Manifest Shipping Company Limited v. Uni-Polaris Shipping Company Limited and Others [2001] UKHL 1

House of Lords
[2001] UKHL 1
Between
Manifest Shipping Company LimitedAppellantUni-Polaris Shipping Company Limited and OthersRespondent
Before
Lord SteynLord HoffmannLord ClydeLord Hobhouse of WoodboroughLord Scott of FoscoteDate 18 January 2001
[1]I have had the advantage of reading the speeches of Lord Clyde, Lord Hobhouse of Woodborough and Lord Scott of Foscote. For the reasons they give I would also dismiss the appeal. LORD HOFFMANN My Lords,[2]I have had the advantage of reading in draft the speeches prepared by my noble and learned friends Lord Hobhouse of Woodborough and Lord Scott of Foscote and for the reasons which they give I would dismiss the appeal. LORD CLYDE My Lords,[3]Section 39(5) of the Marine Insurance Act 1906 concerns the case where "with the privity of the assured, the ship is sent to sea in an unseaworthy state." The underwriters argue that the assured had "blind-eye knowledge" of the two particular respects in which the ship was unseaworthy. Blind-eye knowledge in my judgment requires a conscious reason for blinding the eye. There must be at least a suspicion of a truth about which you do not want to know and which you refuse to investigate. The argument on that approach then fails on the facts. I am not able to spell out of the judgment of Tuckey J any finding that the insured, or particularly any of those whose states of mind may be attributed to that of the insured, suspected any incompetence on the part of the master of the Star Sea , let alone any suspicion of his incompetence in the particular respect which mattered. That is sufficient to dispose of this part of the case; but in any event there is no finding of a suspicion on the part of the insured of the defective state of the dampers which contributed to the loss.[4]As regards the other chapter in the case I consider that it also fails on the facts. Even if the appellants were correct in requiring fair dealing and disclosure at the stage of the litigation I am not persuaded that the evidence supports the proposition that there was in fact any "culpable non-disclosure," as it was termed, on the part of the insured. As regards the obligations in law of an insured at the stage of a disputed claim I take the view that there is no duty upon the insured to make a full disclosure of his own case to the other side in a litigation. I see no practical justification for such an obligation at that stage. Unlike the initial stage when the insurer may rely very substantially upon the openness of the insured in order to decide whether or not to agree to provide insurance cover, and if so at what level of premium, the insurer has open to him means of discovery of any facts which he requires to know for his defence to the claim. Moreover I have found no precedent to support the appellants' proposition; if anything the authority at least of MacGillivray on Insurance Law , 9th ed. (1997), para 19-59 points in the opposite direction. The idea of a requirement for full disclosure superseding the procedural controls for discovery in litigation is curious and unattractive, and one which would require to be soundly based in authority or principle.[5]What has caused me greater difficulty is the broad provision in section 17 which appears to be unlimited in its scope. The expression "utmost good faith" appears to derive from the idea of uberrimae fidei, words which indeed appear in the sidenote, but whose origin I have not been able to trace. The concept of uberrima fides does not appear to have derived from civil law and it has been regarded as unnecessary in civilian systems (Prof T B Smith, "A Short Commentary on the Law of Scotland" (1962), p 836, quoting MA Millner "Fraudulent Non-Disclosure" (1957) 76 SALJ 177, pp 188-9). Indeed more recently the suggestion has been advanced in the Court of Appeal in South Africa that the concept should be jettisoned ( Mutual and Federal Insurance Co Ltd v Oudtshoorn Municipality 1985 (1) SA 419, 433). Blackstone's Commentaries, 4th ed (1876) vol II, chapter 30 pp 412-413states that the very essence of contracts of marine insurance "consists in observing the purest good faith and integrity," but in Carter v Boehm (1766), 3 Burr 1905, at p 1910, Lord Mansfield refers simply to "good faith".[6]On the face of it the comprehensive degree of disclosure which the phrase implies and the absence of any limitation upon the period over which the obligation is to extend gives some support to the appellants' contention. But if the view which I have preferred is correct and the highest degree of openness is not required at the stage of a disputed claim, then the superficial meaning of section 17 cannot be correct. One solution is to impose a limit upon the period of the relationship between the parties to which the statutory provision is meant to apply so that it would only apply to pre-contract negotiations. That can be supported by the fact that the section is placed in a group of provisions dealing with disclosure and representation. The special provisions which immediately follow section 17 may embellish the general rule which applies at the period of formation, but not be exhaustive of it. But that solution now appears to be past praying for. In these circumstances the alternative remains available of adopting a flexible construction of the concept of utmost good faith. The latter course was the one which the respondent has adopted and which I would accept.[7]Since even after the contract is entered into the relationship between the parties should in any event be coloured by considerations of good faith, the point is in some respects academic. But once it is recognised that in a contract of insurance, and indeed in certain other contracts, an element of good faith is to be observed, and that that element may impose certain duties particularly of disclosure between one party and the other, duties which may vary in their content and substance according to the circumstances, then a question may arise as to the utility of the concept of an utmost good faith or an uberrima fides. In my view the idea of good faith in the context of insurance contracts reflects the degrees of openness required of the parties in the various stages of their relationship. It is not an absolute. The substance of the obligation which is entailed can vary according to the context in which the matter comes to be judged. It is reasonable to expect a very high degree of openness at the stage of the formation of the contract, but there is no justification for requiring that degree necessarily to continue once the contract has been made.[8]I agree that the appeal should be dismissed. LORD HOBHOUSE OF WOODBOROUGH My Lords,[9]On 8 November 1989, brokers acting for the Kollakis group of companies renewed with underwriters the marine hull and machinery cover on the 40 or so vessels in their fleet for a further year. One of the vessels was the Cypriot motor vessel Star Sea , built in 1974 and having a gross tonnage 6925 tons. She was a dry cargo vessel having her engine-room and accommodation amidships and 4 refrigerated holds suitable for carrying bananas and this was the trade in which she was primarily employed. The trade is seasonal and it was usual for the Kollakis group to lay up their refer vessels during the late summer and autumn. The Star Sea was laid up in the Piraeus during which time annual maintenance and repairs were done by local contractors. She sailed on her first voyage following lay-up on 28 November 1989 manned by a Maldivian crew with Greek officers. Before she sailed she was inspected by a class surveyor and her cargo ship safety certificate, covering among other things fire safety, was renewed. The renewed insurance cover had attached on 25 November. Her insured value was US$ 3.2 million. The insurance was governed by English law and no specific clauses in the policies have been relied on by either side on this appeal. The provisions of the Marine Insurance Act 1906 ("the Act") apply. Loss by fire is a peril insured against.[10]Between November 1989 and May 1990, no incident occurred relevant to this appeal. There was a minor engine-room fire in March but this was simply dealt with using fire extinguishers. In January there was also a question of the efficiency of the emergency fire pump drawing water from the forepeak. A temporary fire pump was provided which satisfied the local surveyor but the suction in the forepeak was left in a condition where it would not draw unless the tank was filled; it was normally empty when the vessel was laden. However nothing now turns on these matters; they did not contribute to what was subsequently to occur.[11]27 May 1990 the Star Sea sailed from Corinto, Nicaragua bound for Zeebrugge laden with a cargo of bananas, mangoes and coffee. Two days out, on the morning of the 29th, a fire was accidentally started in the engine-room workshop where the third engineer was using an oxyacetylene torch and it flashed back to the oxygen gas bottles. Attempts to use extinguishers on the fire were defeated by smoke. After about two and a half hours the master decided to use the CO2 system. The actions then taken were not effective to put out the fire and it continued to burn although for a while the crew thought it had been extinguished. 12 The vessel had sent out distress calls and these were responded to. The first vessel to arrive departed during the afternoon because the crew thought that the fire was out and that they did not need further assistance. During the early evening it became only to obvious that this was not so. The fire spread to the accommodation. A tug arrived during the early hours of the following day and the fire was unsuccessfully fought for the next day using the tug's monitors. The vessel was towed into Balboa arriving on 1 June with the fire still burning. At Balboa the fire was eventually extinguished but the damage was so extensive that the vessel had become a constructive total loss.[13]Notice of abandonment was given to underwriters on 12 June. It was not accepted. On 10 July the underwriters agreed to put the assured in the same position as if a writ had been issued. The writ in the action endorsed with points of claim was issued on 3 August and served a month later. The writ named two representative underwriters as defendants.[14]At the trial of the action before Tuckey J, various issues of fact and law were raised by the defendants in response to the claim. Only two are now of relevance.[15]The first is the defence that arises under s.39(5) of the Act. For voyage policies there is an implied warranty (s.39(1)) that at the commencement of the voyage the ship shall be seaworthy, ie , reasonably fit in all respects to encounter the ordinary perils of the seas of the adventure insured (s.39(4)). Such a warranty must be exactly complied with, whether it be material to the risk or not, and if not complied with the insurer is discharged from liability as from the date of the breach of warranty (s.33(3)). The policy in question here is a time policy, not a voyage policy. Section 39(5) provides:
"In a time policy there is no implied warranty that the ship shall be seaworthy at any stage of the adventure, but where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness."
[16]There are therefore three elements in this defence. First, there must have been unseaworthiness at the time the vessel was sent to sea. Secondly, the unseaworthiness must have been causative of the relevant loss. ( Thomas v Tyne and Wear SS Freight Ins Ass [1917] 1 KB 938) Thirdly, the assured must have been privy to sending the ship to sea in that condition. At the trial it was accepted that this defence could only defeat the claim for the CTL. The vessel had become a CTL under the policy because the fire had not been put out until it had caused such extensive damage to the vessel that the cost of repairing the damage would have exceeded her insured value. But some damage would have been caused by the fire in any event. It was accepted that the occurrence of the original fire was not attributable to any unseaworthiness; accordingly this defence would not bar a recovery for the lesser (but nevertheless substantial) partial loss.[17]Tuckey J found that the vessel had been unseaworthy in two respects which had concurrently caused the vessel to be so severely damaged that she became a constructive total loss. He also found that the assured had been privy to the vessel putting to sea unseaworthy in those respects. Therefore he held that the defence was made out in so far as the CTL claim was concerned.[18]The second defence was said to arise under s.17 of the Act:
" Insurance is uberrimae fidei A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party."
The case of the defendants was that the assured was under a continuing duty of the utmost good faith to disclose to them any information material to the claim and which might affect their decision to pay or defend the claim. The defendants argued that this duty continued notwithstanding that litigation had started and had been broken by the assured's (and their lawyer's) failure to disclose certain facts material to the defence under s.39(5). Accordingly, the defendants said, they were entitled to avoid the whole contract ab initio - with retrospective effect - and therefore had a complete defence to the whole of the claim, both the CTL and the partial loss.[19]Tuckey J held that this defence failed both in law and on the facts. He therefore gave judgment for the assured limited to the partial loss (giving, on his assessment, a recovery of some US$ 1.7 million).[20]Both sides appealed to the Court of Appeal. The Court of Appeal (Leggatt, Henry and Waller LJJ) in a judgment of the court delivered by Leggatt LJ dismissed the appeal of the defendants but allowed the appeal of the assured, reversing certain of the judge's findings of fact in relation to the first defence. The Court of Appeal therefore entered judgment for the assured in respect of their claim for a CTL. It is from this decision that the defendants have with the leave of your Lordships' House brought this appeal. The defendants submit that both defences should have succeeded. Since the utmost good faith defence (s.17) arises in connection with the privity defence (s.39(5)), I will take the privity defence first. Section 39(5): The relevant unseaworthiness:[21]The judge found that the vessel was unseaworthy in a number of respects when she set sail from Corinto. These reflected the age of the vessel and a low standard of maintenance. But he found that the failure to put out the fire on the morning of the 29th was attributable to only two of them. The vessel was equipped with a CO2 fire extinguishing system. This system worked on the principle of discharging a large quantity of CO2 gas into the engine-room so as to suffocate and thereby extinguish the fire by depriving it of free oxygen. For the system to be effective a number of conditions have to be observed. It should be used as soon as possible, before the fire has spread to other spaces. The engine-room must first have been sealed closing all the vents and other apertures through which CO2 might escape or oxygen enter thus prejudicing the suffocation of the fire. The full amount of CO2 should be discharged at one time into the engine-room so as to flood it with the gas and maximise the suffocating effect. The attempt at around noon on 29 May to put out the fire using CO2 was not successful because the attempt had been left until some two hours after the fire had started, the engine-room could not be sealed as the funnel dampers were in a defective condition and could not be fully closed, and only half of the CO2 was used for the attempt. The CO2 was kept in a special store outside the engine-room holding 4 banks of bottles. The contents of the bottles could be discharged directly into the engine-room by pulling a lever. The wires leading from the lever to two of the banks were broken. The system for discharging the bottles had not been properly maintained. When the lever was pulled only two of the banks were discharged. Had the need to discharge all 4 banks at the same time been appreciated the other two banks could have been discharged by different means but this need was not appreciated and it was not done at that time.[22]The judge found that the failure to use the CO2 earlier and the failure to use all 4 banks of bottles at once was attributable to the incompetence of the master in that he was ignorant of what was required for the successful use of the CO2 system. He held that this disabling lack of knowledge on the part of the master amounted to unseaworthiness. ( Standard Oil Co. of New York v Clan Line Steamers [1924] AC 100) The judge found that the defective condition of the funnel dampers which made it impossible to shut them fully also amounted to unseaworthiness. On the hearing of the appeal these findings were not challenged. The defendants also conceded that, for the purposes of making good the defence under s.39(5), it was necessary for them to establish that the assured was privy to both of these aspects of unseaworthiness. Thus it was conceded that, if the defendants fail to show privity in respect of the master's incompetence, the defendants' defence under s.39(5) fails regardless of what may have been the position about the condition of the dampers: see the Court of Appeal judgment, [1997] 1 Lloyd's Rep 360, 378. The concession was repeated before your Lordships. Whether or not this concession was correctly made has therefore not been the subject of argument before your Lordships: for the purposes of this case, I proceed on the basis of the concession. Privity: The Law:[23]It was accepted that the assured (however defined) did not have actual direct knowledge of the relevant unseaworthiness. But it was argued that the assured had a state of mind which was equivalent to knowledge - so-called 'blind eye knowledge'. This was the type of knowledge which the judge held had been proved. ([1995] 1 Lloyd's Rep 651, 664)[24]The expression was used by Lord Denning MR in The Eurysthenes [1977] QB 49 at 68 in relation to a defence of privity under s.39(5) which had been raised in answer to a claim under a policy of marine insurance:
"To disentitle the shipowner, he must, I think, have knowledge not only of the facts constituting the unseaworthiness, but also knowledge that those facts rendered the ship unseaworthy, that is, not reasonably fit to encounter the ordinary perils of the sea. And, when I speak of knowledge, I mean not only positive knowledge, but also the sort of knowledge expressed in the phrase 'turning a blind eye'. If a man, suspicious of the truth, turns a blind eye to it, and refrains from inquiry - so that he should not know it for certain - then he is to be regarded as knowing the truth. This 'turning a blind eye' is far more blameworthy than mere negligence. Negligence in not knowing the truth is not equivalent to knowledge of it."
Geoffrey Lane LJ in the same case (at p 81) stressed that privity meant knowledge and consent and was not equivalent to negligence. But he added the word "believed":
"I add the word 'believed' to cover the man who deliberately turns a blind eye to what he believes to be true in order to avoid obtaining certain knowledge of the truth."
Roskill LJ discussed the point at p 76. He was prepared to accept the expression "conscious realisation". He agreed with what Lord Denning MR had said. He added - "If the facts amounting to unseaworthiness are there staring the assured in the face so that he must, had he thought of it, have realised their implication upon the seaworthiness of his ship, he cannot escape from being held privy to that unseaworthiness by blindly or blandly ignoring those facts or by refraining from asking relevant questions regarding them in the hope that by his lack of inquiry he will not know for certain that which any inquiry must have made plain beyond possibility of doubt."[25]All these formulations reject the suggestion that even gross negligence will suffice. The use of the word 'suspicion' and 'belief' are indicative of the strength of the suspicion that is required. But perhaps the most helpful guide is to be found in what was said by Roskill LJ and Geoffrey Lane LJ about the reason for refraining from inquiry - "in the hope that by his lack of inquiry he will not know for certain" - "in order to avoid obtaining certain knowledge of the truth". It is probable that Lord Denning MR was saying the same thing when he used the phrase "so that he should not know it for certain". The illuminating question therefore becomes "why did he not inquire?". If the judge is satisfied that it was because he did not want to know for certain, then a finding of privity should be made. If, on the other hand, he did not enquire because he was too lazy or he was grossly negligent or believed that there was nothing wrong, then privity has not been made out. An ambiguity has arisen from the use by Roskill LJ of the phrase "had he thought of it". This suggests that the test may be objective. If so, that is not correct. The test is subjective: Did the assured have direct knowledge of the unseaworthiness or an actual state of mind which the law treats as equivalent to such knowledge?[26]This conclusion is in line with what Branson J had said 40 years earlier in The Gloria (1935) 54 LlLR 35 at 58:
"I think that if it were shown that an owner had reason to believe that his ship was in fact unseaworthy, and deliberately refrained from an examination which would have turned his belief into knowledge, he might properly be held privy to the unseaworthiness of his ship. But the mere omission to take precautions against the possibility of the ship being unseaworthy cannot, I think, make the owner privy to any unseaworthiness which such precaution might have disclosed."
If the shipowner deliberately refrains from examining the ship in order not to gain direct knowledge of what he has reason to believe is her unseaworthy state, he is privy to the ship putting to sea in that unseaworthy state.[27]The section refers to the privity of the assured; the privity must be of an individual who is to be identified with the assured. The owners of the Star Sea were the Manifest Shipping Co Ltd (the plaintiffs in the action), a Cypriot company beneficially owned by the Kollakis family. The management of the vessel was in fact delegated to an English company based in London, Kappa Maritime Ltd. At the material times the directors of Kappa were Captain Stefanos Kollakis and his sons Pantelis and George, who were concerned with commercial and operational matters, and Mr Nicholaidis, the technical director. The registered managers were a Greek company, Charterwell Maritime SA, based in the Piraeus. Its directors were Captain Stefanos and a Mr Faraklas (who was also the sole director of Manifest). The role of Mr Faraklas was in fact subordinate to that of Mr Nicholaidis and the other directors of Kappa. The judge held that Captain Stefanos and his two sons and Mr Faraklas were to be treated as coming within 'the assured' for the purposes of s.37(5); the Court of Appeal considered that Mr Nicholaidis did as well. Nothing however turns on this in the present case and I will proceed on the basis that the state of mind of any of these individuals may have been relevant to the question of privity. Privity: The Facts:[28]The defendants' case on privity was based upon what had happened the previous year to two of the other vessels in the Kollakis fleet. In February 1989 the Centaurus was alongside in Wilmington, Delaware, when there was a fire in the engine-room. The crew initially did nothing to fight the fire and simply summoned the local fire brigade who were not able to put out the fire until some 15 hours later. The vessel was fitted with a CO2 system but the Korean officers did not use it as they should because they apparently had the extraordinary belief that its use would in some way damage the engines. They left its use until it was too late for it to be effective to extinguish the fire. It also emerged that the engine-room could not be effectively sealed. The vessel was a constructive total loss.[29]The other vessel was the Kastora . She also had Korean officers and crew. In April 1989 she was at sea in the Carribean. There was an engine-room fire which again was not put out and allowed to spread so that the vessel became a constructive total loss. On this occasion the crew did use the CO2 within about half an hour of the start of the fire but it was not effective because the funnel dampers were not closed. The surveyor instructed by Kappa was a Dr Atherton who inspected the vessel twice. The first time was fairly soon after the fire. He then observed that one of the funnel dampers was sticking in a partially open position but thought that this might be due to its having been distorted in the fire: see his first report dated 22 May 1989. In mid-September he inspected the vessel again and reported that "an examination of the dampers themselves revealed that these were in poor condition and would not have provided an effective seal in the ventilator trunking": see his second report dated 22 September 1989.[30]There was no dispute that relevant individuals for the purpose of s.39(5) were aware of these facts. To lose two ships within the space of two months through engine-room fires which should have been capable of being extinguished was remarkable and disturbing. The judge found that the assured's response was "completely inadequate". So far as the crews were concerned, Captain Stefanos and the others concerned in the management of the fleet decided that the Korean crews and officers were not good enough. They were influenced in this not only by their experiences with the Centaurus and the Kastora but also with the need to have competent and reliable crews for vessels engaged in the carriage of refrigerated cargoes. They changed over to having entirely Greek officered vessels. This was the reason why the Star Sea when she came out of lay-up was given Greek officers. The master appointed to the Star Sea had been with the fleet for over 11 years with a good record of service, had been at sea for many years before that and had obtained his master's certificate in 1978. There was no evidence that the managers or any of the relevant persons believed that the captain they had appointed to the Star Sea was anything other than competent and experienced. But it was also the case that they took no steps to check his knowledge of the right way to use the CO2 system.[31]So far as the maintenance of the equipment in engine-rooms was concerned, the managers of the fleet did not take any special steps. It appears that they continued to rely upon the same maintenance procedures as before. In respect of the Star Sea , the managers engaged contractors to carry out necessary repairs and maintenance in the engine-room before she returned to service in November 1989. They put her through the required surveys in order to obtain the renewal of her safety certificates. In January 1990 at Zeebrugge, further inspections were carried out. However, neither in relation to the Star Sea nor in relation to other vessels did the management specifically require or instruct their superintendents to check the state of the dampers and other engine-room sealing components.[32]As is shown by the judge's findings as to the state of seaworthiness of Star Sea when she sailed from Corinto, the managers were at fault. The steps that they had taken to prevent any repetition of the disastrous engine-room fires were inadequate, as he put it, "completely inadequate". The judge declined to find that there was any actual knowledge on the part of the relevant persons. He continued, at p 664:
"However, I do find that there was blind eye knowledge on the part of the assured. The inadequate response to the earlier fires and the state of the Star Sea on 27 May [1990], demonstrate in my judgment that the assured did not want to know about her unseaworthiness in the relevant respects. What it comes down to specifically is this. With the message staring them in the face, that the CO2 systems on Centaurus and Kastora had not been used so as to prevent those ships from becoming constructive total losses, the assured took no effective steps to ensure that this would not happen again. The incompetence of the master and the state of the safety equipment for sealing the engine-room, essential to the effectiveness of the CO2 system on Star Sea show only too clearly how ineffective those steps were and how inadequately equipped she was to fight a fire effectively. The assured did not want to know about the competence of the master to use the CO2 system effectively. It is not easy to find a reason for this, since it would not have involved much time or money to ensure that the master was competent. The assured did not want to know about the state of the safety equipment. One reason for this is not difficult to find: money. This was an elderly vessel for which, as I find, there was a tight budget for repairs. A good deal of time and money had been spent on repairing in lay-up and maintaining at sea the reefer machinery which was, of course, essential to its revenue earning ability."
[33]Thus he does use the phrases drawn from the previous cases - "the assured did not want to know" - "staring them in the face" - but it is all postulated upon the inadequacy of the response to the earlier fires not upon any belief that would relate to the Star Sea herself. Whatever might be said about a tendency to skimp on repairs, nothing at all (as the judge himself points out) was to be gained by failing to check the master's state of knowledge of using CO2 and taking the simple steps, with no adverse costs implications, necessary to put any deficiency right. This is the point which was taken up by the Court of Appeal. Leggatt LJ said "an allegation that they ought to have known [is] not an allegation that they suspected or realised but did not make further enquiries". (p 208) He reviewed the evidence and continued at p 378:
"Accordingly, on the evidence, it was simply not open to the judge to make a finding that any of the individuals 'suspected' or 'believed' that the master was incompetent, lacking the basic knowledge on how to utilise CO2. The judge, it is right to say, himself recognised that it was not easy to find a reason why, in making a decision to change the crew, anyone should do so to persons it was 'suspected' or 'believed' would render the ship unseaworthy. Negligence there may have been in failing to ensure that the master was instructed, but 'suspicion' in the minds of any of the relevant individuals that an incompetent master might be being used was simply not established."
[34]The Court of Appeal therefore reversed the finding of the judge. This sufficed (on the concession which had been made) to defeat the defence under s.39(5). They accordingly did not need to deal in detail with the question of privity in relation to the dampers. They pointed out, correctly, that the judge had not made a finding that any of the relevant individuals had suspected or believed that the Star Sea might be unseaworthy because of defects in the dampers. A finding of negligence to a very high degree did not suffice for a finding of privity.[35]There may have been two sources of the difference between the Court of Appeal and the judge on this part of the case. The one was the confusion which has arisen from one of the phrases used by Roskill LJ in The Eurysthenes upon which I have already commented so as to have led to the use of an objective and not a subjective test. The other is the related point that evidence may provide support for making an inference that a person had a certain state of mind but may also be consistent with different states of mind. Thus the inadequate response to the previous casualties was evidence consistent with a number of states of mind of those concerned with the management of the fleet and does not without more establish that there was privity in relation to any individual vessel.[36]I agree that the Court of Appeal were right to reverse the judge's findings of fact and to allow the owners' appeal. The evidence did not on the correct view of the law sustain the finding of privity. The defence under s.39(5) therefore fails. The s.17 Defence: The Facts:[37]The facts relied upon by the defendants arose from the facts concerning the dampers on the Kastora as reported by Dr Atherton to the owners. His first report in May 1989 had noted that they had not been closed but did not criticise their maintenance; his second in September 1989 did. The reports went to Mr Nicholaidis who told the judge that he did not pick up this addition in the second report. Tuckey J disbelieved him and found further that Mr Nicholaidis had told Mr Faraklas that the dampers on the Kastora needed to be overhauled and repaired. In the present litigation the owners did not disclose Dr Atherton's reports, treating them as privileged. Further they did not disclose that he had, on his second visit to that vessel, found the dampers in a defective condition. They served a factual witness statement from Dr Atherton which did not refer to that fact. The witness statements of the Kollakis brothers also did not refer to Dr Atherton's second report. The defendants also relied upon a brokers' letter written in conjunction with negotiations for the settlement of the action which they said was similarly misleading in relation to the Kastora casualty. The defendants thus alleged that there had been a failure to observe the utmost good faith in that there had been a failure to disclose material information and misleading statements had been made. Their allegations involved also the owners' solicitors who were conducting the litigation on the owners' behalf and included allegations that what was done was done deliberately and that the untruths were reckless.[38]The judge rejected the substance of all these allegations. The various statements were not untrue and should not have misled. The brokers' letter was open to criticism but it was not dishonest, nor was it written recklessly. The judge however did disbelieve what Mr Nicholaidis had said in his witness statement and in his oral evidence. Mr Nicholaidis was not responsible for the conduct of the litigation or the prosecution of the claim. The solicitors had treated the first Atherton report as privileged as indeed it was. They had been unaware of the existence of the second Atherton report until the second day of the trial as it had been temporarily mislaid amongst the papers for litigation relating to the Kastora casualty with which the solicitors were not concerned. The judge did not make a finding of fraud against the owners.[39]The Court of Appeal upheld the judge's findings. In relation to the question of fraud, the case advanced by the defendants was that the decision to claim privilege for the Atherton reports was deliberate in the appreciation that its disclosure would weaken the owners' case. But, as the Court of Appeal pointed out, it was accepted that the reports were protected by legal privilege and it was believed by the solicitors that the owners were not under an obligation to disclose privileged documents unless and until they should choose to put them in evidence or call a witness who would be going to refer to them. Thus actual fraud was not alleged and it was at no stage alleged that the claim was being put forward fraudulently without an honest belief that it was a claim that the owners were entitled to make. Therefore, if a finding of fraud was necessary for the defendants to succeed on their defence under s.17, they would fail. Neither the judge nor the Court of Appeal made such a finding against the owners.[40]Before your Lordships the defendants contended that there was a positive duty of fair dealing and disclosure any breach of which would amount, in effect, to constructive fraud giving rise to the s.17 remedy of an entitlement to avoid the contract. But the defendants also had to contend that the duty extended up to and included the pursuit of any claim in litigation since this was the stage at which the matters upon which they relied had occurred. Thus, the defendants argued that it was a breach of that duty for the assured to claim privilege for a document which might assist the insurer to resist the claim. Section 17: The Legal Problems:[41]Section 17 raises many questions. But only two of them are critical to the decision of the present appeal - the fraudulent claim question and the litigation question. It is however necessary to discuss them in the context of a consideration of the problematic character of s.17 which is overlaid by the historical and pragmatic development of the relevant concept both before and since 1906.[42]The history of the concept of good faith in relation to the law of insurance is reviewed in the speech of Lord Mustill in Pan Atlantic Ins Co v Pine Top Ins Co [1995] 1 AC 501 and in a valuable and well researched article (also containing a penetrating discussion of the conceptual difficulties) by Mr Howard Bennett in 1999 LMCLQ 165. The acknowledged origin is Lord Mansfield's judgment in Carter v Boehm (1766) 3 Burr 1905. As Lord Mustill points out, Lord Mansfield was at the time attempting to introduce into English commercial law a general principle of good faith, an attempt which was ultimately unsuccessful and only survived for limited classes of transactions, one of which was insurance. His judgment in Carter v Boehm was an application of his general principle to the making of a contract of insurance. It was based upon the inequality of information as between the proposer and the underwriter and the character of insurance as a contract upon a "speculation". He equated non-disclosure to fraud. He said at p 1909:
"The keeping back [in] such circumstances is a fraud, and therefore the policy is void. Although the suppression should happen through mistake, without any fraudulent intention; yet still the underwriter is deceived, and the policy is void."
It thus was not actual fraud as known to the common law but a form of mistake of which the other party was not allowed to take advantage. Twelve years later in Pawson v Watson (1778) 2 Cowp 786 at 788, he emphasised that the avoidance of the contract was as the result of a rule of law:
"But as, by the law of merchants, all dealings must be fair and honest, fraud infects and vitiates every mercantile contract. Therefore, if there is fraud in a representation, it will avoid the policy, as a fraud, but not as a part of the agreement."
[43]Echoes of his more universal approach could still be found nearly a century later in a judgment of Lord Cockburn CJ in Bates v Hewitt (1867) LR 2 QB 595 at 606-607:
"If we were to sanction such [non-disclosure], especially in these days, when parties frequently forget the old rules of mercantile faith and honour which used to distinguish this country from any other, we should be lending ourselves to innovations of a dangerous and monstrous character, which I think we ought not to do."
[44]It was probably the need to distinguish those transactions to which Lord Mansfield's principle still applied which led to the coining of the phrases "utmost" good faith and "uberrimae fidei" , phrases not used by Lord Mansfield and which only seem to have become current in the 19th Century. Storey used the expression "greatest good faith", Wharton "the most abundant good faith"; a Scottish law dictionary (Traynor) used "the most full and copious" good faith; some English judges referred to "perfect" good faith (Willes J, Britton v Royal Ins Co , (1866) 4 F&F 905) and Lord Cockburn CJ to "full and perfect faith" ( Bates v Hewitt, sup at p 607 ). But 'utmost' became the most commonly used epithet and its place was assured by its use in the 1906 Act. The connotation appears to be the most extensive, rather than the greatest, good faith. The Latin phrase was likewise a later introduction. It has been suggested that its use may have been inspired by the use of similar language in Book IV of the Codex of Justinian (4.37.3) in relation to the contract of partnership. The best view seems to be that it had been unknown to Roman law and had no equivalent in Roman law: Mutual and Federal Ins Co v Oudtshoorn Municipality 1985 (1) SA 419, per Joubert JA at p 432. The first recorded use of the phrase in the law reports was by Lord Commissioner Rolfe (later Lord Cranworth LC) in Dalglish v Jarvie (1850) 2 Mac & G 231 at 243 in connection with the duty of disclosure to the court which arises when an ex parte application is made for an injunction; the phrase was however already current by that date as the judgment shows.[45]Lord Mansfield's universal proposition did not survive. The commercial and mercantile law of England developed in a different direction preferring the benefits of simplicity and certainty which flow from requiring those engaging in commerce to look after their own interests. "Ordinarily the failure to disclose a material fact which might influence the mind of a prudent contractor does not give the right to avoid the contract. The principle of caveat emptor applies outside contracts of sale. There are certain contracts expressed by the law to be contracts of the utmost good faith, where material facts must be disclosed; if not, the contract is voidable. Apart from special fiduciary relationships, contracts for partnership and contracts of insurance are the leading instances. In such cases the duty does not arise out of contract; the duty of a person proposing an insurance arises before a contract is made, so of an intending partner." (per Lord Atkin, Bell v Lever Bros [1932] AC 161 at 227.)[46]In relation to insurance Lord Mansfield was specifically addressing "concealments which avoid a policy". This concept of avoidance most obviously applies to the making of the contract and derives, as he said in Pawson v Watson ( sup ) and as confirmed by Lord Atkin ( sup ), from the application of a rule of law not from the parties' agreement. Later developments have applied the requirement of disclosure to matters occurring after the making of the contract of insurance, namely, the affidavit of ship's papers and the making of fraudulent claims; I will have to discuss these further. But, apart from some dicta, this has still been as a matter of the application of a principle of law and not through an implied contractual term. Nor was there any case prior to the Act where the principle was used otherwise than as providing a basis for resisting liability; no case was cited where the principle gave a remedy in damages, as would the tort of deceit or the breach of a contractual term. Whether there was a remedy in damages for a failure to observe good faith was finally and authoritatively considered by the Court of Appeal in Banque Keyser Ullmann SA v Skandia (UK) Ins Co [1990] 1 QB 665, affirmed by your Lordships' House at [1991] 2 AC 249 at p 280. In order to answer the question, both Steyn J at first instance (p 699 et seq ) and the Court of Appeal (p 773 et seq ) examined the basis of the requirement that good faith be observed. Having concluded on the authorities that the correct view was that the requirement arose from a principle of law, having the character I have described, the Court of Appeal held that there was no right to damages.[47]The arguments of counsel in the present case disclosed a certain amount of common ground between them. The principle of utmost good faith is not confined to marine insurance; it is applicable to all forms of insurance ( London Assurance v Mansel (1879) 11 Ch D 363, Cantiere Meccanico Brindisino v Janson [1912] 3 KB 452 ) and is mutual as s.17 itself affirms by using the phrase "if the utmost good faith be not observed by either party" and as was expressly stated by Lord Mansfield in Carter v Boehm 3 Burr1905.[48]Secondly, both counsel submitted that the utmost good faith is a principle of fair dealing which does not come to an end when the contract has been made. A different inference might have been drawn both from the language of s.17 and from its place in the Act - beneath the heading "Disclosure and Representations" and above sections 18 to 21 which expressly relate to matters arising before the making of the contract. But there is a weight of dicta that the principle has a continuing relevance to the parties' conduct after the contract has been made. Why indeed, it may be asked, should not the parties continue to deal with one another on the basis of good faith after as well as before the making of the contract? In his book upon the Act published in 1907, Sir MacKenzie Chalmers added this note to s.17:
"Note: The general principle is stated in this section because the special sections which follow are not exhaustive."
There are many judicial statements that the duty of good faith can continue after the contract has been entered into. The citations which I make during the course of this speech will demonstrate this. To take just one example for the moment, in Overseas Commodities v Style [1958] 1 Lloyd's Rep 546 at 559, McNair J referred to the obligation of good faith towards underwriters being an obligation which rests upon the assured "throughout the currency of the policy". However, as will also become apparent from the citation, the content of the obligation to observe good faith has a different application and content in different situations. The duty of disclosure as defined by sections 18 to 20 only applies until the contract is made.[49]Thirdly, both counsel accept and assert that the conclusion of the Court of Appeal in the Banque Keyser case is good law and that there is no remedy in damages for any want of good faith. Counsel also drew this conclusion from the second half of s.17 - "may be avoided by the other party". The sole remedy, they submitted, was avoidance. It follows from this that the principle relied upon by the defendants is not an implied term but is a principle of law which is sufficient to support a right to avoid the contract of insurance retrospectively.[50]Having a contractual obligation of good faith in the performance of the contract presents no conceptual difficulty in itself. Such an obligation can arise from an implied or inferred contractual term. It is commonly the subject of an express term in certain types of contract such as partnership contracts. Once parties are in a contractual relationship, the source of their obligations the one to the other is the contract (although the contract is not necessarily exclusive and the relationship which comes into existence may of itself give rise to other liabilities, for example liabilities in tort). The primary remedy for breach of contract is damages. But the consequences of breach of contract are not confined to this. The contractual significance of the breach may go further. It may also amount to a breach of a contractual condition which will excuse or suspend the other party's obligation to continue to perform the contract. It may be a repudiatory breach, or evidence a renunciation, which entitles the other party to terminate the contract and sue for damages. However any such release only applies prospectively and does not affect already accrued rights. ( Bank of Boston Connecticut v European Grain and Shipping Ltd [1989] AC 1056) Ordinarily, the right to the indemnity accrues as soon as the loss has been suffered: Chandris v Argo Insurance Co Ltd [1963] 2 Lloyd's Rep 65.[51]The right to avoid referred to in s.17 is different. It applies retrospectively. It enables the aggrieved party to rescind the contract ab initio . Thus he totally nullifies the contract. Everything done under the contract is liable to be undone. If any adjustment of the parties' financial positions is to take place, it is done under the law of restitution not under the law of contract. This is appropriate where the cause, the want of good faith, has preceded and been material to the making of the contract. But, where the want of good faith first occurs later, it becomes anomalous and disproportionate that it should be so categorised and entitle the aggrieved party to such an outcome. But this will be the effect of accepting the defendants' argument. The result is effectively penal. Where a fully enforceable contract has been entered into insuring the assured, say, for a period of a year, the premium has been paid, a claim for a loss covered by the insurance has arisen and been paid, but later, towards the end of the period, the assured fails in some respect fully to discharge his duty of complete good faith, the insurer is able not only to treat himself as discharged from further liability but can also undo all that has perfectly properly gone before. This cannot be reconciled with principle. No principle of this breadth is supported by any authority whether before or after the Act. It would be possible to draft a contractual term which would have such an effect but it would be an improbable term for the parties to agree to and difficult if not impossible to justify as an implied term. The failure may well be wholly immaterial to anything that has gone before or will happen subsequently.[52]A coherent scheme can be achieved by distinguishing a lack of good faith which is material to the making of the contract itself (or some variation of it) and a lack of good faith during the performance of the contract which may prejudice the other party or cause him loss or destroy the continuing contractual relationship. The former derives from requirements of the law which preexist the contract and are not created by it although they only become material because a contract has been entered into. The remedy is the right to elect to avoid the contract. The latter can derive from express or implied terms of the contract; it would be a contractual obligation arising from the contract and the remedies are the contractual remedies provided by the law of contract. This is no doubt why judges have on a number of occasions been led to attribute the post-contract application of the principle of good faith to an implied term.[53]The principle relied on by the defendants is a duty of good faith requiring the disclosure of information to the insurer. They submit that the obligation as stated in s.17 continues throughout the relationship with the same content and consequences. Thus, they argue that any non-disclosure at any stage should be treated as a breach of the duty of good faith: it has the same essential content and gives rise to the same remedy - the right to avoid.[54]In the pre-contract situation it is possible to provide criteria for deciding what information should be disclosed and what need not be. The criterion is materiality to the acceptance of the risk proposed and the assessment of the premium. This is spelled out in the 1906 Act and was the subject of the Pine Top case. But when it comes to post-contract disclosure the criterion becomes more elusive: to what does the information have to be material? Some instructive responses have been given. Where the contract is being varied, facts must be disclosed which are material to the additional risk being accepted by the variation. It is not necessary to disclose facts occurring, or discovered, since the original risk was accepted material to the acceptance and rating of that risk. Logic would suggest that such new information might be valuable to the underwriter. It might affect how hard a bargain he would drive in exchange for agreeing to the variation; it might be relevant to his reinsurance decisions. But it need not be disclosed. In Lishman v Northern Maritime Insurance Co (1875) LR 10 CP 179, at 182 Blackburn J said:
"concealment of material facts known to the assured before effecting the insurance will avoid the policy, the principle being that with regard to insurance the utmost good faith must be observed. Suppose the policy were actually executed, and the parties agreed to add a memorandum afterwards, altering the terms: if the alteration were such as to make the contract more burdensome to the underwriters, and a fact known at that time to the assured were concealed which was material to the alteration, I should say the policy would be vitiated. But if the fact were quite immaterial to the alteration, and only material to the underwriter as being a fact which showed that he had made a bad bargain originally, and such as might tempt him, if it were possible, to get out of it, I should say that there would be no obligation to disclose it."
[55]Blackburn J is adopting a similar approach to that which he adopted in the leading case Cory v Patton (1872) LR 7 QB 304 which concerned whether there was a duty to disclose adverse facts discovered between the time that the underwriter had accepted the risk by initialling the slip binding in honour only, and the issue of the legally binding policy. Blackburn J said at pp 308-9 that the underwriter cannot depart "from terms thus agreed on [in the slip] without a breach of faith"; and the assured need not disclose to the underwriter "information which ought to have no effect on him, but would expose him to a temptation to break his contract. ..... he is not bound to lead his neighbour into temptation." The duty of good faith is even-handed and is not to be used by the opposite party as an opportunity for himself acting in bad faith.[56]The decision in Cory v Patton was endorsed by the 1906 Act. What Blackburn J said in Lishman was followed in many subsequent cases, for example, Niger Co v Guardian Ass Co (1922) 13 LlLR 75, particularly per Lord Buckmaster at p 76-7, Iron Trades Mutual Insurance Co Ltd v Compania De Seguros Imperio 31/7/90 Commercial Court (unreported); Bank of Nova Scotia v Hellenic War Risks Mutual Insurance Ass (Bermuda Ltd) [1988] 1 Lloyd's Rep 514. In the Niger case an additional argument was advanced. The policy in that case was one which covered the assured for a number of years but it included a cancellation clause which allowed the insurance company to cancel the policy. The risk turned out to be more onerous than had been expected because there was a tendency for considerable quantities of goods to accumulate in the up-river warehouse from which they were to be dispatched. The insurance company sought to avoid the policy or resist a claim because this post-contract development of which the assured was aware had not then been disclosed by the assured to the insurance company. Obviously the development was of interest to the insurance company and might have led it to exercise its right of cancellation. But the Court of Appeal ((1921) 6 LlLR 239, particularly per Bankes LJ at p 245) and the House of Lords held that such facts need not be disclosed. (See also New Hampshire Ins Co v MGN [1997] LRLR 24.) A similar decision has been reached in Australia, NSW Medical Defence Union v Transport Industries Ins Co (1985) 4 NSWLR 107.[57]These authorities show that there is a clear distinction to be made between the pre-contract duty of disclosure and any duty of disclosure which may exist after the contract has been made. It is not right to reason, as the defendants submitted that your Lordships should, from the existence of an extensive duty pre-contract positively to disclose all material facts to the conclusion that post-contract there is a similarly extensive obligation to disclose all facts which the insurer has an interest in knowing and which might affect his conduct. The courts have consistently set their face against allowing the assured's duty of good faith to be used by the insurer as an instrument for enabling the insurer himself to act in bad faith. An inevitable consequence in the post-contract situation is that the remedy of avoidance of the contract is in practical terms wholly one-sided. It is a remedy of value to the insurer and, if the defendants' argument is accepted, of disproportionate benefit to him; it enables him to escape retrospectively the liability to indemnify which he has previously and (on this hypothesis) validly undertaken. Save possibly for some types of reinsurance treaty, it is hard to think of circumstances where an assured will stand to benefit from the avoidance of the policy for something that has occurred after the contract has been entered into; the hypothesis of continuing dealings with each other will normally postulate some claim having been made by the assured under the policy. Ships' Papers:[58]The order for ship's papers was an order made by the common law courts for the disclosure, on affidavit, of all the documentary material which had come into existence in relation to the ship which had suffered the casualty and had any possible relevance to the claim. It was made in actions brought by the assured under contracts of marine assurance and covered wider classes of document than those directly within the possession or power of the plaintiff. The classes of document were set out in the form of order which was by the end of the 19th Century in a standard form and was formalised in an appendix to the Rules of the Supreme Court (latterly O72 r.10). The sanction was the stay of the action until the order had been complied with. Compliance with the order was onerous and the sanction left the assured with little choice but to comply or to abandon his claim. The order never extended to non-marine insurance. In the last century, although still formally permitted by the R.S.C. in all marine insurance actions, the order was as a matter of judicial policy confined to those cases where the underwriter defendants were prepared to state through counsel that they proposed to plead that the vessel had been wilfully cast away with the privity of the assured ( ie scuttling): Probatina Shipping v Sun Insurance [1974] QB 635. Within the last 40 years, the order has become obsolete; it has been recognised that it is largely unnecessary even in scuttling cases and had become an instrument of unjust delay (a view expressed by Greer LJ as early as 1932, Leon v Casey [1932] 2 KB 576 at 588-9).[59]There was throughout a paradox involved in the order. It was an order justified on the basis of the assured's duty of good faith towards the underwriter and accordingly to make full disclosure of all matters which might be material to the claim. But it was never made save in marine insurance cases and the attempt to obtain an order in connection with other types of insurance were rebuffed: Twizell v Allen (1839) 3 M&W 337 (claim in general average, no common law discovery), Henderson v Underwriting Agency Ass [1891] 1 QB 557 (insurance of goods carried by post Cadiz to Syria), Village Main Reef Gold Mining Co Ltd v Stearns (1900) 5 Com Cas 246 (land transit policy). The order was only made by the court in the exercise of its powers and was not as such a contractual right of the insurer. Neither failure to give that discovery without an order nor failure to comply with the order have ever been treated as providing a ground for the insurer to avoid the policy; it merely was the precursor of seeking from the court an order for such discovery or resisting the lifting of the stay. Yet it was repeatedly said by judges that the order was made because of a continuing duty of good faith and disclosure owed by the assured to the insurer: for example, Matthew LJ in Boulton v Houlder Bros Co [1904] 1 KB 784 at 791-792 - "It is an essential condition of a policy of insurance that the underwriters shall be treated with good faith, not merely in reference to the inception of the risk, but in the steps taken to carry out the contract. That being the meaning of the contract, effect is given to it by means of the order for discovery of ship's papers, and the affidavit with relation to them."[60]Historically, it seems probable that the original reason for advancing this justification was the need to establish a jurisdiction in the common law courts to make an order for discovery: Goldschmidt v Marryat (1809) 1 Camp 559, Twizell v Allen ( sup ), Graham Joint Stock Shipping v Motor Union Ins Co [1922] 1 KB 563. But it must be recognised that these statements of justification continued to be repeated by judges (myself included) long after that need had ceased. But it must also be recognised that, whatever the continuing duty was, it was of a different character to that which exists pre-contract. Its extent was different. Its enforcement was in the discretion of the court and required an order from the court. Its breach did not give rise to the right to avoid the contract: so, whatever it was, it was not the obligation referred to in s.17 nor was it the subject matter of Lord Mansfield's judgment in Carter v Boehm . Similarly, it can be taken to support the argument of the owners in the present case that the s.17 obligation does not extend into litigation. Fraudulent Claims:[61]This question arises upon policies which up to the time of the making of the claim are to be assumed to be valid and enforceable. No right to avoid the contract had arisen. On ordinary contractual principles it would be expected that any question as to what are the parties' rights in relation to anything which has occurred since the contract was made would be answered by construing the contract in accordance with its terms, both express and implied by law. Indeed, it is commonplace for insurance contracts to include a clause making express provision for when a fraudulent claim has been made. But it is also possible for principles drawn from the general law to apply to an existing contract - on the better view, frustration is an example of this as is the principle that a party shall not be allowed to take advantage of his own unlawful act. It is such a principle upon which the defendants rely in the present case. As I have previously stated there are contractual remedies for breach of contract and repudiation which act prospectively and upon which the defendants do not rely. The potential is also there for the parties, if they so choose, to provide by their contract for remedies or consequences which would act retrospectively. All this shows that the courts should be cautious before extending to contractual relations principles of law which the parties could themselves have incorporated into their contract if they had so chosen. The courts should likewise be prepared to examine the application of any such principle to the particular class of situation to see to what extent its application would reflect principles of public policy or the over-riding needs of justice. Where the application of the proposed principle would simply serve the interests of one party and do so in a disproportionate fashion, it is right to question whether the principle has been correctly formulated or is being correctly applied and it is right to question whether the codifying statute from which the right contended for is said to be drawn is being correctly construed.[62]Where an insured is found to have made a fraudulent claim upon the insurers, the insurer is obviously not liable for the fraudulent claim. But often there will have been a lesser claim which could properly have been made and which the insured, when found out, seeks to recover. The law is that the insured who has made a fraudulent claim may not recover the claim which could have been honestly made. The principle is well established and has certainly existed since the early 19th Century ( Halsbury's Laws of England , 4th ed reissue vol 25 (1994) p 284 para 492, Welford and Otter-Barry Fire Insurance, 4th ed (1948) p 289 et seq ). This result is not dependant upon the inclusion in the contract of a term having that effect or the type of insurance; it is the consequence of a rule of law. Just as the law will not allow an insured to commit a crime and then use it as a basis for recovering an indemnity ( Beresford v Royal Insurance Co Ltd [1937] 2 KB 197), so it will not allow an insured who has made a fraudulent claim to recover. The logic is simple. The fraudulent insured must not be allowed to think: if the fraud is successful, then I will gain; if it is unsuccessful, I will lose nothing.[63]In Goulstone v Royal Ins Co (1858) 1 F&F 276, which concerned a fire policy and a plea that the claim was fraudulently exaggerated, Pollock CB directed the jury that if the claim "was wilfully false in any substantial respect", they should find for the defendant as the plaintiff had in that case "forfeited all benefit under the policy". (p 279) In Britton v Royal Ins Co (1866) 4 F&F 905, also a fire insurance case where it was alleged that the insured took advantage of the fire to make a fraudulent claim, Willes J directed the jury:
"The law upon such a case is in accordance with justice. and also with sound policy. The law is, that a person who has made such a fraudulent claim could not be permitted to recover at all. The contract of insurance is one of perfect good faith on both sides, and it is most important that such good faith should be maintained. It is the common practice to insert in fire policies conditions that they shall be void in the event of a fraudulent claim; and there was such a condition in the present case. Such a condition is only in accord with legal principle and sound policy. It would be most dangerous to permit parties to practise such frauds, and then, notwithstanding their falsehood and fraud, to recover the real value of the goods consumed. And if there is wilful falsehood and fraud in the claim, the insured forfeits all claim whatever upon the policy. This, therefore, was an independent defence; quite distinct from that of arson"
(p 909) Willes J stressed to the jury that it was of the utmost moment that insurances should be enforced fairly and protected from fraud. (p 911)[64]These authorities link the defence to the observation of good faith but are specifically based upon the actual fraud of the insured in making the claim. These judgments do not use the language of avoidance of the policy ab initio but refer to the forfeiture of "all benefit under the policy" or "all claim" upon it. It seems that the language used at the time in express clauses was similar. The textbooks substantially adopt the same approach: see, for example, most recently Clarke, Insurance Contracts 3rd ed (1997), p 746 et seq .[65]Modern authorities have not however always adopted this analysis. In Orakpo v Barclays Insurance Services [1995] LRLR 443, the insurance covered damage to a building. The insurance contract was in any event voidable since it had been induced by material misrepresentation but the defendant insurance company had also relied upon the defence that the claim was grossly exaggerated and fraudulent. In the Court of Appeal the defence was apparently argued upon the basis of implied term on the assumption that the continuing duty of good faith should be so analysed. The appellant plaintiff was appearing in person. The Court of Appeal dismissed his appeal holding unanimously that there had been a misrepresentation. But, obiter, there was a difference of opinion on the fraudulent claim defence. Staughton LJ, dissenting, was of the opinion that any breach of an implied term or, the duty of good faith would not have been so fundamental as to entitle the insurer to be discharged from liability. The majority, Hoffmann LJ and Sir Roger Parker, held that the insurer would on that ground as well have had a defence to the whole of the claim. The decision of Hoffmann LJ was arrived at applying contractual principles: he was concerned with an implied term (p 451). "I think that the insurance company should be able to trust the assured to put forward a claim in good faith. Any fraud in making the claim goes to the root of the contract and entitles the insurer to be discharged. One should naturally not readily infer fraud from the fact that the insured has made a doubtful or even exaggerated claim. In cases where nothing is misrepresented or concealed, and the loss adjuster is in as good a position to form a view of the validity or value of the claim as the insured, it will be a legitimate reason that the assured was merely putting forward a starting figure for negotiation. But in cases in which fraud in the making of the claim has been averred and proved, I think it should discharge the insurer from all liability." Sir Roger Parker said, at p 452:
"The appellant submits that the law, in the absence of a specific clause, is that an insured may present a claim which is to his knowledge fraudulent to a very substantial extent, but may yet recover in respect of the part of the claim which cannot be so categorised. To accept this proposition involves holding that, although an insurance contract is one of utmost good faith, an assured may present a positively and substantially fraudulent claim without penalty, save that his claim will to that extent be defeated on the facts. ....... I can see .... every reason why he should not recover at all."
Sir Roger also referred to the question whether, in the absence of an express clause providing that the claim and the policy should be avoided, the claim only should be forfeit, and a dictum in a Scottish case ( Reid & Co v Employers' Accident and Livestock Ins Co (1899) 1 F 1031) which, contrary to Britton's case, would hold that on[66]These dicta do not assist the defendants in the present case on the critical point whether anything less than actual fraud in the making of the claim brings the principle into play. Counsel have assured your Lordships that in the present case nothing turns upon whether the claim is wholly forfeit or the whole policy is treated as forfeit as well. The authority of Britton is that the whole claim is forfeit, which was what was material in the Orakpo case. As regards the question, academic in the Orakpo case and academic in the present case save as a pleading point, whether the making of a fraudulent claim would entitle the insurer to avoid the contract ab initio , that is a point upon which the judgments in Orakpo cannot be treated as fully authoritative in view of the contractual analysis there adopted. The language of Hoffmann LJ is fully justified on that contractual analysis - "goes to the root of the contract and entitles the insurer to be discharged". The fraud is fundamentally inconsistent with the bargain and the continuation of the contractual relationship between the insurer and the assured.[67]The same subject matter is discussed in two later cases to which I should refer. The first is the decision of the Court of Appeal in Galloway v Guardian Royal Exchange (UK) [1999] Lloyd's RepIR 209, a case similar to Orakpo involving a householder's insurance, a material misrepresentation in the proposal form and a fraudulent claim. The plaintiff's claim under the policy failed on both grounds. As regards the fraudulent claim defence, the Court of Appeal followed and applied what had been said by Willes J in Britton . On the point of difference between Staughton LJ and Hoffmann LJ and Sir Roger Parker in Orakpo , they preferred the view of the latter on the seriousness of any fraud in the making of a claim. Lord Woolf MR referred also to the speech of Viscount Sumner in Lek v Mathews (1927) 29 LlLR 141 at 145 stressing the seriousness of any fraudulent claim unless it could be treated as de minimis . "The policy of the law in this area, it seems to me", said Lord Woolf, at p 213 "must be to discourage the making of fraudulent claims." Millett LJ in a short concurring judgment stressed the seriousness of such fraud and the public interest in discouraging it. In that context he expressed himself in terms similar to those of s.17 - stating that the Court should consider the fraudulent claim itself and then consider whether "the making of that claim by the insured is sufficiently serious to justify stigmatising it as a breach of his duty of good faith so as to avoid the policy". (p 214) Whilst this case puts the principle on the basis of a rule of law not an implied term, it did not need to consider, nor is it clear that they were focussing on, the distinction between something which would defeat any claim under the policy and something which avoided the contract ab initio with all that that would entail. The case does not support the submission that something less than a fraudulent claim will suffice to give the insurer a defence.[68]The other decision is that of Rix J in Royal Boskalis Westminster NV v Mountain [1997] LRLR 523, reversed ( ib ) on grounds which do not affect the value of the judgment of Rix J in relation to the principle of good faith at pp 591 et seq . He powerfully questions whether in relation to claims the right of the insurer to repudiate all liability can extend beyond the making of a fraudulent claim to an innocent failure to disclose. He points out the difficulties which would arise in relation to the test of materiality and remedy. Again, the judgment underlines the relevance of fraud.[69]Other cases contain dicta which support one or other of the arguments before us but otherwise do not add to the discussion. For example, in the House of Lords in the Banque Keyser case [1991] 2 AC 249 at 282, Lord Jauncey said:
"There is, in general, no obligation to disclose supervening facts which come to the knowledge of either party after the conclusion of the contract ( Lishman v Northern Maritime Ins Co (1875) LR 10 CP 179), subject always to such exceptional cases as a ship entering a war zone or an insured failing to disclose all facts relevant to a claim."
This puts the obligation in wide terms independent of any question of fraud equivalent to those used in s.18 of the 1906 Act. Britton although cited was not referred to in any of the judgments not were its implications considered. The relevant question was different, whether a failure to make full disclosure at the time of making the relevant contract could give rise to a claim in damages.[70]In The Michael [1979] 2 Lloyds 1 at 21-2, a barratry case in which the defence was raised of a want of good faith in presenting and persisting in a claim for a loss by perils of the seas, Roskill LJ giving the judgment of the Court of Appeal rejecting the defence said:
"The relevant test must be honest belief."
The insurers had to prove that a fraudulent claim had been made or maintained by the insured. If it were the law that any non-disclosure would have sufficed to enable the insurers to avoid the contract ab initio , the case would have had to be approached very differently and the result might have been different.[71]Finally, mention should be made of the judgment of Hirst J in The Litsion Pride [1985] 1 Lloyd's Rep 437 which has been used in a number of cases to support a general view of the post contract duty of good faith. It was an exceptional case in that it involved a war risks policy under which the insured shipowners were entitled to send their ship into a highly dangerous war risk zone in the Persian Gulf against an obligation to pay a heavy additional premium calculated on the length of time spent in the zone. The policy, however did not require the shipowner to declare in advance that the ship was entering the zone but permitted declarations after it had done so. As a result the shipowners had a strong motive only to declare the entry if the vessel suffered a loss and that is what they did. Hirst J held that this practice was not a breach of contract but was done with the fraudulent intent of depriving the insurer of the additional premiums to which it was entitled. He held that the insurer was not liable to pay the claim. There had been a breach of the duty of good faith. The remedy was not confined to electing to avoid the policy; the insurer had elected not to avoid it. The insurer was entitled to rely on the breach as giving it a defence to the claim of the mortgagee of the vessel, the only effective plaintiffs in the action. The particular claim was only fraudulent in so far as the broker had not been truthful in dealing with the insurers at that stage. The reasoning adopted by Hirst J has been criticised both by academic writers and by other judges in later cases. I consider that it should not any longer be treated as a sound statement of the law. In so far as it decouples the obligation of good faith both from s.17 and the remedy of avoidance and from the contractual principles which would apply to a breach of contract it is clearly unsound and cannot survive the Court of Appeal judgment in Banque Keyser , upheld by your Lordships' House. In so far as it is based upon the principle of the irrecoverability of fraudulent claims, the decision is questionable upon the facts since the actual claim made was a valid claim for a loss which had occurred and had been caused by a peril insured against when the vessel was covered by a held covered clause. It is not necessary to examine whether there might or might not have been some other basis upon which the case could be decided in favour of the insurer as one feels it clearly ought to have been. But what is clear is that the judgment of Hirst J is not a sound basis for the arguments advanced by the defendants in the present case.[72]For the defendants to succeed in their defence under this part of the case the defendants have to show that the claim was made fraudulently. They have failed to obtain a finding of fraud. It is not enough that until part of the way through the trial the owners (without fraudulent intent) failed to disclose to the defendants all the documents and information which the defendants would have wished to see in order to provide them with some, albeit inadequate, evidential support for their alleged defence under s.39(5). The defence under s.17 fails. It must be added that, on the facts found, had the defendants' defence succeeded it would have produced a wholly disproportionate result. The defence under s.39(5) failed after a full disclosure and investigation of all the material evidence. The claim was in fact a good one which the owners were, subject to quantum, entitled to recover under the policy. The defendants were liable to pay it. The policy was valid and enforceable. For the defendants successfully to invoke s.17 so as to avoid the policy ab initio and wholly defeat the claim would be totally out of proportion to the failure of which they were complaining. Fraud has a fundamental impact upon the parties' relationship and raises serious public policy considerations. Remediable mistakes do not have the same character. In Litigation:[73]The point here is whether the obligation of good faith and disclosure continues to apply unqualified once the parties are engaged in hostile litigation before the courts. There is no authority directly on this point. It was decided in favour of the owners by both courts below. There are however dicta in cases which show that the judges concerned contemplated that the obligation of good faith could continue to apply during litigation. Thus, by way of example, Viscount Sumner in Lek v Mathews ( sup ) at p 145 said in relation to an express clause that he was inclined to think that it would extend to false statements during the course of the trial. It is therefore right to consider what effect the commencement of legal proceedings has upon the relationship of the parties. Similarly some of the judgments in the ship's papers cases treat the order for ship's papers as an application of the obligation of good faith.[74]Before the litigation starts the parties' relationship is purely contractual subject to the application of the general law. If one party has a right such as that given by s.17 it derives from the contract itself or from the application of the general law to the contractual relationship. These rights continue unimpaired unless one party has exercised a right of avoidance or termination. The insured has or may have a claim against the insurer. The insurer may have accepted the claim or may have rejected it. The insurer may have done so in a manner which evinces an intention not to be bound by the contract or, more probably, may simply be requiring to be satisfied that there is a valid claim covered by the policy. But the insured will either have or not have a cause of action against the insurer. Indeed, in relation to CTL cases, and the present case is such a case, the English doctrine of ademption makes the date of the issue of the writ the determinative date for deciding upon the validity of the notice of abandonment. ( SS Blairmore Co v Macredie [1898] AC 593) That is why it is normal for the assured to ask the underwriter to put him in the same position as if a writ had been issued. ( Polurrian SS Co v Young (1913) 19 Com Cas 143)[75]When a writ is issued the rights of the parties are crystallised. The function of the litigation is to ascertain what those rights are and grant the appropriate remedy. The submission of the defendants in this case is that, notwithstanding this, one party's conduct of the litigation can not only change that party's substantive rights but do so retrospectively avoiding the contract ab initio . It cannot be disputed that there are important changes in the parties' relationship that come about when the litigation starts. There is no longer a community of interest. The parties are in dispute and their interests are opposed. Their relationship and rights are now governed by the rules of procedure and the orders which the court makes on the application of one or other party. The battle lines have been drawn and new remedies are available to the parties. The disclosure of documents and facts are provided for with appropriate sanctions; the orders are discretionary within the parameters laid down by the procedural rules. Certain immunities from disclosure are conferred under the rules of privilege. If a party is not happy with his opponent's response to his requests he can seek an order from the court. If a judgment has been obtained by perjured evidence remedies are available to the aggrieved party. The situation therefore changes significantly. There is no longer the need for the remedy of avoidance under s.17; other more appropriate remedies are available. The same points have been persuasively made by Callahan AJ sitting in the Supreme Court of Connecticut in Rego v Connecticut Ins Placement Facility (1991) 593 A.2d 491 at 497.[76]I recognise that it is possible for something to be done in the litigation which may amount to a contractual act; the delivery of pleadings and similar documents are a form of communication. Such communication can have a contractual significance which can and will still be given effect to. Thus it is possible by a pleading to repudiate a contract or accept a repudiation as terminating the contract. Similarly, a claim or defence may affect the substantive rights of a landlord and tenant inter se . But the acts and omissions of the assured relied upon by the defendants in the present case are not of that character. They are solely relevant as alleged failures to observe good faith under s.17. The s.17 principle is a principle of law and if its rationale no longer applies and if its operation, the conferment of a right of avoidance, ceases to make commercial or legal sense then it should be treated as having been exhausted or at the least superceded by the rules of litigation. It will also very often be the case that by the time the litigation has started the cover has expired or its subject matter has ceased to exist so as to make the continuing relationship of insurer and insured no longer current and the observation of good faith only significant to the litigation.[77]I am therefore strongly of the view that once the parties are in litigation it is the procedural rules which govern the extent of the disclosure which should be given in the litigation, not s.17 as such, though s.17 may influence the court in the exercise of its discretion. The cases upon ship's papers, far from supporting the continuing application of the duty of good faith in truth support the opposite conclusion. As previously discussed, the fact that orders for ship's papers were only made in marine insurance despite the fact that the principle of good faith applies to all insurance and the fact that the order was a matter of discretion not of right shows that it is a procedural remedy not a matter of contract although the principle of good faith clearly influenced the attitude of the court to making such an order. But, most conclusively, the fact that the remedy was to obtain an order from the court and not to avoid the contract shows both the limits of the principle and the change of relationship which comes about when the parties are in hostile litigation.[78]Therefore this point must be decided against the defendants as well. Conclusion:[79]I have in the course of this speech referred to some cases from other jurisdictions. It is a striking feature of this branch of the law that other legal systems are increasingly discarding the more extreme features of the English law which allow an insurer to avoid liability on grounds which do not relate to the occurrence of the loss. The most outspoken criticism of the English law of non-disclosure is to be found in the judgment in the South African case to which I have already referred, the Mutual and Federal Insurance case. There is also evidence that it does not always command complete confidence even in this country: CTI v Oceanus [1984] 1 Lloyd's Rep 476, Pan Atlantic v Pine Top ( sup ). Such authorities show that suitable caution should be exercised in making any extensions to the existing law of non-disclosure and that the courts should be on their guard against the use of the principle of good faith to achieve results which are only questionably capable of being reconciled with the mutual character of the obligation to observe good faith.[80]My Lords,[80]the judgment of the Court of Appeal should be affirmed and the appeal should be dismissed with costs. Your Lordships were invited by the Appellants to make a special order for costs relating to the adjournment of the hearing of this appeal from its previously scheduled date. Having considered the submissions of the parties I do not consider that it would be appropriate to make the special order asked for. In so far as the Respondents may seek to recover any additional costs as a result of the adjournment, that will be a matter to be scrutinised on taxation in the usual way. LORD SCOTT OF FOSCOTE My Lords,[81]There are two issues of some general importance that arise in this appeal. The first point arises under section 17 of the Marine Insurance Act 1906:
"17. A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party."
Sections 18, 19 and 20 of the Act spell out in some detail the content of the duty of disclosure owed by the assured to the insurer before the contract is concluded and the yardstick for assessing whether a representation made by the assured to the insurer is material and is true. It might have been possible at one time to treat section 17 as merely an introduction to sections 18, 19 and 20. But if that were ever possible it is so no longer. The duty of utmost good faith has been held to apply where an assured is obliged under an existing policy to give notice of entry into a war risk zone (The Litsion Pride [1985] 1 Lloyd's Rep 437) and to the obligation of an assured to give notice when seeking to take advantage of a "held covered" clause in an existing policy (Overseas Commodities Ltd v Style [1958] 1 Lloyd's Rep 546; Liberian Insurance Agency Inc v Mosse [1977] 2 Lloyd's Rep 560). It has been held, also, to give rights of inspection under re-insurance treaties ( Phoenix General Insurance Co of Greece SA v Halvanon Insurance Co Ltd [1985] 2 Lloyd's Rep 599). And the section 17 duty has repeatedly been held to be owing in the context of claims. A dishonest claim constitutes a breach by the assured of section 17 and entitles the insurers to avoid the insurance contract.[82]The present case involves a claim. The respondent on this appeal, Manifest Shipping Company Ltd (Manifest), made a claim under policies of marine insurance in respect of which the appellant insurers have been sued as representative underwriters. The vessel insured was the Star Sea . It was insured against marine perils, including fire, for US $ 3.2 million. As a result of a fire in the engine room workshop on 29 May 1990, the Star Sea became a constructive total loss. A claim was made and on 3 August 1990 a writ was issued. The writ was served on 4 September 1990. It has not been suggested that the claim was not honestly made nor that the continued prosecution of the claim was or is dishonest. What is complained of is, first, that two accident reports into the causes of a fire on a vessel, the Kastora , which, like the Star Sea , was part of a fleet of over 30 vessels beneficially owned by the Kollakis family, had not been disclosed to the insurers. Both reports had been made by Dr Atherton, the shipowner's expert. As to the first report, privilege was claimed for it. Privilege would have been claimed for the second report as well, but the second report had been accidentally mislaid and overlooked and was not re-discovered until the second day of the trial. Privilege was eventually, during the trial, waived in respect of both reports. The insurers' complaint, however, is that the claim was formally made and persisted in for a considerable period without disclosure of these reports. The failure to disclose them is categorised as a breach of the section 17 duty of utmost good faith and the insurers claim to be entitled, as a consequence, to avoid the insurance contract. The insurers complain, also, that a Mr Nicholaidis, a director of Kappa Maritime Ltd, an English company that managed the Kollakis fleet, gave certain evidence which the trial judge, Tuckey J disbelieved. Mr Nicholaidis had particular responsibility for technical matters and his giving of the disbelieved evidence is represented as constituting a breach by the assured of its continuing section 17 duty of utmost good faith. The trial judge, Tuckey J, concluded that the section 17 duty owed by the assured came to an end once court proceedings had been commenced. At that point, in his view, court procedures and court sanctions, embodied in Rules of Court and practice directions, would supersede and replace any statutory obligations under section 17. He said, [1995] 1 Lloyd's Rep 651, 667 (rt. col):
"I think, as a matter of principle, that the English courts should hold that once insurers have rejected a claim, the duty of utmost good faith in relation to that claim comes to an end. There is a logic to this which was well summarised by the court in Connecticut."
[83]The judge's reference to the Connecticut court is a reference to the judgment of the Supreme Court of Connecticut in Rego v. Connecticut Insurance Placement Facility ((1991) 593 A2d 491). Callahan AJ, in whose opinion the other Justices concurred, said this:
"If the insurer denies liability and compels the insured to bring suit, the rights of the parties are fixed as of that time for it is assumed that the insurer, in good faith, then has sound reasons based upon the terms of the policy for denying the claim of the insured. To permit the insurer to await the testimony at trial to create a further ground for escape from its contractual obligation is inconsistent with the function the trial normally serves."
(p 497)[84]The Court of Appeal, in the present case [1997] 1 Lloyd'd Rep 360, did not endorse Tuckey J's conclusion that the section 17 duty came to an end where court proceedings began, but arrived at the same result via a different route. The Court of Appeal held that at the claim stage, and after the claim had been made, the section 17 duty required no more than that the claim should not be made, or persisted in, fraudulently:
"When the assured makes his claim, the duty of utmost good faith requires that it should not be made fraudulently; and we are prepared to contemplate that the duty not to present a fraudulent claim subsumes a duty not to prosecute a claim fraudulently in litigation. There is no need to demand more of the assured than that, if the Draconian remedy is to apply."
(p 371).[85]So, on this first point, the issues for your Lordships are, first, the duration of the section 17 duty - does it continue beyond the making of the claim and the issue of court proceedings prosecuting the claim? - and, second, the content of the duty at the claim stage and thereafter - was the Court of Appeal right in confining the duty to a duty to refrain from the fraudulent presentation or prosecution of a claim and, more particularly, can the matters on which the insurers rely suffice to constitute a breach of the assured's section 17 duty?[86]The second important point for decision arises under section 39(5) of the 1906 Act:
"39 (5) In a time policy there is no implied warranty that the ship shall be seaworthy at any stage of the adventure, but where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness."
[87]The policies under which the Star Sea was insured were time policies. Tuckey J., at trial, found that the Star Sea was unseaworthy in two relevant respects. First, he found that the master was incompetent in not knowing the manner in which the vessel's CO 2 fire extinguishing system should properly be used. Secondly, he found that the condition of the port and starboard engine room dampers was such that when operated they did not provide an effective seal, thereby reducing the efficacy of the CO 2 system. He found that both these matters were causative in enabling the fire to spread and to render the vessel a constructive total loss. But for the combined effect of these failures, the indemnity to which the assured would have been entitled would have been limited to US $1.7 million - as opposed to US $3.2 million, the insured value of the vessel.[88]The critical issue was whether the assured knew of the two matters in respect of which unseaworthiness was found. This issue required an examination of the concept of "privity". It was not alleged that any of the individuals whose state of mind might be taken to be that of the assured for section 39(5) purposes had actual knowledge that the Star Sea was unseaworthy in either of the two respects found. What was said, however, was that there was "blind-eye" knowledge. It was common ground that each of the two Kollakis brothers, Mr Pantelis (Lou) Kollakis and Mr George Kollakis, could be treated as the assured for section 39(5) purposes. Tuckey J concluded that, in addition, a Mr Faraklas should be so treated. Mr Faraklas was one of the two directors of Charterwell Maritime SA, a Greek company based in Piraeus and the registered managers of the Star Sea . He was also the sole director of the assured. Tuckey J considered the position of Mr Nicholaidis but concluded he did not qualify for inclusion. On this point, the Court of Appeal disagreed. So there are, in the end, four individuals, namely, the Kollakis brothers, Mr Faraklas and Mr Nicholaidis, whose state of mind has to be considered. Tuckey J, addressing himself to the states of mind of the Kollakis brothers and Mr Faraklas, made a finding of "blind-eye" knowledge on the part of the assured in respect both of the incompetence of the master regarding the CO 2 fire-fighting equipment and of the defective state of the Star Sea's dampers. He reached this conclusion by the following route. There had, within the period of 15 months or so before the Star Sea embarked upon its disastrous voyage also, been a fire leading to a constructive total loss on two other vessels in the Kollakis fleet, namely the Centaurus and the Kastora . The accident reports that followed these fires had revealed a degree of ignorance on the part of the master of each vessel of the proper use to be made of CO 2 firefighting equipment and of the possibility (in the case of the Centaurus ) and the near certainty (in the case of the Kastora ) that the faulty state of the vessel's dampers had prevented, or would have prevented if the CO 2 equipment had been properly used, the effective sealing of the site of the fire. Tuckey J found on the evidence that the accident report relating to the Centaurus had come to the attention of the assured. Two reports on the fire on the Kastora had been made, both by Dr Atherton. Tuckey J found that the assured, via one or other of the Kollakis brothers or Mr Faraklas, had become aware of the master's excessive delay in ordering the CO 2 firefighting equipment to be used and of the defective state of the vessel's dampers.[89]He then posed the question, at p 663:
"So much for what the assured learned from the two earlier fires. What did they do about it?" and answered the question by saying "
I am in no doubt that the assured's response to the earlier fires was completely inadequate." In the following passage, at p 664,

the judge expressed his conclusion on the critical issue of privity:

"I do find that there was blind eye knowledge on the part of the assured. The inadequate response to the earlier fires and the state of the Star Sea on 27 May [1990], demonstrate in my judgment that the assured did not want to know about her unseaworthiness in the relevant respects."
Tuckey J reduced the assured's recovery from the US $3.2 million to US $1.7 million. He did so on the footing that the Star Sea was, "with the privity of the assured", sent to sea in May 1990 with a master incompetent in the use of CO 2 firefighting equipment and with faulty dampers incapable of sealing off the engine room. The Court of Appeal disagreed that the requisite privity had been demonstrated. The court concluded that the judge's findings relevant to this issue "[come] down simply to a finding of negligence, albeit negligence in a high degree" (p 377). The court, therefore, allowed the assured to recover the full US $3.2 million. Accordingly, the question of principle for your Lordships is what, short of actual knowledge, has to be shown for a section 39(5) finding of "privity" to be made.[90]Before your Lordships the allegations on the back of which a breach of the section 17 duty is sought to be constructed are levelled against Mr Nicholaidis and against the assured's solicitors, Hill Taylor Dickinson, whose partner, Mr Mallin, had charge of the case. As against Mr Nicholaidis, the allegation is that he dishonestly included in his witness statement a passage which to his knowledge was untrue. As against the solicitors, the allegation is that Mr Mallin resorted to underhand and unconscionable, albeit not dishonest, tactics in suppressing the Atherton reports for as long as possible. Mr Jonathan Sumption QC, for the assured, has taken us through the relevant facts in order to submit that they simply do not sustain the weight that the insurers need them to bear. The importance of the section 17 issue in your Lordships' House relates to law and principle. But charges against Mr Mallin of underhand or unconscionable conduct and against Mr Nicholaidis of dishonesty are, I am sure, of more importance to them than the state of marine insurance law. It would not, in my opinion, be right to decide the section 17 issue in favour of the assured on grounds simply of legal principle. The solicitors and Mr Nicholaidis are entitled, in my opinion, to have your Lordships' view as to whether, on the evidence the serious allegations made against them are sustainable.[91]In my opinion, the allegations are not sustainable. Let me take first the allegations against Mr Mallin. He was, I will assume, responsible for the decision not to disclose to the insurers the existence of privileged documents, namely, the two Atherton reports until such time as the privilege had been waived. This is not surprising. It was common ground before your Lordships that the reports were privileged. Solicitors do not disclose in litigation documents which are entitled to privilege. They would risk being sued if they did. Mr Gordon Pollock QC, counsel for the insurers, suggested to your Lordships that Mr Mallin's motive in withholding the first report (the second was missing until the second day of the trial) was to improve the assured's chances of obtaining a favourable settlement before trial. There was, however, no evidence at all to support that suggestion. It had apparently never been put to Mr Mallin that that had been his motive. Mr Pollock explained that his suggestion was based upon an inference that that had been the motive. My Lords, I do not think an imputation of a discreditable motive can be properly so based. Mr Mallin was entitled to have the imputation put to him so that he could deal with it. The inference is neither an obvious one nor an inescapable one. The obvious inference, and the one that in the absence of any other evidence I would myself draw, is that the withholding of a privileged document is no more than the instinctive action of a solicitor experienced in litigation. Mr Pollock drew our attention to the judge's description of passages in Dr Atherton's witness statement as being "disingenuous" in that no reference was made in the statement to the contents of his two reports (see pp 670/671). Mr Pollock invited us to infer that Mr Mallin had asked Dr Atherton to draft his witness statement omitting any reference to his reports. But this, too, was not put to Mr Mallin. Moreover Tuckey J expressly exonerated Mr Mallin from criticism arising out of the contents of Mr Atherton's witness statement (p 671).[92]In my opinion, the evidence in the case does not warrant any imputation of underhand or unconscionable behaviour against Mr Mallin. I am prepared to assume, without deciding, that the conduct of solicitors in conducting litigation can be attributed for section 17 purposes to the assured, their client. The insurers' section 17 case, however, in so far as it is based upon the conduct of Mr Mallin in the conduct of the litigation, is based upon conduct that it is accepted was not dishonest and that cannot, for the reasons I have given, be characterised as underhand and unconscionable.[93]As to Mr Nicholaidis, it is true that Tuckey J preferred other evidence to that given by Mr Nicholaidis. But in doing so he did not say that he thought Mr Nicholaidis had given dishonest evidence. A charge of giving dishonest evidence made against a witness requires, in my opinion, something more than that the judge has not accepted his evidence and has preferred the evidence of someone else. Leggatt LJ in the Court of Appeal used the word "dishonesty" when referring to Mr Nicholaidis' state of mind (p 367). But in the passage in question, Leggatt LJ was addressing the question whether Mr Nicholaidis' knowledge and state of mind could be taken to be that of the assured for section 17 purposes. He held that it could not. He was not, as I read the judgment, adding a finding of the giving of dishonest evidence to the findings about Mr Nicholaidis that Tuckey J had made.[94]Leggatt LJ went on to say that Mr Nicholaidis' evidence about what he knew of the defective state of the fire dampers on the Kastora - the evidence that had been disbelieved by the judge - could not be attributed to the assured. I respectfully agree with that conclusion. It follows that Mr Nicholaidis evidence and state of mind does not constitute a route whereby a section 17 breach of duty can be brought home to the assured. I now turn to the section 17 point of principle.[95]It is accepted that the section 17 duty of the utmost good faith continues to apply after the conclusion of the insurance contract. It does not follow, however, that the content is the same after the contract as before. Indeed it cannot be. Sections 18 to 20 prescribe the contents of the pre-contract duty in terms which are inapplicable thereafter. It is very possible for the duty that pre-contract is owed by an assured to be broken by an act or omission which would not in ordinary language be described as a breach of good faith at all. Under section 18(1) the assured is deemed to know, and is therefore under an obligation to disclose, "every circumstance which, in the ordinary course of business, ought to be known by him" (see also section 19(a)). So an honest failure to disclose something of which the assured was in fact unaware may constitute a breach of duty. Consider also the concept of materiality. The duty to disclose extends to "every material circumstance" known to the assured (s. 18(1)) or to the assured's agent (s. 19(a)). The test of what is material is an objective one. An honest belief by the assured, or the agent, that a particular circumstance is not material, or an honest oversight of the materiality of a particular circumstance, will not assist the assured if, objectively viewed, the circumstance was material. I need not, perhaps, labour the point that a breach of section 18 or section 19 duty may arise notwithstanding the good faith of the assured. The addition of the adjective "utmost" does not affect the point.[96]It seems to me clear, therefore, that the content of the duty of "utmost good faith" post-contract must be examined afresh and is not coloured by the extent of the duty owed by the assured pre-contract. That this is so is demonstrated also by authority. Cory v Patton (1872) 7 QB 304 establishes the general proposition that the duty on the assured to disclose a fact material to the risk being undertaken by the insurer does not continue after the insured has become bound by the insurance contract.[97]Niger Co Ltd v Guardian Assurance Co Ltd (1922) 13 LlLR 75 concerned a continuing policy terminable by three months notice. It was held in your Lordships' House that no duty lay on the assured to disclose to the insurers post-contract facts which, if known, might have induced the insurer to exercise its right to terminate the contract. Viscount Sumner said this:
"The object of disclosure being to inform the underwriter's mind on matters immediately under his consideration, with reference to the taking or refusing of a risk then offered to him, I think it would be going beyond the principle to say that each and every change in an insurance contract creates an occasion on which a general disclosure becomes obligatory, merely because the altered contract is not the unaltered contract, and therefore the alteration is a transaction as the result of which a new contract of insurance comes into existence. This would turn what is an indispensable shield for the underwriter into an engine of oppression against the assured."
(p 82)[98]In the same case in the Court of Appeal, Bankes LJ had commented "if people enter into contracts of insurance for long periods, it would be a wise precaution to insert some provision requiring notice to be given them if the nature of the risk does alter or vary appreciably." ((1921) 6 LlLR 239, 245).[99]Plainly enough, neither in the Court of Appeal nor in this House was it regarded as a breach of the section 17 duty for the assured to fail to disclose facts within his knowledge which, if disclosed, might have induced the insurer to terminate the policy.[100]Cory v Patton and Niger Co Ltd v Guardian Assurance Co Ltd were followed in New South Wales by Rogers J in NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1985) 4 NSWLR 107. Rogers J held that it was not a breach of the continuing duty of good faith for an assured to fail to volunteer to the insurer information material to whether the insured would exercise a right to give notice terminating the contract.[101]Finally on this point I should refer to New Hampshire Insurance Co v MGN Ltd [1997] LRLR 24. Counsel for the insurer had submitted that where under a policy there was continuing cover subject to a right on the insurers to cancel on notice, an obligation of disclosure lay on the assured and extended to facts relevant to a decision by the insurer whether or not to cancel. The Court of Appeal rejected this submission. Potter J, at first instance, described it as "an unwarranted extension of the principle of disclosure" (p 47).[102]These authorities make clear that the content of the duty of good faith owed by an assured post-contract is not the same as the duty owed in the pre-contract stage. So what is the content of the duty owed at the claim stage? It is, at least, that of honesty in the presentation of a claim.[103]In Britton v Royal Insurance Co (1866) 4F&F 905, 909 Willes J told a jury that:
"The law is, that a person who has made such a fraudulent claim could not be permitted to recover at all. The contract of insurance is one of perfect good faith on both sides, and it is most important that such good faith should be maintained…. It would be most dangerous to permit parties to practise such frauds, and then, notwithstanding their falsehood and fraud, to recover the real value of the goods consumed."
[104]Views to the same effect were expressed in Orakpo v Barclays Insurance Services [1995] LRLR 443 and in Galloway v. Guardian Royal Exchange (UK) Ltd [1999] Lloyd's Rep IR 209. The Michael [1979] 2 Lloyd'd Rep 1 was a case in which a claim under a policy of marine insurance had been presented honestly. But after the claim had been presented the assured became aware, or had grounds to suspect, that the loss of the insured vessel had been caused not, as had been thought, by perils of the seas, but by scuttling. This information had not been passed on to the insurers. The insurers' reliance on this non-disclosure to avoid the policy failed on the facts. The court was not prepared to find or infer that the claim, honestly presented, had subsequently been dishonestly maintained. Roskill L.J. dealt with this issue in the following passage, at p 22:
"As to the allegation of subsequently maintaining a fraudulent claim, Piermay and Mr Pierrakos are not to be found guilty of fraud merely because, with the wisdom of hindsight, they had information which might, if appreciated at its true value, have led them to the truth at an earlier date. A plaintiff in litigation is not maintaining a fraudulent claim merely because during interlocutory proceedings he or his solicitors become aware of evidence which may militate against the correctness of the plaintiff's case and its likelihood of ultimate success. The relevant test must be honest belief."
[105]The Michael is, in my opinion, a very important case for present purposes. It seems to me that in order to succeed on the section 17 issue Mr. Pollock must persuade us that it was wrongly decided. It is true, as Mr. Pollock pointed out, that the insurer's case in The Michael was presented as one of fraud on the part of the assured. It was not argued that a lower degree of culpability would suffice. There is, however, no hint in Roskill LJ's judgment in The Michael that the insurer's were trying to jump a hurdle higher than was necessary.[106]Mr Pollock, in support of the submission that the section 17 duty attending the presentation and prosecution of a claim might be broken by culpable conduct falling short of fraud, relied on remarks made by Hirst J in The Litsion Pride [1985] 1 Lloyd's Rep 437. The Litsion Pride was insured against war risks but, in the event of the vessel sailing to certain specified destinations, the insurers could exact an additional premium at their discretion. The time was the Gulf War. Bandar Khomeini in the Persian Gulf was, it was agreed, the most dangerous port in the Gulf. A voyage there would be bound to attract an additional premium at a very high rate. The vessel sailed to Bandar Khomeini without notification being given to the insurers. It came under attack and sank. A letter purporting to pre-date the voyage and to give notice of the vessel's destination was concocted by the assured in order to deceive the insurers into believing that the failure to give notice of the voyage before its commencement was due to an innocent oversight. Hirst J. held that the falsely dated letter was a fraud directly connected to the claim and a breach of the section 17 duty of utmost good faith. I do not think anyone would dissent from that conclusion. But Mr Pollock, counsel for the insurers before Hirst J had submitted that a breach of the duty "… might be established for instance by proof of deliberate non-disclosure [or] misrepresentation, albeit negligent or even innocent, by either the owners or the brokers." (p 507). Mr Kentridge QC, counsel for the assured, had submitted that, once the contract had been concluded, "the sole duty of the assured was not to act vis-à-vis the underwriter in a fraudulent manner … (p 508)" But Hirst J did not accept that the post-contract duty was so confined and held, at p 512, that:
"…the duty in the claims sphere extends to culpable misrepresentation or non-disclosure."
Before us, Mr Pollock has resiled from the contention that, post- contract, merely negligent or innocent misrepresentation or non-disclosure could constitute a breach of the continuing section 17 duty. But he has maintained his submission that fraud or dishonesty is not essential and that conduct which can fairly be described as unconscionable could suffice.[107]Two recent cases in which this issue has been considered merit attention. The first is the judgment of Rix J. in Royal Boskalis Westminster NV v Mountain [1997] LRLR 523. Rix J was troubled by the notion that the post-contractual duty of good faith could extend beyond fraud to some unspecified degree of culpability (p 597). He found, on the facts of the case that "non-fraudulent but culpable and deliberate misrepresentation and non-disclosure have been proved, albeit they were subsequently repented of and remedied" (p 601). He held that the insurers had failed to establish that the misrepresentations and non-disclosures had been material and that the insurers were not entitled under section 17 to avoid the policy.[108]Mance J. in Standard Steamship Owners' P & I Association (Bermuda) Ltd v. Oceanfast Shipping Ltd , (unreported) in which judgment was handed down on 6 March 1996, described as "extravagant …. [the] proposition that mere negligence in the presentation of a claim could lead to avoidance of the whole contract of insurance". (p 13).[109]In my opinion, the ambit of the post-contract section 17 duty cannot be considered without account also being taken of the difficulties of materiality that troubled Rix J in the Royal Boskalis case. Let it be supposed that Mr Pollock is right and that non-disclosure not involving any dishonesty may entitle an insurer to avoid the policy. Materiality becomes highly relevant. It can only be the non-disclosure of material facts or information that can lead to the Draconian remedy of avoidance. But what is to be the yardstick by which materiality is measured? A decision to disclose or not to disclose would have to be taken at an early stage. Delayed disclosure would expose the assured to similar charges to those being made in the present case where disclosure of the two Kastora reports was made in the course of the trial. The assured will often not know where, in the spectrum that runs from 'interesting' at one end to 'issue determinative' at the other, the facts or information in question should be placed. A similar problem in connection with the discovery of documents led to the rule that "a document, which, it is not unreasonable to suppose, may tend either to advance the case of the party seeking discovery, or to damage the case of his adversary" should be disclosed ( Compagnie Financiere et Commerciale du Pacifique v Peruvian Guano Co (1882), 60 11 QBD 55, 60). If Mr Pollock is right, what other test of materiality is proposed? None has been suggested. In the present case, let it be supposed that nothing in either of the two reports is determinative of any issue in the claim. Nonetheless, it is submitted that a decision not to give early disclosure of them constitutes a section 17 breach and entitles the insurer to avoid the contract. If that were right, an assured would have to be advised to swamp his insurer with a mass of facts and information which might have some conceivable relevance to an issue in the case. This duty of disclosure could not logically be limited to information contained in documents. It would, if Mr. Pollock is right, extend also to information imparted orally. A duty that required such massive disclosure at the claim stage lacks any commercial justification or sense.[110]These difficulties make clear, in my opinion, that Mr Pollock's submission cannot be accepted. The presentation of a dishonest or fraudulent claim constitutes a breach of duty that entitles the insurer to repudiate any liability for the claim and, prospectively at least, to avoid any liability under the policy. Whether the presentation of such a claim should be regarded as a breach of a continuing duty under section 17 that entitles the insurer to avoid the policy with retrospective effect, enabling any payments made in satisfaction of previous unimpeachable claims to be recovered by the insurer, is more debatable. It is not necessary in the present case to decide that point. Nor is it necessary to decide what the position would be, if a claim that had been honestly begun were dishonestly continued. I have in mind a claim for the loss of goods that, post-claim, were found or otherwise restored to the insured owner. I can see a great deal of force in the argument that the section 17 duty does not apply to conduct in the prosecution of litigation, as to which the Rules of Court that govern litigation constitute the regulatory code. A decision as to that, too, is best left for a case where the point is critical to the result.[111]I would, however, limit the duty owed by an insured in relation to a claim to a duty of honesty. If the duty derives from section 17, nonetheless this limitation does not, in my opinion involve a judicial re-writing of section 17. On the contrary, it would be the creation out of section 17 of a duty that could be broken notwithstanding that the assured had acted throughout in good faith that would constitute a re-writing of the section. Unless the assured has acted in bad faith he cannot, in my opinion, be in breach of a duty of good faith, utmost or otherwise. For these reasons, I agree with Tuckey J and the Court of Appeal in concluding that the insurers' section 17 claim cannot succeed. The section 39(5) issue[112]Did the assured have blind-eye knowledge of the unseaworthiness of the Star Sea ? It is as well to return to the language of the sub-section. What is required is "privity" on the assured's part of the unseaworthiness. "Privity" in its ordinary meaning connotes knowledge. "Blind-eye" knowledge approximates to knowledge. Nelson at the battle of Copenhagen made a deliberate decision to place the telescope to his blind eye in order to avoid seeing what he knew he would see if he placed it to his good eye. It is, I think, common ground - and if it is not, it should be - that an imputation of blind-eye knowledge requires an amalgam of suspicion that certain facts may exist and a decision to refrain from taking any step to confirm their existence. Lord Blackburn in Jones v. Gordon (1877) 2 App Cas 616, 629 distinguished a person who was "honestly blundering and careless" from a person who "refrained from asking questions, not because he was an honest blunderer or a stupid man, but because he thought in his own secret mind - I suspect there is something wrong, and if I ask questions and make farther inquiry, it will no longer be my suspecting it, but my knowing it, and then I shall not be able to recover". Lord Blackburn added "I think that is dishonesty".[113]In The Eurysthenes [1977] 1 QB 49, Lord Denning MR gave the following description of 'blind-eye' knowledge:
"If a man, suspicious of the truth, turns a blind eye to it, and refrains from inquiry - so that he should not know it for certain - then he is to be regarded as knowing the truth."
(p 68)[114]Roskill LJ, in the same case, made clear that 'privity' in section 39(5) "must mean that he is privy to the unseaworthiness and not merely that he has knowledge of facts which may ultimately be proved to amount to unseaworthiness" and then turned to 'blind-eye' knowledge. He said:
"If the facts amounting to unseaworthiness are there staring the assured in the face so that he must, had he thought of it, have realised their implication upon the unseaworthiness of his ship, he cannot escape from being held privy to that unseaworthiness by blindly or blandly ignoring those facts or by refraining from asking relevant questions regarding them in the hope that by his lack of inquiry he will not know for certain that which any inquiry must have made plain beyond possibility of doubt."
(p 76) I have some difficulty with Roskill LJ's inclusion in the cited passage of the qualification "had he thought of it." If the assured had not "thought of it" he would, presumably, not have realised the implications of the facts. His refraining from inquiry would not then have been attributable to the hope that he would not know for certain. I do not, myself, see how a failure to think about the facts, and hence a failure to realise their implications, can afford the basis for a finding of blind-eye knowledge. I respectfully prefer the formulation by Geoffrey Lane LJ:
"Knowledge of what? Again the subsection is clear. It says 'unseaworthiness', not 'facts which in the upshot prove to amount to unseaworthiness'. Accordingly it seems clear to me that if this matter were res integra, the section would mean that the assured only loses his cover if he has consented to or concurred in the ship going to sea when he knew or believed that, it was in an unseaworthy condition. I add the word 'believed' to cover the man who deliberately turns a blind eye to what he believes to be true in order to avoid obtaining certain knowledge of the truth."
(p 81) Geoffrey Lane LJ's formulation was very similar to that of Branson J in The Gloria (1935) 54 LlLR 35:
"I think that if it were shown that an owner had reason to believe that his ship was in fact unseaworthy, and deliberately refrained from an examination which would have turned his belief into knowledge, he might properly be held privy to the unseaworthiness of his ship. But the mere omission to take precautions against the possibility of the ship being unseaworthy cannot, I think, make the owner privy to any unseaworthiness which such precaution might have disclosed."
(p 58) Leggatt LJ in the present case, after referring to The Eurysthenes and The Gloria , concluded that: "what the defendant underwriters had to establish was a suspicion or realisation in the mind of at least one of the relevant individuals that Star Sea was unseaworthy in one of the relevant aspects, and a decision not to check whether that was so for fear of having certain knowledge about it". (p 377).[115]Save that, having regard to the judge's findings on causation, I and the insurers' concession (referred to by my noble and learned friend Lord Hobhouse of Woodborough), the suspicion or realisation of unseaworthiness had to be of both, and not simply of one, of the relevant aspects, I agree with that formulation. There must be a suspicion of the relevant unseaworthiness, and a decision not to check. Unless there is a decision not to check, not to obtain confirmation of what is suspected, there will, in my opinion, be no privity, no blind-eye knowledge, however seriously negligent the failure to check may be. It is in this respect that, in agreement with Leggatt LJ, I think Tuckey J was in error. He made no finding of a deliberate decision not to enquire on the part of any of the individuals who, for this purpose, could constitute the assured. Such a finding was, in my view, an essential condition of a conclusion of blind-eye knowledge. It is not acceptable, in my opinion to assume, from the judge's conclusion of blind-eye knowledge that he did find that one or other of the individuals had made a deliberate decision not to enquire.[116]In summary, blind-eye knowledge requires, in my opinion, a suspicion that the relevant facts do exist and a deliberate decision to avoid confirming that they exist. But a warning should be sounded. Suspicion is a word that can be used to describe a state-of-mind that may, at one extreme, be no more than a vague feeling of unease and, at the other extreme, reflect a firm belief in the existence of the relevant facts. In my opinion, in order for there to be blind-eye knowledge, the suspicion must be firmly grounded and targeted on specific facts. The deliberate decision must be a decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe. To allow blind-eye knowledge to be constituted by a decision not to enquire into an untargeted or speculative suspicion would be to allow negligence, albeit gross, to be the basis of a finding of privity. That, in my opinion, is not warranted by section 39(5).[117]In the present case, on the facts, I can see no sufficient basis for attributing to any of the four individuals blind-eye knowledge of either of the two respects of unseaworthiness. The incompetence of the masters of the Centaurus and the Kastora did not put the Kollakis brothers, Mr Faraklas or Mr Nicholaidis in a position in which they were bound to enquire into the competence of every other master in the Kollakis fleet. The master of the Star Sea , although recently appointed to the Star Sea , had been with the fleet for over 11 years and there was no evidence of any previous incompetence on his part. He had held a master's certificate since 1978.[118]As to the dampers, outside contractors had been hired to overhaul the Star Sea's fire dampers while the vessel was laying-up in Piraeus before commencing its final voyage. Tuckey J expressed the opinion that:
"It was not enough merely to instruct outside contractors to overhaul dampers. The evidence shows that the decision as to what dampers to overhaul was effectively made by the contractors' foreman. In view of the state of the dampers on Star Sea after the fire, it is quite clear, I think, that work should have been done to her dampers in lay-up which was not done."
(p 663) The judge went on to say that some system should have been in place to ensure that the necessary work had been done.[119]These findings go to negligence, perhaps gross negligence, but they are, in my opinion, no basis for a finding of blind-eye knowledge. The judge made no finding against either of the Kollakis brothers or against Mr Faraklas of a suspicion or belief that the dampers were defective. And, as Leggatt LJ in the Court of Appeal pointed out, "there is no reason to suppose that the finding would have been made on this aspect fixing Mr Nicholaidis with a suspicion or belief where others were not" (p 378). I agree that the evidence did not justify a finding that these four individuals, whether viewed individually or collectively, sent the Star Sea on its voyage in an unseaworthy state believing or suspecting that that might be so.[120]I therefore agree with the Court of Appeal's conclusion that Tuckey J's finding in favour of the insurers on the section 39(5) issue cannot be sustained. For these reasons and those given by Lord Hobhouse of Woodborough in his opinion, which I have had the advantage of reading in draft, I would dismiss the appeal.

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