Representations, lies and videotape

United Kingdom

The following article reviews the House of Lords Judgment in HIH Casualty & General Insurance Limited & Others v Chase Manhattan Bank & Others [2003] UKHL 6

1. An exclusion clause drafted in general terms will not, as a matter of construction, exclude liability on the part of the principal for fraudulent misrepresentation/non-disclosure by his agent in the inducement of the making of the contract.

2. On Thursday 20 February 2003, the House of Lords delivered its Judgment in HIH Casualty and General Insurance Limited & Others v Chase Manhattan Bank & Others ("Phoenix"), the leading film finance insurance case in a line of cases involving various insurance companies, various Banks and/or production companies, and Heath Insurance Broking Limited (and its subsidiary Heath North America and Special Risks Limited). The case is of particular importance for the other film finance cases which are pending before the Commercial Court. However the judgments also contain some useful points of general importance relating to exclusion clauses in contracts.

3. The case concerned the interpretation of an exclusion clause (misleadingly entitled the "Truth of Statements" clause) in a policy of insurance covering repayment of loans provided by a syndicate of Banks (led by Chase) to various production entities formed by Phoenix Picture Incorporated (a newly formed Hollywood production company) or Sony Pictures Incorporated. The loans were provided to fund a portion of the production cost of various films produced by Phoenix entities or Sony. Each loan was to be repaid out of the revenue generated in various defined media in various defined territories (subject to certain deductions) within three years of the release of the film to which it related. If, within three years, there was a deficit in the recoupment of the individual loan, Chase would claim this deficit from the Underwriters to complete the repayment of the loan amount. Two of the films ("The Mirror Has Two Faces" and "The People v/s Larry Flynt") were placed facultatively using individual slips. The remaining three films were declared off a line slip. The line slip was a contract "for insurance", whereas the slips/ declarations relating to the individual films were contracts "of insurance". The insurance was broked by Heaths to the various insurance companies.

4. The "Truth of Statements" clause excluded Chase's duty of disclosure. It also purported to exclude Chase's liability "of any nature" for information provided by other parties, and the rights of Insurers to avoid the policy on the basis of information provided or non-disclosure by other parties, including Heaths.

5. The decision is important for a number of reasons. The House of Lords ruled (Lord Scott dissenting):

a. As a matter of construction the exclusion clause did not exclude Insurers' right to avoid/rescind the contracts "of insurance" on the grounds of fraudulent misrepresentation and/or fraudulent non-disclosure on the part of Heaths as agent for Chase.

b. As a matter of construction the exclusion clause did not exclude the Insurers' right to avoid/rescind the contract "for insurance" on the grounds of fraudulent misrepresentation on the part of Heaths as agent for Chase.

c. As a matter of construction the exclusion clause did not exclude Insurers' right to damages from Chase for fraudulent misrepresentation by Heaths as agent for Chase, and/or fraudulent non-disclosure insofar as the non-disclosure amounted to a fraudulent misrepresentation.

d. As a matter of construction, the exclusion clause excluded Insurers rights to avoid/rescind/claim damages from Chase on the grounds of misrepresentation/ non-disclosure by Heaths as agent for Chase, and/or non-disclosure on the part of Chase, insofar as such misrepresentations/non-disclosures were not fraudulently made.

6. In relation to (a), (b) and (c), the House of Lords refused to rule on whether, as a matter of law, it was impossible for a principal to exclude liability for the fraud of his agent in inducing the making of the contract, although they reiterated that the law will not allow the Insured to exclude liability for his own fraud in such circumstances. Their Lordships preferred to decide the case on the construction of this particular clause. However, their Lordships rejected Chase's argument accepted by the Court of Appeal that the degree of culpability of the person failing to disclose material facts is irrelevant. It was accepted that it is possible to distinguish between "dishonest" and "honest" non-disclosures, with the exclusion clause not covering the former.

7. Their Lordships confirmed the principle set out in Banque Keyser Ullman SA v Skandia (UK) Insurance Ltd [1990] 2 AC 249 at 280 and 281 that pure non-disclosure (whether fraudulent or not) cannot give rise to a claim in tort for damages. However, both Lord Bingham and Lord Hoffman stated that silence where there is a duty to speak will often amount to a misrepresentation, in particular because the non-disclosure will turn representations into "half-truths", in which case damages may be available.

8. In relation to (d), their Lordships ruled that the general principles set out in the opinion of Lord Morton of Henryton in Canada Steamship Lines Ltd v The King [1952] AC 192 at 208, were simply guidelines, rather than rules of construction. In particular, Lord Morton had stated that where an exclusion clause is drafted in terms broad enough to cover liability in negligence and some lesser liability, such as for innocent misrepresentation, the clause should be interpreted as covering only this lesser liability, and not negligence. However, their Lordships rejected this approach, and concluded that the terms of the Truth of Statement clause in Phoenix, when interpreted against the commercial background to the deal, were chosen to preclude liability on the part of Chase for Heaths' negligent misrepresentation or non-disclosure.

9. One word of warning. The decision draws the distinction between contracts "of insurance" and contracts "for insurance", with only the former being the subject of the duty of "utmost good faith", and therefore the duty of disclosure on the part of the Insured and his agent. However, this distinction is not apparent from the individual opinions given. These opinions should nevertheless be read with this distinction in mind.

For further information, please contact John Hall, Jenny Williams, Karen Cargill or Jonathan Thorpe on +44 (0)20 7367 3000 or by e-mail at [email protected], [email protected], [email protected] or [email protected].