli Caplin had a non-Kosher bakery business called Hollyland Bakery Ltd which operated from premises at 1 Bernard Road, Rangemoor Road Industrial Estate, London N15. There was no connection between the two businesses. Mr Caplin sold his business in early 2007, but the purchaser was permitted to continue to use the premises until November 2007. Later in the same year, Mr Nassim sold the 3 Fountayne Road premises. The result was that Mr Nassim had Kosher bakery equipment available, whilst Mr Caplin had a location available from which a bakery business could be carried on. The two men agreed to set up a new wholesale kosher bakery business, which would in due course be incorporated as the claimant company, Sharon's Bakery (Europe) Ltd.
7. The plan was that the new company would use Mr Nassim's equipment from 3 Fountayne Road which would be relocated at Mr Caplin's premises at 1 Bernard Road. What they agreed between them was that some of the equipment would be transferred to the new company in return for Mr Nassim having 50% of the shareholding, while the remainder of the equipment would be purchased from him by new company. The business was to be run by Mr Caplin, and as the claimant has put it, was not an entirely new business. Both men are very experienced in the bakery business, and there was nothing in any way unusual about their agreement.
8. I do not think that there is any relevant dispute as to that summary, but from now on in the narrative, there is little common ground. It is not easy (and not generally necessary) to give a precise chronological account of events. According to Mr Nassim and Mr Caplin, the latter wanted an independent valuation of the equipment to be obtained in respect of the equipment to be purchased by the claimant from Wholesale. Their evidence was supported in this respect by Mr Smart. He was knowledgeable about bakery equipment and its value, and as the defendants say, there appears little reason why Mr Smart could not have given a valuation himself. Mr Smart however explains that he recommended Mr Moshe Levy as a suitable candidate, and it was agreed that he should carry out the valuation. Mr Nassim had known Mr Levy for some time, though his evidence is that he knew little about him. He paid Mr Levy £2,000.
9. According to the evidence of Mr Nassim and Mr Caplin at trial, Mr Levy initially provided (as Mr Caplin put it) an informal handwritten or typed valuation around Christmas time in 2007. However, in that regard the defendants point out that in the claimant's Reply dated 3 October 2010 (bearing Statements of Truth of both Mr Caplin and Mr Nassim) an apparently different case is set out. It is pleaded that Mr Levy provided the valuation by providing the invoice addressed to Wholesale identified as document [1] in the defence. This is a reference to a document dated 15 November 2007 in the form of an invoice purportedly issued by Bakequip (UK) Ltd, described as bakery equipment suppliers, to Sharon's Bakery Wholesale and Retail Ltd, purporting to be an invoice for £156,000 plus VAT in respect of the supply of various named bakery items with serial numbers, description and amount stated for each. It has on it the words in manuscript, "Paid in full with thanks" and Mr Levy's signature (the signature was confirmed by Mr Nassim in evidence). It is common ground that there was no such transaction, and this is one of two documents on which the defendants base their defence. The claimant's case at trial was that the document was provided by Mr Levy in February 2008 (though there was no handwriting on it). For now, it is sufficient to note that the defendant points out that there is no reference in the pleading to any informal valuation prior to the document dated 15 November 2007. The claimant's response is that despite such absence, the pleading is not in any way inconsistent with the case advanced at trial. I shall come to my findings in due course.
10. The claimant's case is that following the agreement they had reached between them, Mr Nassim and Mr Caplin entered into a written agreement, the parties being Wholesale and the new company, Sharon's Bakery (Europe) Ltd. The document was prepared by Mr Nassim, with some informal assistance from a solicitor friend. It shows that Mr Nassim's contribution was to be equipment from Wholesale valued at £200,000, and that payment for the other equipment in the approximate sum of £150,000 was to be comprised of a loan from Lombard. The agreement is stated to be made on 15 January, and the company number of Sharon's Bakery (Europe) Ltd (i.e. the claimant) is stated.
11. It is however common ground that this company was not incorporated until 24 January 2008, and it would have been impossible to know the company number before then. Mr Nassim's evidence was that the agreement was made on 15 January 2008, and that in February he substituted page two of the agreement bearing the company number and re-stapled the document together. There are no computer records that support this explanation. There is reference in the claimants' Reply dated 3 October 2010 to an oral agreement between the parties, but no reference to a written agreement (though as the claimant points out, the written agreement was in the claimant's disclosure given on 6 July 2010). The defendants say that the evidence of Mr Nassim and Mr Caplin as to the agreement is inherently implausible. This is one of a number of matters on which reliance is placed in support of the submission that Mr Caplin and Mr Nassim were not credible witnesses and that their evidence should be rejected save insofar as it is corroborated by other reliable sources. I will explain in due course my conclusions in that regard, but I need make no findings as regards the provenance of the written agreement, because it has not affected my conclusions on any material issues in the litigation. I should state here however that Mr Caplin and Mr Nassim were appointed directors of the newly incorporated company on 25 January 2008.
12. The question arose as to finance for the new company, and at the end of 2007 or the beginning of 2008 Mr Caplin was introduced by his bank manager to Mr Martyn Freeman who was at that time a relationship manager employed by Lombard Finance which provides secured finance in the form of financial leasing. Mr Caplin said that he was looking for finance both for the purposes of working capital for the company (which Mr Freeman accepted as a possibility though I do not think anything turns on this), and to fund the acquisition of the equipment from Wholesale, and some further equipment from another company called High Four Company based in Lebanon. As to the latter, there is an invoice from High Four to the claimant company dated 21 January 2008 in the sum of £48,000.
13. So far as the equipment from Wholesale is concerned, this was moved by Mr Smart from Fountayne Road to Bernard Road over a number of days from the end of January to 1 February 2008. Removal was a considerable task, the equipment including a large industrial oven. Mr Smart charged £6,000 for his work. So far as Mr Nassim and Mr Caplin were concerned, various matters remained for attention at this time, one of which was to progress the finance lease transaction with Lombard which (among other things) was to fund the acquisition of the equipment from Wholesale.

Bakequip (UK) Ltd

14. As I have said, the document dated 15 November 2007 is in the form of an invoice issued by a company called Bakequip (UK) Ltd evidencing a supply of bakery equipment that it is common ground never happened. The claimant's case is that Mr Levy concocted a scheme to pretend that he operated a business called "Bakequip", and that Mr Nassim and Mr Caplin knew nothing of any of these matters until they emerged in the course of these proceedings. Mr Levy was not called by the defendants to answer that charge. For the moment, I am concerned only with the established facts as to Bakequip (UK) Ltd, the claimant submitting that the following matters may be inferred from documents made in January 2008 and later.
15. On 15 January 2008, Mr Levy completed a Companies House Form 288a, purporting to appoint himself as a director of a company called SPC (GB) Ltd with effect from 20 October 2007 (the form was submitted to Companies House on 8 April 2008). On 24 January 2008 SPC (GB) Ltd purported to pass a special resolution to change its name to Bakequip (UK) Ltd. The identity of the person signing this document is also unclear, but the claimant says the inference is that it was Mr Levy again. The document was lodged with Companies House on 18 March 2008. On 29 January 2008 Mr Levy appears to have completed Companies House Form 287, in order to register a change of address for SPC (GB) Ltd to an address in Frinton-on-Sea, Essex. Companies House issued a Certificate of Change of Name on 19 March 2008 certifying that SPC (GB) Ltd having by special resolution changed its name was now incorporated under the name of Bakequip (UK) Ltd. It appears that the name was changed back again on 11 April 2008, though the certificate is not in evidence.

The disputed fax dated 1 February 2008

16. At this point in time, in other words the end of January 2008, there is an important dispute on the evidence. According to Mr Smart's third witness statement of 29 November 2010, he provided a list of items, with model numbers and serial numbers. His recollection was that the document was hand written and otherwise blank. He says that he passed the list to Mr Nassim, who passed it to Mr Levy. He says that on 1 February 2008, he was asked to go round to the Bernard Road premises with "Mr Levy's informal valuation document", list the items moved from Fountayne Road, and either to include values in confirmation of Mr Levy's November 2007 valuation or to propose a breakdown of the aggregate valuation. He says that Mr Nassim asked him to arrange for this list to be faxed to Mr Levy once it was done.
17. Shortly before trial, a document which is apparently a fax dated 1 February 2008 was disclosed by the defendants' solicitors which (the defendants say) went from the claimant to Mr Levy. It contains a list of equipment, with values against the items concerned. These match the description and amount in the invoice dated 15 November 2007 provided by Mr Levy which I have referred to already. Underneath, there appears the following: "Make invoice to Sharon's Bakery Europe Ltd, Unit 1, Bernard Road, Rangemoor Ind. Estate, London, N15". There was a further document disclosed at the same time, which was an undated invoice purportedly issued by Bakequip (UK) Ltd with handwritten serial numbers against the listed items. There is nothing on its face to indicate the date of this second document.
18. Particularly in a case involving allegations as to false documents, it is plainly most unsatisfactory that this document should have emerged in this way. As Mr Adam Tolley, counsel for the claimant, put it, rightly in my view, the explanation given for late disclosure was also unsatisfactory, at least to the extent of the reference to a fax of 7 July 2009 sending the fax to the defendants' solicitors which turned out not to be correct. However, he does not suggest any deliberate omission on the part of the defendants' solicitors, and I do not accept his further point that the late disclosure has irremediably prejudiced the claimant, in that it became impossible as a result to obtain evidence to show that no such fax had been sent by the claimant at the alleged time on 1 February 2008. No request was made for further time by way of an adjournment or otherwise, and had it been, I would have considered it.
19. Authenticity is nevertheless in dispute and the claimant makes a number of points as to "numerous unexplained, and inexplicable oddities about the document". It submits that there is no evidence as to the genuineness of either of these documents, and only Mr Levy (who as I have said was not called) could have purported to provide such evidence. For their part, doubtless in view of the circumstances of disclosure, the defendants say that the documents are not fundamental to their case, which rests upon the submission of the document dated 15 November 2007, "but they explain the context of that document".
20. It is important in dealing with this issue to consider the other evidence in this regard. The claimant's case, as I have said, is that Mr Levy was asked to produce a valuation of the equipment to be transferred from Wholesale to the new company, Europe. As to how that valuation would be given, according to Mr Smart's second witness statement of 31 October 2010, "Messrs Nassim, Caplin and Levy agreed that the way that we would proceed in preparing the valuation would be that I would prepare a list of the equipment, providing the description, type or serial number and the number of items involved. I would also provide my view as to the value of the equipment to Mr Levy on an informal basis by way of contribution to his own valuation." This was accepted by Mr Nassim and Mr Caplin in their evidence. On that basis, the defendants submit that I should find that Messrs Nassim, Caplin and Levy agreed that Mr Smart would prepare a list of equipment to be purchased by Europe from Wholesale with descriptions and serial numbers and his views as to the value of the items of equipment and that the list would be provided to Mr Levy. To that extent the evidence is effectively not in dispute, and I make that finding.
21. The parties are also in agreement that Mr Smart did fax Mr Levy with a list of equipment descriptions, serial numbers and suggested values on 1 February 2008. Mr Smart says it was in the late afternoon, not at 9.18 which is the notation on the disclosed fax, and that it was handwritten, whereas the disclosed fax is typed. He also says he sent it from the claimant's offices, and the claimant says that the fax notation shows that it came from a machine in Wholesale's offices. The defendants on the other hand say that the number was the same as that used by Europe. As to this, there is material supporting both assertions, and in my view either could be correct. Mr Smart no longer has the fax which he agrees he sent, which remained with the claimant.
22. In his oral evidence, Mr Nassim said that he had never seen the disclosed fax, but accepted that it contained a list of equipment and values which was consistent with his expectation that Mr Smart would send such a list to Mr Levy. In his oral evidence, Mr Smart said that it accurately reflected what he had drawn up on his list. As regards the values he said, "Well, to the best of my memory they look exactly the same. Yes, they look exactly the same." So far as the content of the document consists of numbers against items therefore, it is common ground that those numbers were sent by fax that day to Mr Levy. As regards the other document disclosed (an undated invoice purportedly issued by Bakequip (UK) Ltd), he said that the handwritten serial numbers against the listed items were a "pretty good copy" of his handwriting, but were not his handwriting.
23. Clearly, the more important document is the fax, and in support of their authenticity submissions, the claimants suggest that a fax header from a fax sent on one occasion might be used on another document. In the circumstances of this case, I do not think that this suggestion can be entirely ruled out, but this and the claimant's other points do not appear to me to outweigh the fact that as is common ground, a document containing this information was faxed to Mr Levy on this day. On balance, I find (as the defendants submit I should find) that on 1 February 2008 this document was faxed by or on behalf of Europe and/or Wholesale to Mr Levy. If it was not Mr Smart's list, it was a list based on the list which Mr Smart prepared.

The information given to Lombard

24. I now come to a crucial part of the case. Over the course of February, the finance arrangements in relation to the High Four equipment proceeded with Lombard, and the first Lease Purchase Agreement between Lombard and the claimant was entered into on 13 February 2008. This transaction is not controversial, and I need say no more about it. The position remained however as to the larger proposed financing, which was to be secured on the equipment transferred from Mr Nassim's company Wholesale to the claimant. It is not in dispute that in that regard, on 3 March 2008, Mr Caplin faxed two documents to Lombard. Page one consisted of an invoice with a tax date of 3 February 2008 from Wholesale to the claimant showing the same equipment, serial number and amount as in the Bakequip invoice dated 15 November 2007. The document dated 15 November 2007 was the second page of the fax that Mr Caplin sent Lombard (there is however a dispute as to whether handwriting on the document was present at the time—I will come to this later).
25. The claimant's case in this respect (based on the summary in its opening submissions) is as follows. The claimant made it clear to Mr Martyn Freeman of Lombard that it was acquiring its equipment from another company, Sharon's Bakery (Wholesale & Retail) Ltd, which had previously operated a Kosher wholesale bakery business elsewhere, and provided Lombard with the invoice from Wholesale to the claimant. (That is the first page of the fax of 3 March 2008.) The claimant also provided Lombard with another document, which was in fact a valuation of certain of the equipment supplied by Wholesale, and which it told Lombard was a valuation of the equipment, and which had been prepared by Mr Levy. (That is the second page of the fax of 3 March 2008.) The claimant's case is that Lombard subsequently asked that the valuation should be addressed to the claimant, rather than to Wholesale, and a revised version was duly supplied by Mr Levy giving the customer's name as Sharon's Bakery Europe Ltd and provided to Lombard. This third document is not found on Lombard's file, which however the claimant says (with some force) was far from complete. Notwithstanding, the defendants say that the document was never given to Lombard. Mr Caplin's evidence, as I shall explain, is that he gave it to Mr Freeman.
26. In his third witness statement of 30 November 2010, Mr Caplin says that Mr Freeman visited the premises on 12 or 13 February 2008, and asked about the newly installed machinery and equipment. He told him that it had come from Mr Nassim's company Wholesale, and the new company (that is, the claimant) proposed to provide some of it as security for a further loan from Lombard. He gave Mr Freeman, he says, the invoice which was subsequently the first page of the fax of 3 March 2008. He says that Mr Freeman noted that the sale was from one Sharon's bakery company to another Sharon's bakery company, and asked if Mr Caplin had an independent valuation. He said that he had asked for an independent valuation, and that he would provide this to him. Following the meeting with Mr Freeman, he asked Mr Nassim to provide him with a copy of Mr Levy's valuation that he could pass onto Lombard. Mr Nassim did so in late February or early March, and this was the second page of the fax sent on 3 March 2008. The purpose of this fax, he says, was to pass on the independent valuation to Mr Freeman as promised. He does not believe that the words "paid in full with thanks" appeared on the document that he faxed. He says that on 5 March 2008 when Mr Freeman came to the premises again, he thanked Mr Caplin for providing the independent valuation, but said that it was addressed to Wholesale, whereas Lombard required a valuation to be addressed to their own borrower, i.e. the claimant company, Europe. On his return from the Ukraine on 11 March 2008, Mr Caplin says that Mr Nassim gave him the further version of Mr Levy's valuation, this time addressed to Europe as Mr Freeman had requested.
27. Mr Freeman denied in cross examination that he had asked Mr Caplin whether Mr Caplin could provide an independent valuation of the equipment. He said that because the two companies (that is, Wholesale and Europe) were related, Lombard would have had to prove "good title roots", and therefore he would have requested a copy of an invoice from whoever supplied the equipment to Wholesale. On his part, Mr Nassim denied in his evidence that it would have been necessary to show the sale to Wholesale, but as he said, he was not the one who did the faxes.
28. Mr Tolley for the claimant criticises Mr Freeman's evidence saying that his testimony was merely an act of attempted reconstruction from the documents. As regards the "back up invoice", in other words the document dated 15 November 2007, as Mr Tolley said, various explanations were given by Mr Freeman in the course of his evidence as to why such an invoice would be needed. In cross examination, he suggested that Lombard could not accept Wholesale as the supplier because Wholesale was not on Lombard's list of recognised suppliers—as Mr Tolley says, it is difficult to see how a transaction which would have been unacceptable to Lombard if it had proceeded as between an unrecognised supplier and the claimant became acceptable because another unrecognised supplier was interposed into the contractual chain. Mr Freeman indicated in his evidence that such were the rules, but no documentary evidence of any such rules was produced. I do consider that Mr Freeman's evidence was unsatisfactory in certain respects, in particular because he appeared at times to have little recollection of the transaction for which he was responsible. I have nevertheless to reach conclusions on whether or not I accept it on particular questions.
29. In deciding whether Mr Freeman requested the claimant to provide a valuation, it is necessary to consider further the document with which Lombard was actually supplied, the claimant says, by way of valuation at Mr Freeman's request. As I have said, on 3 March 2008 Mr Caplin faxed Lombard the Bakequip invoice dated 15 November 2007. This again as I have said is an invoice purportedly issued by a company called Bakequip (UK) Ltd, described as bakery equipment suppliers, to Sharon's Bakery Wholesale and Retail Ltd, purporting to be an invoice for £156,000 plus VAT in respect of the supply of various named bakery items with serial numbers, description and amount stated for each. It has on it the words in manuscript, "Paid in full with thanks," and Mr Levy's signature. It plainly does not purport to be a valuation of the bakery equipment, but purports to be an invoice in respect of their supply. The fact that it was provided to Lombard supports Mr Freeman's evidence that he did not request a valuation. Mr Nassim and Mr Caplin are experienced business people, and I am satisfied that they are aware of the difference between an invoice and a valuation. Mr Nassim accepted in cross examination that if having got the document, what he really wanted was a valuation, it would have been very straightforward for him to say, "No, that's not what I want; I want a valuation".
30. As the defendants say, the invoice was not sent to Lombard by the claimant with any kind of covering note explaining that it was merely a valuation and there is an absence of any documentary evidence suggesting that Lombard received any indication that it was merely a valuation. On the contrary, it was sent to Lombard together with an invoice with a tax date of 3 February 2008 from Wholesale to the claimant covering the same equipment, serial number and amount as in the Bakequip invoice dated 15 November. Taken together the documents purported to show a chain of supply or 'title roots' as Mr Freeman put it. The documents on their face purported to show that Bakequip had supplied the equipment to Wholesale on 15 November 2007, and then Wholesale had supplied the same equipment to the claimant on 3 February 2008.
31. Though I have said that Mr Freeman's evidence was unsatisfactory in certain respects, he was clear in his evidence that he was not told by Mr Caplin that the document dated 15 November 2007 was a valuation rather than an invoice. I accept his evidence that he did not request a valuation, nor was he told that it was a valuation, which appears to me to be consistent with the overall evidence. This includes the presence on Lombard's file of a letter sent by Mr Levy as a director of Bakequip dated 10 March 2008 addressed to Ms Angela Ellis of Lombard. The claimant says that it had nothing to do with the preparation or production of this document, and knew nothing of it at the time. Whether or not that is the case, the letter nonetheless appears on Lombard's file—as the claimant says, Lombard appears to have contacted Mr Levy directly, and this presumably is the explanation. The letter says, "As requested, I confirm that the equipment supplied to the above company [Wholesale] has been paid for in full. I further confirm that title to the machinery and goods so supplied has now passed to Sharon's Bakery Wholesale and Retail Ltd". The claimant submits that the letter does not identify what "equipment" supplied to Wholesale is being referred to, nor the person by whom such "equipment" is said to have been supplied. But it appears to me that the inference is that the equipment is that supposedly supplied by the company in the letterhead, namely Bakequip (UK) Ltd, described as "Bakery Equipment Suppliers". At the least, the presence of that letter on Lombard's file is inconsistent with the claimant's case that Lombard understood that the document dated 15 November 2007 was merely a valuation and not evidence of a genuine sale transaction.
32. In fact, the invoice dated 15 November 2007 was false, because (as is common ground) no such supply had taken place. Mr Nassim accepted in cross examination that the document was false, but the matter is not in doubt. As I have said, the invoice faxed to Lombard on 3 March 2008 also has on it the words in manuscript, "Paid in full with thanks," and Mr Levy's signature. This was also false. Mr Caplin said that when the document was sent to Lombard the words "Paid in full with thanks" and the signature at the bottom were not on it. Mr Nassim said that he didn't remember seeing them. Mr Caplin suggested that after the document entered Mr Freeman's possession the handwriting was placed on it and that somebody procured Mr Levy's signature on the document. Mr Freeman thought that the writing was on it when he received it. Leaving aside whether his recollection is reliable in that regard, he also said that the writing is not his nor, to his knowledge, that of anyone at Lombard, and that document was not sent outside Lombard. In my view, it is implausible to suppose that the writing was added to the document after it was faxed to Lombard. I reject the evidence of Mr Caplin and Mr Nassim in that regard. I am satisfied that the manuscript was on the purported invoice when it was sent to Lombard, and that they were aware of the fact.
33. I find that the claimant, through Mr Nassim and Mr Caplin knew that the document was false in that it was not a true invoice, receipt or valuation. Further, it is common ground that on 1 February 2008 (whether in the disputed fax or otherwise) Mr Smart gave his view as to the value of the equipment, and he is experienced in the bakery trade. He could have provided a valuation had one been required. It was he who was to provide values for Mr Levy to include in Mr Levy's document. There is no evidence of Mr Levy having gone to the premises to carry out a valuation or acting like a valuer. I accept the defendants' submission that there was no reason why Mr Levy was required to provide a valuation, and that his involvement by the claimant could only have been to create a false invoice, which is what he did create. On 3 March 2008 the invoice was submitted by the claimant to Lombard as evidence of a true sale and purchase transaction between Bakequip and Wholesale and not as a valuation. This appears to me to be the only plausible inference to be drawn from the facts.
34. These findings inevitably cast doubt on the credibility of the evidence of Mr Nassim and Mr Caplin generally, and the weight that the court can place on it, to the extent that it is not supported by other evidence, or the overall probabilities. (In that regard, I have also taken account of the defendants' submission that there were significant inconsistencies in their evidence as to when they got the document, as between late 2007 in their early witness statements and February 2008 at trial—that is plainly an important question. I have not however given any weight to the defendants' complaint about evidence relating to an alleged debt owed by the Cake Company Ltd to the claimant which was the subject of cross examination—this seems to me to be peripheral.)
35. I turn to the remaining matter to be resolved on this part of the evidence. As I have said, Mr Caplin's evidence is that on his return from Ukraine on 11 March 2008 at Mr Freeman's request he gave Mr Freeman a revised version of the Bakequip invoice (Mr Caplin would say valuation) dated 3 February 2008 showing the customer as Sharon's Bakery Europe Ltd and not Sharon's Bakery Wholesale and Retail Ltd. According to his witness statement, Mr Freeman did "not recall seeing the invoice dated 3 February 2008 from Bakequip (UK) Ltd to the Claimant. Had I seen that it would have rung alarm bells because it would have suggested that Bakequip (UK) Ltd had sold the equipment directly to the Claimant whereas my understanding was that the Claimant had purchased the equipment from Sharon's Bakery Wholesale & Retail Ltd". He gave a similar answer when asked about this in examination in chief.
36. I accept Mr Tolley's submission that the absence of this document on Lombard's file is of limited weight because of doubts as to the completeness of the file. Mr Freeman's evidence in cross examination on the subject was in my view confused, but he did say that he would not have "…accepted an invoice from Bakequip to Sharon's Bakery Europe Limited because the deal would just never have got paid out". This was a reference to his unsatisfactory evidence about Lombard's internal rules which I have referred to above. In his closing for the defendants, Mr Graham Eklund QC put it this way. He submitted that the fundamental reason Mr Freeman gave was that he needed to establish that Lombard was going to get good title, because that was the nature of the transaction that Lombard was involved in. There were different types of transactions. One was a transaction with a supplier that was already on its books. Another was where Lombard (or any financier) would not take the word of its customer that it had good title. It would look for something more. A valuation, he submitted, was not going to tell Mr Freeman what he needed to know in order to be satisfied about Lombard's security. In my view, this submission gets to the heart of the matter. This equipment was to be acquired by Lombard, and title mattered. Ultimately however, the choice is between accepting the evidence of Mr Caplin or Mr Freeman in this regard, and on balance I prefer that of Mr Freeman, which seems to me to be more consistent with the overall evidence. I find therefore that this further document was not given to Mr Freeman.

Finalisation of the transactions with Lombard and the defendants

37. I do not believe that the remaining matters in this part of the chronological account are controversial, and I am grateful for Mr Tolley's written submissions in this regard. On 11 March 2008, the claimant issued an invoice to Lombard in relation to the transfer of the bakery equipment in Lombard's standard form (it was amended on 26 March 2008), title to the goods to pass to Lombard on receipt of funds by the claimant. The Lease Purchase Agreement (what was produced at trial was the schedule to the agreement signed by Mr Caplin) was completed on 19 March 2008, and following a further inspection, £76,450 was advanced by Lombard on 9 April 2008 (a further £27,811 in respect of VAT was advanced on 12 December 2008).
38. As regards insurance for the claimant's business, including the equipment, this had been put in train by its brokers on 5 February 2008. The insurance quotation was issued on 15 February 2008 and the insurers agreed to hold the claimant covered with effect from that date which became the inception date of the Policy, and the relevant date so far as the commencement of the insurance is concerned. The proposal form was completed by the broker, and signed by Mr Caplin some weeks later, on 13 March 2008. Nothing in this case turns on the terms of the Policy.

The fire and its aftermath

39. The fire at the claimant's premises at 1 Bernard Road happened on Sunday 8 June 2008. The claimant instructed Harris Balcombe (then known as Harris Claims Group Ltd) to act on its behalf in relation to the claim, Mr Alan Harris dealing with the matter. The claimant informed Lombard of the position, and that no further payments would be made under the Lease Purchase Agreement. The defendants instructed Cunningham Lindsey to act as loss adjusters in respect of the claim, Mr Mark Maskell dealing with the material damage part of the claim. I think it is fair to say (as the claimant does) that the claims file indicates that the defendants were looking, from an early stage, for a reason not to pay in respect of the claim, not least because it came soon after the inception of the insurance.
40. There was much correspondence between the various actors, including a letter of 7 August 2008 to Mr Maskell from Mr Dymant of Harris Balcombe setting out among other things the claimant's trading history (the claimant says it also shows that it had acquired the equipment from Wholesale not Bakequip). It is not necessary to refer to most of the other correspondence (and I have not been referred to it) because of the limited nature of the issues between the parties. As I have said, the second part of the defence is that following the fire, the claimant submitted a document in support of the claim which amounted to "fraudulent means or devices" in aid of its claim, the submission of which, the defendants say, discharged them from liability. The document in question—and it is a single document—is the version of the Bakequip invoice dated 3 February 2008 purporting to show the supply of equipment from Bakequip to Sharon's Bakery Europe Ltd. This is the document which I have dealt with above in the context of the information that was given (or in the case of this document as I have found not given) to Lombard. The factual basis of the defence is that the document was provided by the claimant to Mr Harris as evidence of a true sale and purchase transaction between Bakequip and Europe and in support of the claim, that it was not explained by the claimant to Mr Harris as a valuation or valuations or as evidence of valuations, and that it was then submitted by Mr Harris to Cunningham Lindsey (on behalf of the defendants) in support of the claim.
41. The background to this allegation is that on 25 June 2008, Mr Harris wrote to Mr Caplin asking for among other things "copies of purchase invoices relating to all plant and machinery purchased, either new and/or second hand". The reason for Mr Harris' request was, obviously, so that he could submit documents to the defendants' loss adjusters in support of the claimant's insurance claim. It is common ground that the version of the Bakequip invoice dated 3 February 2008, that is to say the version that purported to show the supply of equipment to the claimant (not Wholesale), was provided to Mr Harris at a meeting in late June or early July 2008. Mr Caplin says it was provided together with the first of the two documents that was faxed to Lombard on 3 March 2008, namely the invoice from Wholesale to the claimant with a tax date of 3 February 2008. It is clear that this document was given to Mr Harris as well, if not then, at around this time, and it is on his file.
42. Mr Harris was called as a witness by the claimant. In his witness statement, he said that at approximately the same time as Mr Caplin dropped off the papers, he had a meeting with Mr Nassim and Mr Caplin the purpose being to agree values for the damaged items which were the subject of the Lombard financing. For this purpose, they used the Bakequip document described as an invoice to put values into his inventory for the items leased from Lombard. He says he understood from the title and form of this document that it was an invoice.
43. On 17 September 2008, Mr Maskell sent an email to Mr Harris asking for various items of information, saying that it was important for insurers to understand fully the method by which the business was sold in February 2007. Mr Harris was asked to "provide a schedule of assets purchased and work undertaken during this refit along with supporting invoices, and an audit trail confirming the transfer of ownership to the Insured". He was therefore, as the defendants point out, asking for invoices, and was not asking for a valuation, and was asking about the transfer of ownership.
44. Mr Harris forwarded Mr Maskell's request to Messrs Caplin and Nassim, referring to a heated discussion he had had with Mr Maskell and saying that "Eli [Caplin] needs to get his head around this and provide answers to me ASAP". Mr Harris then had a brief discussion with Mr Caplin following which he wrote to Mr Maskell on 22 September 2008 (copying in Mr Caplin and Mr Nassim). In seeking to explain the basis on which the claimant had acquired the equipment installed at the premises, Mr Harris wrote that "all we can state is that we enclose a copy of a purchase invoice of assets between Bakequik (UK) Ltd [sic] and Sharon Bakery Europe for £156,000". This was the document that Mr Caplin had given him in June. Mr Harris explains in his witness statement that he simply assumed that the "Bakequip document" was, as it appeared to be, an invoice, and he did not have in mind the invoice from Wholesale to the claimant, which Mr Caplin had given him and which he had on file. He said that he had not received any instructions from the claimant to represent that it had acquired the goods from Bakequip.
45. He said, and confirmed in cross examination, that, "I assumed the Bakequip Document was a purchase invoice because that is what, on its face, it appears to be. This 'invoice' was not given to me on the understanding that it was a document to be used for valuation purposes, but, as I believed, given to me in proof of purchase of said goods. Whether it was in the name of Wholesale and/or Europe was, so far as I was concerned, irrelevant. I did not discuss it with Mr Nassim or Mr Caplin but then it is not my normal practice to cross check documents – if a document is handed to me by a client, I accept in good faith that it is what it is." I found Mr Harris to be an entirely reliable witness, and I am satisfied from that evidence, as well as that of Mr Caplin himself in cross examination, that Mr Harris was not told that the Bakequip invoice was a valuation, nor did he pass it on as such. Mr Harris goes on in his statement to deal with the other invoice he had been given from Wholesale to the claimant with a tax date of 3 February 2008.
46. On those facts, I consider that there is force in the defendants' submission that the fact that Mr Caplin did not tell Mr Harris that this Bakequip invoice was a valuation is corroborative evidence of Mr Freeman's testimony that Mr Caplin did not tell Lombard that the Bakequip invoice dated 15 November 2007 made out to Wholesale was a valuation either.
47. In any case, it is not in dispute that Mr Harris submitted the Bakequip invoice he was given to Mr Maskell, the defendants' loss adjustor, under cover of his letter dated 22 September 2008, describing it as a purchase invoice. There was, of course, no such purchase. Nor I think is it in dispute that it was sent in support of the claimant's insurance claim in response to Mr Maskell's specific request for a schedule of assets purchased by the claimant along with supporting invoices and an audit trail confirming the transfer of ownership of goods to the claimant. I will come later to the claimant's contentions that this does not amount to fraud in the presentation of the claim, but those are the facts as I find them.
48. By now, it had been established that the fire was accidental. A report prepared by Dr Broadhurst of Hawkins sent by Cunningham Lindsey to the insurers on 21 August 2008 had indicated that there was no evidence that the fire was started deliberately. The underwriters decided to accept the claim, and attention shifted to making an interim payment. On 7 October 2008, Mr Maskell sent an e-mail to Mr Harris to confirm that liability had been accepted, and matters would doubtless have moved fairly quickly to settlement of the claim.
49. At this point in time however, Mr Levy intervened. On 15 October 2008 he faxed to Mr Harris two different versions of the Bakequip invoice, one dated 15 November 2007 made out to Sharon's Bakery Wholesale and Retail Ltd, and the other dated 5 February 2008 made out to Sharon's Bakery Europe Ltd. Both purported to show the same equipment as in the other versions of the invoices, and a total price of £183,300 including VAT. He telephoned Mr Harris, who described him as calm but not coherent, alleging that the claim was fraudulent. A letter on Mr Levy's behalf was sent by Morris & Co solicitors on 17 October. By email on that day, Mr Harris passed these on to Mr Caplin and Mr Nassim, saying that before he responded, he required a written explanation along with their clear and precise instructions.
50. Mr Harris was clearly placed in an invidious position, but as his professional duty required, after getting an explanation from his client, on 28 October 2008 he wrote to Cunningham Lindsey, the insurers' loss adjusters, enclosing among other things the two invoices he had been sent by Mr Levy. He said:

"What I have been told by my client company is that the first invoice [dated 15 November 2007 made out to Wholesale] was incorrectly addressed and was only brought to their attention when the VAT quarter was due.

The correct invoice [dated 5 February 2008 made out to Europe] was then reissued and VAT was recovered once only."

He goes on to refer to a letter to him from Morris & Co of 27 October 2008, which says that Mr Levy is contacting the police, and says that his own client has also been to the police to lodge a complaint against Mr Levy. He ends by saying that, "I would respectfully ask that you conduct your own investigation into this matter and should the £100,000 interim payment under the business interruption claim be received here into our client account I hereby give my written confirmation that said funds will be either held in the client account or immediately returned to your principal."

51. The references in this letter to invoices are entirely inconsistent with the claimant's case. According to the claimant, the explanation is that this letter addresses the question of an alleged VAT fraud, and it is suggested that it was Mr Harris's attempt to rationalise the nature of Mr Levy's allegation, by making it clear that VAT has been recovered only once. The claimant says that the terms of Mr Harris's letter are unclear in this respect, and he refers to the "Bakequip documents" as though they were in fact invoices. The position is, it is said, simply that there was a misunderstanding between Mr Harris and Mr Caplin. Mr Harris did not have a face-to-face meeting at this stage with Mr Caplin, with the documents in front of them. The misunderstanding about the status of the Bakequip documents was promptly made clear to Mr Harris at a meeting in early November 2008.
52. This explanation is based on the evidence of Mr Caplin and Mr Nassim. It was not supported by Mr Harris either in his witness statement or in cross examination:

Q. … When you wrote this letter to Mr Maskell on the basis of the instructions from your clients, your understanding was that those documents were invoices?

A. My understanding was that they were -- that it was an invoice.

Q. Yes. No doubt due to the explanation that you had been given for the two of them, one being reissued because the other was a mistake, that would have reinforced your view that for VAT purposes, they were being treated as invoices?

A. Yes.

53. As regards the suggestion that this was his attempt to rationalise the nature of Mr Levy's allegation, he made it clear that he had got an explanation from his clients:

Q. Well, it's not just, I think, your rationalisation of the position, or your belief; I think, as you told us, you got an explanation as to why there were two invoices, it related to the VAT mistake?

A. Yes.

54. I accept the evidence of Mr Harris. I am sure that given the circumstances his letter of 28 October 2008 was drafted with care, and was not the result of a misunderstanding. I find that the two invoices were not explained to him by the claimant as a valuation or valuations or as evidence of valuations, but as evidence of a sale and purchase transaction between Bakequip and the claimant. Such a transaction never happened. The fact of there being two documents was explained by reference to a mistake having been made in the documentation for VAT purposes. Again, my findings in this respect inevitably affect the credibility to be attached to the evidence of Mr Nassim and Mr Caplin, and the weight that I can give to it.
55. By way of ending the factual account, it is noted that the insurers avoided the policy on 27 February 2009, and in due course these proceedings were brought by the claimant.
56. At the outset of this judgment, I explained that the defendants had filed a witness statement on behalf of Mr Levy (and Mr Rana who gave certain further explanations of Mr Levy's evidence). At a relatively late stage in the defendants' case, Mr Eklund QC indicated that Mr Levy (and Mr Rana) would not be called. As Mr Tolley for the claimant pointed out, there was no suggestion that Mr Levy was not ready and willing to give his evidence. Mr Eklund explained that the decision not to call Mr Levy was made because his evidence was largely extraneous to the matters which the court would have to decide as regards to the defence. As presented, it is correct to say that Mr Levy does not feature in the defendants' case, save to the extent that he appears in the factual narrative. I do not think that Mr Tolley is correct to say that without his evidence, the defendants' case lacks the thread that would otherwise hold it together. I would however state that a consequence of the course that has been taken is that the court received, and read in advance, Mr Levy's witness statement (and that of Mr Rana). Furthermore, Mr Nassim and Mr Caplin, as well as other witnesses for the claimant, were obliged to, and did, deal in detail with the allegations which he made, which considerably lengthened their witness statements. It is right to state that these witness statements show that Mr Levy on the one hand, and Mr Nassim and Mr Caplin on the other hand, make serious allegations against each other. Mr Nassim says that Mr Levy sought on numerous occasions to extort payment from him, and to blackmail him, on the basis that if he were paid substantial sums of money, he could "cancel" his allegations. Because of the conclusions I have reached in this case, I need not determine that issue. As regards the allegations which he has made, had Mr Levy been called to give evidence, or had his allegations formed any part of the defendants' case, which they do not, I would have had to rule upon them. In the circumstances, they do not arise for decision, and I make it clear that they form no part of the reasoning by which I have reached my decision.

Non-disclosure: moral hazard

The law

57. There is no dispute as to the applicable law. The classic statement of materiality in the law of insurance is the decision of the House of Lords in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501. The claimant acknowledges that the concept of materiality extends beyond the risk of damage occurring within the scope of the policy, and includes "moral hazard", whereby there is an increase in the likelihood of it being made to appear falsely that loss or damage had occurred falling within the scope of the policy.
58. For present purposes, the principles can be taken from the decision of Mance J in Insurance Corporation of the Channel Islands v The Royal Hotel Ltd [1998] Lloyd's Rep IR 151. This decision was the sequel to an earlier decision, also arising out of a series of fires at the Royal Hotel in Guernsey. The question in the later case was whether insurers could avoid the policy by reason of the creation by one of the insured hotel's directors of false invoices intended to create a more favourable picture of the hotel's trading performance if and when it became necessary or desirable to show its accounts to its bankers. It was accepted that no actual use of the invoices had been made (p.156). The issue was whether the matters were nevertheless material to be known to a prudent insurer in the claimant's position upon the renewal of insurance, the onus being on the insurer to establish this.
59. At p.156, Mance J cites Steyn LJ's judgment in the Court of Appeal in Pan Atlantic at [1993] 1 Lloyd's Rep 496, 506, where he says that "…avoidance for non-disclosure is the remedy provided by law because the risk presented is different from the true risk. But for the non-disclosure the prudent underwriter would have appreciated that it was a different …risk". Mance J goes on to discuss what is embraced by "risk" in the context of avoidance for material non-disclosure:

"It is not simply the peril or possibility of loss of damage occurring within the scope of the policy. It embraces other matters which would, if known be likely to influence a prudent underwriter's decision. It includes what is known as 'moral hazard' which may merely increase the likelihood of it being made to appear (falsely) that loss or damage has occurred falling within the scope of the policy…."

60. There is, he continues, ample authority regarding the potential materiality of "moral hazard":

"… in Gate v Sun Alliance Insurance Ltd [1995] LRLR 385 (High Court of New Zealand) 407, Fisher J held that incidents of prior dishonesty by a proposer were capable of being material (in particular as going to the risk of a false claim) whether or not they had been detected or had led to conviction. It was a question of fact and degree and so of expert evidence whether any particular act of dishonesty was one which a prudent underwriter would take into account when assessing the risk."

61. "Moral hazard" is described in Gate v Sun Alliance in terms of prior dishonesty. In my view, the phrase is used to describe circumstances, invariably involving dishonesty on the part of the assured, which give rise to a concern that there will be dishonesty in the reporting and presentation of claims (see MacGillivray on Insurance Law, 11^th edn, at §17-055). Mr Tolley says, I consider rightly, that to the extent the concept has any application in the present case, it is in this sense. In the result, in Royal Hotel Mance J concluded "without hesitation" that the hotel's conduct in preparing false invoices for use if and when necessary or desirable in relation to its bankers would have been a matter which any prudent underwriter would have taken into account, if it had been known to him, when assessing whether to renew the hotel's fire insurance risk (see p 158). Dishonesty in relation to its bankers was clearly material to be known to a prudent underwriter.
62. The test of materiality operates by reference to what would influence the judgment of the prudent underwriter. This is an objective test, and the characteristics to be imputed to the prudent underwriter are in substance a matter for the court to decide. In this context, there is room for a test of proportionality, having regard to the nature of the risk and the moral hazard under consideration: Norwich Union Insurance Ltd v Meisels [2006] EWHC 2811; [2007] Lloyd's Rep IR 69, at [25], Tugendhat J.

The defendants' case

63. The defendants' case is that the production of the false Bakequip invoice dated 15 November 2007 recording a sale and full payment for the sale by the representation that the full amount had been paid "with thanks", was a material fact to be disclosed to underwriters. This was clearly, it is said, an act of dishonesty. Both Mr Caplin and Mr Nassim knew that there had been no sale of the equipment by a single third party to Wholesale. They knew that arranging the production of a document as an invoice recording (1) the sale from a single third party to Wholesale and (2) the receipt of payment was the arrangement of a false document. They knew that the Bakequip invoice was a false invoice.
64. The defendants submit that a prudent underwriter would regard as material in his assessment of the risk (1) The preparation of the false invoice recording a sale and payment for equipment, when there had been no sale and no payment as stated on the invoice. This is so, whether Mr Caplin and Mr Nassim were personally involved in the actual preparation of the invoice or whether the preparation of the invoice was done on their behalf. (2) The dishonest conduct of Mr Caplin and Mr Nassim in submitting a false document to Lombard. This approach taken in the Royal Hotel case applies, the defendants submit, equally in the present case.
65. The evidence of Mr Coates (the defendants' expert on the question of materiality for underwriting purposes) that the production of the false invoice was material is (it is submitted) in accordance with the finding by Mance J in Royal Hotel that the preparation of a false document was material and should be disclosed. The evidence of Mr Mott (the claimant's expert on the question of materiality for underwriting purposes) that materiality is dependent on whether the document was used for a dishonest purpose is not (it is submitted) in accordance with the observations of Mance J. His evidence that the deliberate submission of false documents without such dishonest purpose was not something that a prudent underwriter should know about should be rejected.
66. The defendants must also prove inducement, because as Mance J pointed out at p.158, under the two stage Pan Atlantic test, to justify avoidance it is not only necessary to establish materiality—the actual underwriter must also show that he himself was actually induced by ignorance of the material matters to enter into the insurance on the terms which he in fact did. In this regard, the defendants called Mr Tom Keefe, who said that that if he had known that the insured had been dishonest with another financial institution he would not want to do business with the insured. The defendants say that his evidence should be accepted, and the court is invited to find that the element of inducement has been established through Mr Keefe's evidence.

The claimant's case

67. There are cases, the claimant submits, of which North Star Shipping Ltd v Sphere Drake Insurance plc [2006] EWCA Civ 378; [2006] 2 Lloyd's Rep 183, is a leading example, where an insured will be under an obligation to disclose allegations of dishonesty which have been made against him, and not resolved. (North Star involved outstanding criminal proceedings in Greece.) This appears to have been the source (it is said) of Mr Coates's confusion in his evidence. His repeated references to the insurer needing to have the opportunity to investigate can only be sensibly understood in the context of a case where a plausible allegation of dishonesty has been made against the insured. In such a case, it is not for the insured, believing that the allegations are unfounded, to decide for himself that there is nothing to disclose.
68. However, the case involving no established dishonesty and no allegation of dishonesty is, it is submitted, quite different. If the insured does not believe himself to have acted dishonestly, and no-one has suggested otherwise at the material time, there can be nothing which the insured is capable of disclosing. And even if the insured is aware that another person might potentially suspect dishonesty, even if none has been alleged, the ultimate question is whether there has in fact been dishonesty. If not, there is nothing to disclose.
69. Mr Coates's views as to the scope of materiality in the mind of the prudent insurer should (it is submitted) be rejected as manifestly too wide. While "moral hazard" is a fact-sensitive question, it cannot possibly extend, in an ordinary case of commercial insurance, to innocent or even negligent misstatements made by an insured to another financial institution. There is no apparent basis for concern, in such a case, that the insured would be more likely to act dishonestly in the reporting or presentation of a claim. Moreover, it is, on the premises of Mr Coates's views, unreasonably impracticable to expect an insured to disclose a fact which might, on investigation, turn out to be material, even though it is not presently material. So to hold would be to expand the concept of "materiality" to the point where it was all-encompassing.
70. As regards the facts, it is said that Mr Levy has caused insurers to avoid the Policy and to refuse to pay a legitimate claim. There was valuable equipment in the premises, which were used as an operational wholesale bakery business. There was a fire on 8 June 2008, which caused extensive damage and no evidence of arson. On its face, the claimant's claim is a perfectly legitimate one for reinstatement and business interruption indemnity under the Policy.
71. As between the claimant and Lombard, it is impossible (it is submitted) to discern what (if any) fraud is supposed to have taken place. (I shall mention later in this judgment some of the matters that were previously but are no longer suggested.) The most important point made by the claimant, given the way the defence was put at trial, is that there is no evidence to show that, as at 3 March 2008 (when the two-page fax was sent by the claimant to Lombard), Lombard was at all concerned as to how Wholesale had acquired title to the goods in question. By that stage, Lombard must already have seen the invoice of 3 February 2008 from Wholesale to Europe, and marked on it in manuscript a note to the effect that the racks, trays and tables could not be included in the finance transaction. If Lombard had asked the claimant for evidence as to the verification of Wholesale's title to the goods, this could have been readily provided. Wholesale had records of invoices and receipts in relation to its acquisition of the items in question.
72. The claimant had no motive, and no commercial advantage to be gained, in presenting the Bakequip document as an invoice, as opposed to a valuation. It should therefore not be inferred that the claimant or Wholesale would have been prepared to act dishonestly, and to invent material for Lombard that Wholesale had acquired the goods from Bakequip, merely to avoid providing material which was available legitimately and without pretence.
73. The best contemporaneous evidence of how Lombard actually regarded the Bakequip document would have been Mr Freeman's "credit submission" within Lombard. Its absence from the documents provided by Lombard is unexplained. If and to the extent that Lombard was concerned about title, and, the claimant says, it is far from clear that it really was in practice, it was the claimant's title and not Wholesale's which would have been of immediate interest. Lombard was acquiring the goods from the claimant, not from Wholesale, and so needed to be sure that it was acquiring good title from the claimant. However, Lombard does not appear to have undertaken any checks as to the basis on which the claimant was acquiring good title. It is therefore even less likely that it would have been interested in working out whether Wholesale, at one stage removed from the transaction between the claimant and Lombard, had itself acquired good title.
74. The pre-meditated nature of Mr Levy's conduct, it is submitted, in seeking as the claimant alleges to set up a trap for the claimant, is apparent from his dealings in respect of SPC (GB) Limited/Bakequip. There is no suggestion (and nor could there be) that the claimant knew anything of his schemes in this regard. Moreover, Mr Levy appears to have produced his "Bakequip (UK) Limited" documents on dates (15 November 2007 and 3 or 5 February 2008) when, to his own knowledge, no company by that name had been registered at Companies House. It is to be inferred therefore, on the reasonable assumption that he knew what he was doing, that he knew that his use of "Bakequip" as the provider of the valuation could and, on investigation by any third party after the event, would unravel easily.

Fraudulent means or devices

The law

75. It is common ground that clause 3 of the General Policy Conditions effectively replicates the common law rule on forfeiture of insurance claims in the event of fraud in the presentation of a claim prior to the commencement of proceedings. Clause 3 provides that, "If any claim upon this Policy shall be in any respect fraudulent or if fraudulent means or devices be used by or on behalf of the insured to obtain any benefit under the Policy … all benefit under this Policy shall be forfeited".
76. In Agapitos v Agnew [2002] EWCA Civ 247; [2003] QB 556, Mance LJ discussed the distinctions that exist between fraudulent claims, in the narrow sense of cases of no or exaggerated loss, and the use of fraudulent means or devices. He said at [30]:

"A fraudulent claim exists where the insured claims, knowing that he has suffered no loss, or only a lesser loss than that which he claims (or is reckless as to whether this is the case). A fraudulent device is used if the insured believes that he has suffered the loss claimed but seeks to improve or embellish the facts surrounding the claim by some lie. There may however be intermediate factual situations, where the lies become so significant that they may be viewed as changing the nature of the claim being advanced."

77. In my opinion, this is not a case of a claim by an insured knowing that it has suffered no loss, or only a lesser loss than that which it claims. It is not in that sense a "fraudulent claim". The question therefore if the defendants are to succeed on this point is whether they have established that a fraudulent means or device was used by the claimant. In discussing the approach to be adopted by the court to such a question, Mance LJ said in Agapitos v Agnew at [38], "The fraud must of course be directly related to and intended to promote the claim…. Whenever that is so, the usual reason for the use of a fraudulent device will have been concern by the insured about prospects of success and a desire to improve them by presenting the claim on a false factual basis".
78. At [38], he made it clear that for the fraudulent claim rule to apply to the use of fraudulent means or devices, the fraud in question must have had some objective significance in advancing the claim:

"The view could, in this situation, be taken that, where fraudulent devices or means have been used to promote a claim, that by itself is sufficient to justify the application of the sanction of forfeiture. The insured's own perception of the value of the lie would suffice. Probably, however, some limited objective element is also required. The requirement, where a claim includes a non-existent or exaggerated element of loss, that that element must be not immaterial, "unsubstantial" or insignificant in itself offers a parallel. In the context of use of a fraudulent device or means, one can contemplate the possibility of an obviously irrelevant lie—one which, whatever the insured may have thought, could not sensibly have had any significant impact on any insurer or judge. Tentatively, I would suggest that the courts should only apply the fraudulent claim rule to the use of fraudulent devices or means which would, if believed, have tended, objectively but prior to any final determination at trial of the parties' rights, to yield a not insignificant improvement in the insured's prospects—whether they be prospects of obtaining a settlement, or a better settlement, or of winning at trial. Courts are used enough to considering prospects, e g when assessing damages for failure by a solicitor to issue a claim form within a limitation period."

79. The claimant rightly emphasises that the court is concerned in the context of fraudulent means or devices with dishonesty by the insured. Applying the above principles, for the purposes of the present case, the insurer must establish: (1) the use by the insured of some lie to seek to improve or embellish the facts surrounding the claim; and (2) that the lie would, if believed, have tended objectively to yield a not insignificant improvement in the insured's prospects of obtaining a settlement.

The defendants' case

80. The defendants submit Mr Harris was aware that documents showing the equipment which had been purchased would have to be provided to Cunningham Lindsey, and Mr Caplin was also aware. Mr Caplin provided documentation shortly after 30 June 2008 to Mr Harris including the Bakequip invoice to the claimant. Thereafter in a meeting with Mr Caplin and Mr Nassim, a Bakequip invoice was used to note values in relation to the equipment. Mr Harris considered that he was dealing with a Bakequip invoice and not a valuation. In September, Mr Harris had a meeting with Cunningham Lindsey which emailed him seeking a "schedule of assets purchased … along with supporting invoices and an audit trail confirming transfer of ownership to the insured". The email was forwarded to Mr Caplin. Having taken instructions, Mr Harris forwarded to Cunningham Lindsey a "purchase invoice of assets between Bakequip (UK) Limited and Sharon Bakery Europe for £156,000". Mr Harris considered that an invoice had been handed to him and he assumed that the Bakequip document was a purchase invoice because that is what it said on its face. The document was not given to him on the understanding that it was a document to be used for valuation purposes. The document was provided to Mr Harris as a document supporting the purchase of the equipment referred to in the invoice. Mr Caplin knew it was required by Cunningham Lindsey and was to be submitted to Cunningham Lindsey in support of the claim. It was a false document, known by Mr Caplin to be a false document, because there never had been a sale of that equipment by Bakequip to the claimant.
81. The document was used fraudulently to support the claim or constituted fraudulent means or a fraudulent device in support of the claim. The submission that the Bakequip invoice was used fraudulently to support the claim is supported by the claimant's response to the queries on the two invoices sent by Mr Levy. The claimant did not respond by correcting the representation that there had been a sale from Bakequip, but it explained (by Mr Caplin) that there had been a VAT mistake, with the wrong invoice being listed in the VAT return, which had to be corrected. Far from dispelling the false representation made by the Bakequip invoice provided originally to Mr Harris, the defendants say, the explanation served to confirm the false representation that there had been a sale by Bakequip and that the Bakequip invoice (or invoices) evidenced that sale.

The claimant's case

82. The essence of the claimant's case is that it did not act dishonestly (or fraudulently) in relation to its claim for indemnity under the policy. It relies on the following matters in particular:

(1) The reference in Mr Harris's long letter of 22 September 2008 to "a purchase invoice" was obviously a mistake. It had never been suggested (whether to Lombard or otherwise) that the claimant had acquired anything from "Bakequip".

(2) Moreover, Mr Harris had a copy on file of the invoice as between Wholesale and the claimant, but had overlooked its relevance. He had not at any stage been told in terms that the claimant had acquired the goods from "Bakequip" rather than Wholesale.

(3) The claimant had no reason to misrepresent the position with regard to the acquisition of the equipment, on the pretended basis that it had been acquired from "Bakequip". There was a perfectly valid set of documentation, showing how the claimant had acquired the goods from Wholesale, and how Lombard had provided finance on the security of the goods. It is wholly implausible to suggest, the claimant says, that the claimant would have committed a fraud because it was more convenient.

(4) It would be a peculiarly incompetent "fraud" to pretend to Lombard that "Bakequip" had sold the goods to Wholesale, while telling a completely different and inaccurate story to insurers, to the effect that "Bakequip" had sold the goods to the claimant. Indeed, the sheer implausibility of any such conduct is made manifest by the fact that the claimant supplied Cunningham Lindsey with the documents as between itself and Lombard, which were on their face inconsistent with any suggestion that the claimant had acquired the self-same goods from "Bakequip" (instead of Wholesale). The claimant had already told Cunningham Lindsey, in Harris Balcombe's letter dated 7 August 2008, that it had acquired the equipment from Wholesale.

(5) In relation to Mr Harris's letter of 28 October 2008, it should be noted that the context was that Mr Harris was drawing insurers' attention to the allegations made by Mr Levy, and providing Cunningham Lindsey with copies of the documents which Mr Levy had himself sent to Mr Harris. It cannot possibly be said the provision of these documents to insurers was any kind of "fraudulent device". (I interpose to mention that the defendants do not say this.) Moreover, the claimant submits, it is unlikely in the highest degree that, in advertently drawing to insurers' attention an allegation of fraud made by Mr Levy, and inviting insurers to conduct their own investigations, the claimant would then itself intentionally seek to mislead Cunningham Lindsey. It is, to put it mildly, unusual for someone committing a fraud to offer up to the putative victim of that fraud the means of discovery of the fraud in question.

(6) Moreover, the essential focus of what Mr Harris was seeking to convey was to reassure Cunningham Lindsey that any suggestion of a VAT fraud was not well-founded. In substance, this was true, and the point was that Mr Takom had originally entered the Bakequip document as the invoice in the claimant's accounting records, only for this to be corrected by Mr Caplin at the end of the relevant VAT quarter (period ending 31 May 2008). The correct invoice was the invoice from Wholesale to the claimant, and this was indeed the invoice on which VAT was recovered by the claimant, and only once.

Discussion and conclusions

83. I have been conscious during the trial of the significant expense to Mr Nassim in particular of bringing this claim, which must to a degree have been pursued as a matter of principle. I should make it clear therefore that this is not, in my judgment, a case in which the insured is dishonestly advancing a claim under the insurance policy to which it knows it is not entitled. I accept Mr Tolley's point that there was valuable equipment in the premises, which were used as an operational wholesale bakery business. There was a fire on 8 June 2008, which caused extensive damage and no evidence of arson. On its face, the claimant's claim is a perfectly legitimate one for reinstatement and business interruption indemnity under the policy. In so far as these points have been pursued at trial, I am satisfied that this case does not involve a VAT fraud. The evidence of the claimant's book keeper (Mr Takom) is relevant in this regard, including explanatory forensic evidence filed after the hearing. I reject any suggestion that the equipment was of dubious provenance, lacking in serial numbers. I also reject any suggestion that the goods were not worth what they were portrayed as having been worth (I say more about this under the quantum heading). The contention that the equipment was portrayed to Lombard as new in November 2007, such that Lombard was misled, did not survive Mr Freeman's cross-examination. As I shall explain, so far as quantum is concerned, I accept the claimant's case. The reason that Mr Nassim and Mr Caplin joined forces in this venture was one of commercial opportunity: Mr Nassim had the equipment, Mr Caplin had the premises, and both had long experience in the bakery trade. If this claim is to fail, it will do so on what in the event have been narrow (though significant) points advanced by the defendants.
84. As regards avoidance for material non-disclosure, Mr Tolley's main point for the claimant is that if the insured does not believe himself to have acted dishonestly, and no-one has suggested otherwise at the material time, there can be nothing which the insured is capable of disclosing. Points of a similar nature have been debated in a number of the authorities (see for example the discussion of "hard cases" in Brotherton v Aseguradora Colseguros SA [2003] 2 C.L.C. 629 [22] and following). In the present case, the viability of the argument depends largely upon my finding that the Bakequip invoice dated 15 November 2007 was a valuation, provided to Lombard as such at its request. For reasons which I have set out above, that is not my finding in this case. I have accepted Mr Freeman's evidence that he did not request a valuation. He needed to establish that Lombard was going to get good title, because that was the nature of the transaction that Lombard was involved in. I have found that on 3 March 2008, the invoice dated 15 November 2007 was submitted by the claimant to Lombard as evidence of a true sale and purchase transaction between Bakequip and Wholesale and not as a valuation. Taken together with the other document faxed by Mr Caplin, it purported to show a chain of supply. In fact, the invoice was false, because (as is common ground) no supply from Bakequip to Wholesale had taken place. I have found that the claimant, through Mr Nassim and Mr Caplin, knew that the document was false in that it was not a true invoice, receipt or valuation. I am satisfied that the words "Paid in full with thanks" and Mr Levy's signature were on the invoice when it was sent to Lombard, and that Mr Nassim and Mr Caplin were aware of the fact. Mr Coates and Mr Mott (the experts on the question of materiality for underwriting purposes) are agreed that if the Bakequip invoice was put forward to Lombard for a dishonest purpose, that was a material fact to be disclosed to the defendants. On the basis of the above findings, it is plain that a dishonest purpose is established, and the defendants make good their "moral hazard" defence on the basis of a failure to disclose the dishonest use of the Bakequip invoice.
85. The defendants have a further submission, which is that there was a failure to disclose the material facts as to the dishonest production of the Bakequip invoice. Relying of the Royal Hotel case, they say that the mere production of a false invoice in the circumstances was itself clearly material to an underwriter's assessment of the risk. Mr Mott's evidence that materiality is dependent on whether the document was used for a dishonest purpose is not, it is said, in accordance with the observation of Mance J. His evidence that the deliberate submission of false documents was not something that a prudent underwriter should know about should be rejected.
86. The submission depends, I think, on the premise that the production of the false invoice was the responsibility of the insured who had asked Mr Levy to produce it. That was the position in the Royal Hotel case, in which a director created false invoices to show to the hotel's bankers if necessary, albeit in the event no use of the invoices had been made. The hotel was therefore responsible for the creation of the false invoices. I would not accept that the mere production of a false invoice by Mr Levy would ground this defence. On the basis however that Mr Levy was asked to produce a false invoice, this submission is in my view correct.
87. What would the position be if, contrary to my findings, but as the claimant has contended, Mr Levy had been asked to produce a valuation because that is what Lombard had asked for? Mr Tolley would contend that the insured did not believe itself to have acted dishonestly, and there can be nothing which it was capable of disclosing. He relies on the evidence of Mr Mott, who sought to draw a distinction between a document that is incorrect and a document that is false. In principle, the distinction is plainly a valid one, albeit not always easy to draw. However in the present case, there is no such difficulty. Whatever he was asked to produce, Mr Levy in fact produced a false invoice. The Bakequip invoice was false, because it purported to show the supply of equipment by one company to another, and payment for the equipment, all of which was fictitious. When the invoice came into the hands of Mr Nassim and Mr Caplin that would have been apparent to them. Mr Mott suggested that disclosure would nevertheless only be material if the document had been used for a dishonest purpose. He had in mind the obtaining of a loan that would not otherwise be extended through use of the document. I reject that contention, and prefer the evidence of Mr Coates in that regard. Knowing that it was false, it was dishonest of the claimant to send the invoice to Lombard, and that would be so even if (contrary to my finding) a valuation was all that Lombard required, and Lombard was told that the document was a valuation. By sending the invoice to the finance company, the claimant adopted and perpetrated the lie that the document contains. False documents are inimical to commerce, and in my view, this factual scenario also falls within the "moral hazard" principle.
88. The evidence of Mr Keefe, who was the junior underwriter concerned at the time, was that if a business was prepared to be dishonest with a potential funder such as Lombard then that business would be equally prepared to be dishonest with him and its insurers. He stated that had he known that there had been any dishonesty on the part of the claimant in its dealing with Lombard that would have been conclusive to him that he could not offer any insurance at all to the claimant— that he would have declined outright. He did not materially stray from this in cross-examination. He was a straightforward witness, and I accept his evidence, and on that basis find that the element of inducement has been established.
89. As regards fraudulent means or devices, again the essence of the claimant's case which I have set out above is that it did not act dishonestly in relation to its claim for indemnity under the policy. Again, the viability of the claimant's case depends on a finding that Mr Harris was mistaken when passing on as an invoice the version of the Bakequip invoice dated 3 February 2008 purporting to show the supply of equipment from Bakequip to Sharon's Bakery Europe Ltd, whereas it was only a valuation. What, the claimant says, did it have to gain? Mr Harris already had the invoice as between Wholesale and Europe, and the matter was simply a misunderstanding.
90. I have rejected this version of events. To summarise, the invoice was provided by the claimant to Mr Harris as evidence of a true sale and purchase transaction between Bakequip and Europe and in support of the claim on the insurance. It was not explained by the claimant to Mr Harris as a valuation or valuations or as evidence of valuations. It was provided by Mr Harris to Cunningham Lindsey (on behalf of the defendants) in support of the claim, following a request that he "provide a schedule of assets purchased and work undertaken during this refit along with supporting invoices, and an audit trail confirming the transfer of ownership to the Insured". He provided it as "a copy of a purchase invoice of assets between Bakequik (UK) Ltd [sic] and Sharon Bakery Europe for £156,000". Its status as an invoice was confirmed in his letter of 28 October 2008, which I am satisfied was not the result of a misunderstanding with his clients.
91. As I have said, Agapitos v Agnew (ibid) establishes that to show "fraudulent means or devices" the insurer must establish the use by the insured of some lie to seek to improve or embellish the facts surrounding the claim. The lie in this case consists of the representation in the invoice that there had been a supply of equipment from Bakequip to Sharon's Bakery Europe Ltd. As Mr Caplin (and Mr Nassim) knew, there had been no such transaction, and they adopted the lie by providing the invoice. It was tendered in response to the request to provide a schedule of assets purchased along with supporting invoices, and an audit trail confirming the transfer of ownership to the Insured, thereby embellishing the facts surrounding the claim. The lie would, if believed, have tended objectively to yield a not insignificant improvement in the insured's prospects of obtaining a settlement. In short, the invoice was tendered as a necessary step towards having the claim accepted, which it was. I am satisfied that fraudulent means or devices have been used by or on behalf of the insured to obtain benefit under the Policy, and that consequently all benefit under the Policy is forfeited.

Quantum

92. Though given my findings on liability, the question of quantum does not arise, I should set out my findings. There were efforts during the trial to reach agreement on quantum for which I was grateful. Though agreement was not reached, there was little by way of submission on the subject. The defendants' interest was mainly aimed at trying to demonstrate that the values placed on the individual items in the Bakequip invoice were excessive, and so further evidence of dishonesty on the part of the claimant. I reject that contention. The numbers in the invoice as I have explained emanated from Mr Smart, who was well placed to express a view. They were supported by the claimant's valuation expert, Mr Dunne, who as the claimant says, had 40 years' experience in the baking equipment industry, and could fairly be said to be steeped in the detail and practice of buying and selling second-hand bakery equipment. I prefer his evidence to that of Mr Davies, the defendants' valuation expert, who had no specific bakery equipment expertise. Mr Davies fairly said that he had never come across a transaction involving Kosher bakery equipment, and had therefore no basis on which to comment on Mr Dunne's view that the price of Kosher bakery equipment is generally traded at a premium, which I accept.
93. As the claimant says in its closing submissions, there has been, in effect, little or no challenge to its case on the cost of replacing the equipment. This is the relevant basis for indemnity under the Policy. Mr Davies has not addressed this issue. The claimant's closing submissions also say, I think correctly, that the earlier challenges, or signalled challenges, to the existence of a form of baking equipment called depositors in the premises at the time of the fire appear to have been abandoned in light of the decision not to call Mr Maskell or Dr Broadhurst to give evidence. The pleaded claim is in the total amount of £403,814.50. It is supported by the evidence of Mr Harris, and the expert evidence of Mr Dunne, and I accept the claimant's case on quantum.

Conclusion

94. However, for the above reasons, the claim must be dismissed. I am grateful to the parties for their assistance, and will hear them as to any further matters arising.