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England and Wales High Court (Technology and Construction Court) Decisions |
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You are here: BAILII >> Databases >> England and Wales High Court (Technology and Construction Court) Decisions >> Mutual Energy Ltd v Starr Underwriting Agents Ltd & Anor [2016] EWHC 590 (TCC) (23 March 2016) URL: http://www.bailii.org/ew/cases/EWHC/TCC/2016/590.html Cite as: 165 Con LR 220, [2016] EWHC 590 (TCC), [2016] BLR 312 |
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QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
Rolls Building Fetter Lane, London, EC4A 1NL |
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B e f o r e :
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Mutual Energy Ltd |
Claimant |
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- and - |
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(1) Starr Underwriting Agents Ltd (2) Travellers Syndicate Management Ltd |
Defendants |
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Tom Adam QC and Nicholas Saunders (instructed by Clyde & Co) for the Defendants
Hearing Date: 16 February 2016
Further Written Submissions: 1 March 2016
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Crown Copyright ©
The Hon. Mr Justice Coulson:
1. INTRODUCTION
"On the true construction of the insurance policies pleaded in the Particulars of Claim in action HT-2015-000178, and on the assumptions (which are disputed by the claimant):
(a) That the facts and matters pleaded in the defendant's defence and counterclaim are true; and
(b) That by their defence and counterclaim the defendants have alleged that at least one individual employed by the claimant or its agent to ensure how the state of mind alleged in paragraph 26 of the defence; then
are the defendants entitled to avoid the insurance policies ab initio?"
2. THE RELEVANT FACTS
(a) Certain problems were identified with the cables during the construction and commissioning phase (2000-2001). These included problems with the polyethylene insulation for the IRC.(b) Whilst it appears to be MEL's case that these matters were resolved by the time that the Moyle Interconnector was in commercial use in 2002, it is the Insurers' case that these matters were significant and were indicative that the cables were poorly designed, manufactured and installed by Nexans.
(c) The Insurers contend that at least one individual employed by the claimant or it agent to ensure held the state of mind alleged in paragraph 26 of the defence in relation to the 2000-2001 failures. The relevant assumed knowledge is that the individual in question was aware of information and aware that it was not being disclosed to insurers but held the honest but mistaken belief that it need not be disclosed.
(d) The Moyle Interconnector had been working apparently satisfactorily for 8 years by the time the policy of insurance was effected.
3. THE RELEVANT PRINCIPLES OF CONSTRUCTION
"28. The principles upon which contracts are to be interpreted have been stated and restated at the highest level, including most recently in Arnold v Britton [2015] UKSC 36. It is not necessary to review them again. The principles which, in my judgement, are most relevant for present purposes are as follows:
(i) The aim of the court is to determine what a reasonable person who had all the background knowledge which would reasonably have been available to the parties when they contracted would have understood the parties to have meant: Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900 [14] and the cases there cited; this exercise relates to their understanding at the time that the contract was made: Arnold v Britton at [19].
(ii) The exercise of construction is essentially one unitary exercise – Rainy Sky [21], which should be "neither uncompromisingly literal nor unswervingly purposive": per Sir Thomas Bingham MR in Arbuthnott v Fagan [1995] CLC 1396, 1400. It is also an iterative exercise: Arnold [76]. The court looks to see where different constructions lead, how they fit with other provisions in the contract (or other phrases in the same clause), what obstacles to a particular interpretation are met upon the way, and what results are reached.
(iii) In a case where, as here, parties have used language which is capable of more than one meaning, the court should consider the implications of the rival constructions: Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd [2001] CLC 1, 103 at [16]; and is entitled to prefer a construction which is consistent with business common sense and to reject one that is not.
29. Care must, however, be taken in using "business common sense" as a determinant of construction. What is business common sense may depend on the standpoint from which you ask the question. Further the court will not be aware of the negotiations between the parties. What may appear, at least from one side's point of view, as lacking in business common sense, may be the product of a compromise which was the only means of reaching agreement. As Nicholas Strauss QC, sitting as a Deputy High Court judge, said in Churchill v Temple [2010] EWHC 3369 at 37 (d):
"It is always necessary to keep in mind the position of both parties. It is not enough just to consider what the vendor may have wanted to achieve. There is also the consideration that the purchaser might not see what the vendor wants as being in his interests, and that the vendor might, as a result, find it difficult to sell, or to get his price, if he insists upon it. The resulting covenant may represent a compromise. It is therefore not surprising to find covenants which are not altogether logical from the point of view of either party, or do not entirely achieve the probable aims of either of them. See Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd [1990] QB 818 at 870 (C.A.)."
30. Businessmen sometimes make bad or poor bargains for a number of different reasons such as a weak negotiating position, poor negotiating or drafting skills, inadequate advice or inadvertence. If they do so it is not the function of the court to improve their bargain or make it more reasonable by a process of interpretation which amounts to rewriting it. Thus:
"A court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed … The purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed … when interpreting a contract a judge should avoid re-writing it in an attempt to assist an unwise party or to penalise an astute party": Arnold at [20].
31. In effect a balance has to be struck between the indications given by the language and the implications of rival constructions. The clearer the language the less appropriate it may be to construe or confine it so as to avoid a result which could be characterised as unbusinesslike. The more unbusinesslike or unreasonable the result of any given interpretation the more the court may favour a possible interpretation which does not produce such a result and the clearer the words must be to lead to that result. Thus if what is prima facie the natural reading produces a wholly unbusinesslike result, the court may favour another, even if less obvious, reading. But, as Lord Neuberger observed in Arnold v Britton at [17] "commercial common sense and surrounding circumstances … should not be invoked to under value the importance of the language of the provision which is to be construed". It is material, however, to note that Arnold was a case where the interpretation argued for involved adding in the words "up to" in the relevant clause so as to constitute the sum specified a maximum and not a definition of the amount which had to be paid – a very radical change."
4. THE TERMS OF THE POLICY
"5. Scope of Disclosure
The Insurers acknowledge that (i) they have received adequate information in order to evaluate the risk of insuring the Company in respect of the risks hereby insured on the assumption that such information is not materially misleading, (ii) there is no information which has been relied on or is required by Insurers in respect of their decision to co-insure the Co-Insured Parties or their directors, officers, employees or agents, and (iii) no person has been authorised to make any representation on behalf of any of the Co-Insured Parties or their directors, officers, employees or agents in relation to their becoming or being co-insured under this policy. Non-disclosure or misrepresentation, negligence or breach by any one insured (or its agent) shall not be attributable to any other insured party who did not directly and actively participate in that non-disclosure or misrepresentation knowing it to be such.
6. Non-disclosure, misrepresentation and breach
Notwithstanding any other provisions of this policy:
(a) the Insurers agree not to terminate, repudiate, rescind or avoid this insurance as against any Insured, or any cover or valid claim under it, nor to claim damages or any other remedy against any Insured or any agent of any Insured, on the grounds that the risk or claim was not adequately disclosed, or that it was in any way misrepresented, or increased, or that any term, condition or warranty was breached, or on the ground of negligence, unless deliberate or fraudulent non-disclosure or misrepresentation or breach by that Insured is established in relation thereto; and
(b) the Insurers' right to repudiate, avoid, rescind or terminate this contract or to treat the contract as terminated or suspended or to delay any otherwise valid claim shall be limited to those circumstances in which the contract expressly so provides, and each Insurer waives any right that it would otherwise have to do so in any other circumstances on any ground."
(a) s.17 re-states the well-known principle that a contract of insurance is a contract "based upon the utmost good faith";(b) s.18(1) provides that the assured must disclose to the insurer "every material circumstance which is known to the assured, and the assured is deemed to know every circumstances which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract;"
(c) s.18(2) provides that "every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk";
(d) s.19(1)(a) provides that where insurance is affected for the assured by an agent, the agent must disclose every material circumstance "which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to him"; and
(e) s.20 dealing with representations made during the negotiation of the contract of insurance, provides that these "must be true".
There can be no doubt that these are very wide ranging obligations and that, by contrast, Clauses 5 and 6 were designed to replace or modify them with a much more limited set of obligations.
5. THE PRINCIPAL ISSUE: DELIBERATE NON-DISCLOSURE
"Deliberate default means, in my view, a default that is deliberate, in the sense that the person committing the relevant act knew that it was a default (i.e. in this case a breach of contract)."
"…despite the desirability and importance of certainty, a good many commercial contracts are less tidy than might be desirable as a matter of strict theory. In this respect, commercial contracts reflect the realities of commercial life. It is thus no surprise to find in a commercial contract surplus language, for instance that which merely states the obvious".
"It is possible to deliberately non-disclose without being fraudulent. While dishonesty is one of the essential criteria for fraud, there must also be deception, designed to obtain to which you were not entitled. For example, a customer might deliberately withhold information they are embarrassed about. Although, in doing so, they are acting dishonestly and deliberately, they are not acting fraudulently because there is no deceitful intention to obtain an advantage."
I accept of course that this is not authority in any sense. But it is perhaps a helpful reminder that, in the real world, a sensible and workable distinction between deliberate dishonesty, on the one hand, and fraud, on the other, appears to be readily identifiable. On that basis, both words ('deliberate' and 'fraudulent') have utility, but they both involve an element of dishonesty.
"86. The practical circumstance which has since been said to justify this special treatment of insurance contracts is a disparity between the knowledge of the proposer (and his agent) and the underwriter. This may well be realistic in certain classes of business and certain types of insurance. But it is not in others…
87. In such situations it becomes questionable whether it is appropriate to place on the assured the full burden of disclosure with its attendant risk of the avoidance of the policy. Clauses protective of the assured's position become appropriate…"
"165. In this connection the next matter for consideration is what is meant by a fraudulent non-disclosure. The term has never been defined. Sometimes it is referred to as a deliberate concealment: but I am by no means sure that the two can be equated. A matter may be deliberately concealed in the honest but mistaken belief that it is not relevant or material or that enquiry of it has been waived. There may be nothing dishonest in that, but ex hypothesi the remedy of avoidance remains. In other circumstances, outside the insurance context a deliberate concealment might be described as dishonest, or at any rate extremely unattractive, and yet, in the absence of any duty to speak, cannot be additionally castigated and remedied as fraudulent. No authority has been cited for a definition of fraudulent non-disclosure: and the absence of such authority in my judgment is not a merely collateral matter but intimately connected with the current problem of asking whether it makes sense to distinguish between fraudulent and non-fraudulent non-disclosure. I am doubtful that it is. No case has been cited in which the distinction has been material to any remedy or absence of remedy under an insurance contract."
Mr Adam maintained that this passage demonstrated that deliberate concealment did not involve dishonesty and so was different to fraudulent non-disclosure. He said this supported the Insurers' interpretation in the present case. He went on to say that, although the was no express support for this passage in the judgment in the House of Lords, he said that there was "clues" to Lord Bingham's support of it in his speech in this passage:
"21. …Since an agent to insure is subject to an independent duty of disclosure, the deliberate withholding from the insurer of information which the agent knows or believes to be material to the risk, if done dishonestly or recklessly, may well amount to a fraudulent misrepresentation."
"If a non-disclosure is deliberate then I cannot see that the word 'fraudulent' adds anything in this context either."
"…the fact which he decides not to disclose either must be one which it was his duty to disclose, or must at least be one which he would ordinarily have disclosed in the normal course of his relationship with the claimant, but in the case of which he consciously decided to depart from what he would normally have done and to keep quiet about it."
That suggested an element of dishonesty, which is doubtless why MEL relied on it.
6. CONCLUSIONS
APPENDIX 1 – The Insurers' Suggested Assumed Facts.
The 2000-2001 Failures
a. their design and operational characteristics;
b. the quality of their manufacture and manner of their installation;
c. their long term integrity, such that the expected life of the IRC insulation in particular is significantly shorter than expected; and
d. their ability to withstand entirely ordinary subsea conditions during operation. [D&CC para 8]
Materiality, knowledge and disclosure of the 2000-2001 Failures
Note 1 At paragraph 21 of his skeleton argument, Mr Adam relied on the fact that his definition did not require dishonesty. That is on any view a bad point: notions of dishonesty depend on what noun or verb ‘deliberate’ is describing. A ‘deliberate’ donation to charity is not dishonest. Here it is the connection between ‘deliberate’ and ‘non-disclosure’ which, on MEL’s case, gives rise to the requirement for dishonesty. [Back] Note 2 MEL referred to a number of other cases to support the proposition that the breach itself must be deliberate, not merely the act which constitutes the breach: Re Mayor of London and Tubbs’ Contract (1894) 2 Ch 524, and Re City Equitable Fire [1925] 1 Ch 407. [Back] Note 3 The Interpretation of Contracts, 6th edition, paragraph 7.03. [Back] Note 4 British Overseas Bank Nominees Ltd v Analytical Properties Ltd [2015] EWCA Civ 43 [Back] Note 5 Tektrol Ltd V International Insurance Co of Hanover Ltd [2005] 2 Lloyd’s Rep 701 [Back] Note 6 Although Mr Adam referred to Armitage v Nurse [1998] Ch 241, a breach of trust case, it seemed to me to be grappling with different issues. If anything, it helped MEL’s position rather than the Insurers because, at page 251, Millett LJ explained that a trustee may deliberately commit a breach of trust but if they do so in the honest belief that they are acting in the interests of the beneficiaries, their conduct is not fraudulent. [Back] Note 7 Cave v Robinson [2003] 1 AC 384, another limitation case, was also irrelevant to the construction issue which I have to decide, although I note that Lord Scott rejected the submission that some degree of unconscionability in the conduct of a defendant was necessary. [Back]