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The House
of Lords held that a truth of statement clause in film finance insurance
policies was effective to preclude insurers' rights to avoid except
on grounds of fraudulent misrepresentation or non-disclosure by the
brokers, acting as agent.
Chase was
the representative of a syndicate of lending banks that advanced substantial
sums to finance the making of films. Under cover procured by Heath,
HIH and others insured Chase against the risk of failing to recoup their
investment on a particular "slate" of films.
The policies
contained a "truth of statement" clause which provided that
Chase would not have any duty or obligation to make any representation,
warranty or disclosure of any nature; that they should have no liability
of any nature to insurers for any information provided by any other
parties; and that any information provided or non-disclosure by other
parties, including Heath, would not be a ground for avoidance of insurers'
obligations under the policy or for cancellation.
Chase made
a claim under the policy. HIH then sought to avoid, on the basis of
non-disclosure and misrepresentation, either fraudulent or negligent,
by the brokers, Heath.
The House
of Lords held that HIH's waiver of Chase's duty to disclose in the "truth
of statement" clause did not also relieve Heath of its disclosure
duty, for which Chase could be liable as principal. It was not to be
supposed that insurers did not require any disclosure of information
of material circumstances, but only that they were not looking to Chase
to provide the information. Insurers had chosen not to rely on disclosure
by Chase, which on the facts was distanced from the details of the transaction,
but rather, on disclosure by the agent, which was actively involved.
It was
accepted that the truth of statement clause precluded avoidance by HIH
on the grounds of innocent misrepresentation by Heath. At the same time,
their Lordships took the view that the effect of the clause was not
to deny Heath's authority to speak for Chase. There was nothing in the
clause which could reasonably be understood as denying or restricting
the implied and apparent authority of Heath to act as Chase's agent.
Thus, insurers were not denied their usual remedies for negligent misstatement
by Heaths. The provision that Chase should have "no liability of
any nature" was comprehensive in meaning and the words were clearly
chosen to give Chase an extended immunity, both as regards damages for
any negligent misrepresentation under the Misrepresentation Act and
also as regards avoidance.
The question
then was whether Chase were protected from any liability if insurers
should have been induced to enter the contract by any fraudulent representation
of Heath acting as agent. The House of Lords agreed with the trial judge
and with the Court of Appeal that liability for fraudulent misrepresentation
was not excluded. Fraud is a thing apart and unravels all. Parties entering
into a commercial contract will no doubt recognise and accept the risks
of errors and omissions, but each party will assume the honesty and
good faith of the other. As a matter of public policy, the law does
not permit a contracting party to exclude liability for his own fraud.
As regards the agent, if a party seeks to exclude the ordinary consequences
of fraudulent or dishonest misrepresentation or deceit by the agent,
acting as such, inducing the making of the contract (and the court did
not decide it this were possible), such intention must be expressed
in clear and unmistakable terms to relieve the principle of liability
for fraud of the agent. While innocent or negligent non-disclosure gave
no right to avoid, the deliberate withholding from the insurer of information,
if done dishonestly or recklessly, could amount to a fraudulent misrepresentation.
Thus, the
answer to the preliminary issues was that HIH would be entitled to avoid
only on the grounds of fraudulent misrepresentation or non-disclosure
by Heath as agent for Chase and would be entitled to damages from Chase
only for fraudulent misrepresentation by Heath as agent for Chase or
fraudulent non-disclosure amounting to fraudulent misrepresentation.
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