Aldrich and others v Norwich Union Life Insurance Co Ltd (formerly Norwich Union Life Insurance Society); Norwich Union Life Insurance Society v Qureshi and others




[1999] Lloyd's Rep IR 453, (Transcript: Smith Bernal)




23 NOVEMBER 1998




S Goldblatt QC for the Applicants; L Price QC and D R'Cruz for the Respondent








MORRITT LJ: These applications for leave to appeal arise out of the Norwich Union's Life Property Backed Guarantee Plan ("the Plan"). It was marketed in the direction of underwriting members of Lloyd's. The purpose of the plan was to enable a Name to demonstrate his financial capacity to underwrite risks by production of a guarantee from a bank or insurance company rather than demonstrating his own underlying assets.


The scheme involved a number of different elements. First, the Norwich Union would provide a guarantee of the Name's liability to Lloyd's in return for a charge over the Name's house or other property and over an endowment policy to be taken out by the Name with the Norwich Union specifically for the purpose of the guarantee.


The amount of the endowment policy was designed to create a fund equal at its maturity to the maximum amount payable under the guarantee and thereby to provide a ready source for the repayment of any obligation of the Name to the Norwich Union, which, in the meantime, was to be secured by the charge over the Name's house. The Name was required to pay the premiums as and when they fell due and interest on any sums paid by the Norwich Union to Lloyd's pursuant to the guarantee. Provided he did that, he was not required to repay the Norwich Union the amount of any payment under the guarantee unless and until the endowment policy matured. Such a plan was similar to those marketed by banks and other lending institutions but in those cases the guarantee provided by the bank was provided in return for a fee proportionate to the amount of the guarantee. This case was different in that there was an advantage to the Name because his money was used to provide an asset in the form of an endowment policy and to the Norwich Union that it had thereby obtained new insurance business from the Name. In summary, that was the plan and the mutual benefits that it provided for the parties to it.


Each of the applicants in this case entered into such a plan with the Norwich Union in or about 1989. In each case the Norwich Union was called upon to pay such Name's liabilities to Lloyd's and in each case the Name was unable to pay to Norwich Union the premiums on the policies or the interest on the amounts paid to Lloyd's under the guarantees. Proceedings were commenced. There is a difference between the two applications which is not material in that in one case the Norwich Union is the plaintiff seeking to enforce the mortgage and in the other case the Names are the plaintiffs seeking a declaration that the guarantee is unenforceable.


The various pleadings put forward by the Names, be they defences and counterclaims or statements of claims, were struck out by Rix J on 8 June 1998 in the one case, and by Rimer J on 31 July 1998 in the other. Leave to appeal was refused in each case by Waller LJ on the papers.


The core of the allegation the Names seek to put forward is, in summary, as follows. They allege that at the time the Norwich Union sold the plan to them, the Norwich Union knew of impending losses in certain specified areas of the Lloyd's insurance market, including asbestosis, pollution, stop-loss and excess of loss reinsurance. The Norwich Union is alleged to have acquired that knowledge through its association with two subsidiary or affiliated companies engaged in insurance and reinsurance, namely Norwich Winterthur Reinsurance Corporation and Stronghold Insurance Company Limited. It is said that the Norwich Union obtained the knowledge through common directorships, one being the chairman and the other the chief executive. The Names allege that the Norwich Union dishonestly concealed that information, which was material, at the time when they bought the plan from the Norwich Union.


This core allegation in all the cases, be they by claim or defence, are relied on in a number of legal contexts as absolving the Name from liability to the Norwich Union to reimburse it for sums payable by Norwich Union to Lloyd's and/or as a defence to any claim to enforce the charge over the Name's property.


The defences and counterclaims relied on are as follows:


(1) The non-disclosure by Norwich Union constituted the breach of a statutory duty arising under s 47 the Financial Services Act 1986 and/or gave rise to a defence of illegality pursuant to that Act.


(2) As one of the elements of the plan was a contract of life insurance, the Norwich Union owed to the Name a duty uberrimae fidei to disclose to the Name what the Norwich Union knew about the Lloyd's insurance market.


(3) The sale of the plan to each of the Names without disclosing what it knew involved Norwich Union in an unconscionable bargain with the Name.


(4) The Norwich Union knew of the fraud on the part of Lloyd's at the time they made the payments due under the guarantees thereby avoiding any liability on the Names to indemnify Norwich Union for the sums paid thereunder.


As I have indicated, Rix and Rimer JJ considered that each of those contentions was manifestly unsound and struck out the parties' pleadings. The question for us to determine is whether it is arguable that any one or more of those contentions is reasonably arguable and therefore one for which leave to appeal should be given.


I take first the question arising under s 47 of the Financial Services Act 1986. The Names seek to rely on that section as giving rise to a claim for breach of a statutory duty sounding in damages which can be set off against the claim the other way by the Norwich Union against them. As I have indicated, they also claim that the section gives rise to the defence of illegality which they can raise against any claim by Norwich Union either for a money judgement or to enforce a charge over their homes.


The material provisions for present purposes are as follows. Section 47 deals with misleading statements and practices. Omitting immaterial words it provides in subsection 1:


"Any person who-


(a) .... dishonestly conceals any material facts;


is guilty of an offence if he makes the statement, promise or forecast or conceals the facts for the purpose of inducing, or is reckless as to whether it may induce another enter or offer to enter investment agreement...."


Investment agreement for the purposes of the Act is defined, so far as material, so as to include a contract of insurance.


Section 47(2) provides that there is an offence re certain conduct; s 47(3) provides for a defence to the criminal charge; subsections (4) and (5) confine the effect of the prohibition to actions and effects taking place and felt within the United Kingdom; subsection (6) provides that:


"....a person guilty of an offence under the section shall be liable to...."


and the maximum punishments are set out.


The Act then has provisions in ss 55 and 56 for dealing with client's money, unsolicited calls, restrictions on advertising and so forth. Section 61 contains a provision headed "Injunctions and restitution orders". Section 61(1) provides that:


"If on the application of the Secretary of State the court is satisfied-


(a) that there is a reasonable likelihood that any person will contravene any provision of...."

and one of the many provisions specified is s 47,


"....the court may grant an injunction restraining the contravention...."


Paragraphs (b) and (c) deal with the cases where the person has contravened such a provision, is likely to continue and there are steps that could have been taken for remedying the contravention. Thus, in summary, s 61(1) provides a power to the Secretary of State to apply to the court either to prevent or remedy a breach of s 47.


In subsection (3) of that section, the court is entitled on the application of the Secretary of State to make an order if satisfied that profits have accrued to the person who was contravening the section or one or more investors has suffered loss. In that event, under subsection (4), it can order payment into court or under subsection (5) it can order payment to the person who suffered the loss. There are then provisions for payment into court and the furnishing of accounts. Subsection (9) provides:


"Nothing in this section affects the right of any person other than the Secretary of State to bring proceedings in respect of the matters to which this section applies."


The effect therefore of that section is to give the court extensive powers on the application of the Secretary of State to deal with contraventions of s 47, actual or threatened, but subject in each case to sub-s 9 that nothing in the section affects the right of a person other than the Secretary of State to bring proceedings in respect of the matters to which it applies.


Section 62 is headed "Actions for damages" and provides that:


"Without prejudice to Section 61 above, a contravention of...."


and it sets out a number of provisions in the Act, not including s 47:


"shall be actionable at the suit of a person who suffers loss as a result of the contravention",


The relevance is that it is not contemplated that section 47 gives rise to that action for damages. On the other hand, the opening words are "without prejudice to section 61".


The argument in favour of a cause of action for breach of a statutory duty did not appeal to Rix J. He considered on the construction of the sections to which I have referred, that it was quite clear that the argument the Names wished to put forward was incorrect as a matter of law. He said at page 17:


"It seems to me that the point of law is a short one, and self-contained, and not of particular difficulty, being dependent on well-established principles, and is one that I can properly and usefully decide on this application. I have reached the firm conclusion that there is no right of action for damages arising out of a contravention of section 47(1) of the FSA."


Rimer J followed that conclusion in his judgment given some two months later. The applicants now contend that the matter is by no means as clear as Rix and Rimer JJ found it. Reliance is placed on s 61(9) as recognising a cause of action for damages for breach of a statutory duty and the opening words of s 62 as being without prejudice to that recognition. It is submitted that the terms and the context of s 47(1), prima facie, comply with the test laid out in Cutler v The Wandsworth Stadium [1949] AC 398, [1949] 1 All ER 542 and that it is at least arguable with some reasonable prospects of success that there is an affirmative cause of action. It is alleged in the alternative that there is a defence of illegality which arises in the case of the contravention of a statute irrespective of whether the statute gives rise to any affirmative cause of action.


One of the grounds on which the judges concluded that the cause of action, even if otherwise available, or the defence if otherwise available would fail, is that they found it difficult to see how the facts not yet disclosed were material for the purposes of s 47(1). They pointed out that the only investment agreement was the insurance contract and that it was not prima facie relevant to that particular risk as to whether or not there were the impending losses, the knowledge of which was alleged to have been concealed.

It is pointed out that what is material depends on the context, and that the insurance policy was an integral part of the plan as a whole the object of which was to guarantee to Lloyd's the liability of the Name. It is submitted that you cannot sub-divide the plan as a whole and find that the knowledge of impending losses was material to some part of it but not material another part of it. It is said again, at the very least, that that is a point which is arguable.


I agree. I think that there is a reasonable argument to be mounted that s 47 does provide an affirmative cause of action which could give rise to a monetary claim which could be set off and also that it is capable of providing a defence of illegality to any claims made against the Names. I express no view as to what the ultimate conclusion of the court would be, but I think that it is sufficiently arguable to justify leave being given in relation to that particular part of the claim.


I pass to the second element which is that the insurance contract obligation gives rise to the normal uberrimae fidei requirement of disclosure on the part of the insurer to the insured. This again was rejected by Rix and Rimer JJ on the ground that the facts alleged and not disclosed were not material to the insurance policies. In Rix J's judgment he entered into an elaborate and complicated analysis of the rationes decidendi of Keyser Ullman v Westgate Insurance Co Ltd [1991] 2 AC 249, [1990] 2 All ER 947 in the three courts which considered it.


On this application the applicants contend that the judges took too narrow a view. What is material for any part of the plan, they submit, must be material for all parts of the plan, and it is not possible therefore to segregate the insurance policy from the mortgage obligations and the guarantee and say that it was material to the latter but not to the former.


For my part, again for much the same reasons as in relation to s 47, this is a point which is arguable with some prospect of success, although I give no indication as to how much prospect it might have. It is sufficient in my view for this court to grant leave to pursue that point before the full court.

I pass to the third of the legal contexts to which I have referred. This is the allegation of the plan being an unconscionable bargain. Rix J said:


"In my judgment, however, it is just impossible even to begin to try to bring this case within the applicable principles. Mr Qureshi suffered from none of the disabilities of the classic victim of unconscionable conduct: he was neither young, nor poor, nor ignorant, nor bereft of any adviser. There is nothing alleged against NU Life which can possibly be described as oppressive, overreaching or exploitative. There is nothing in the terms of the Plan itself which can possibly be described as unconscionable. Indeed, the advantage of the Plan was the normal costs of a bank guarantee, gone forever, were replaced by the value of the premiums invested under the life policy. It has not been suggested that the terms of the Plan were even in any way unusual, let alone unreasonable or unfair. In essence, Mr Qureshi's plea of unconscionable conduct comes down to the same complaint that NU Life failed to disclose to him what they knew about the impending losses at Lloyd's. If, as I have held, there was no duty on the part of NU Life to disclose any such information, I cannot see how it can be said that they have acted unconscionably. I am asked in effect to say that a judge at trial could find that Nu Life's conduct in the traditional phrase 'shocks the conscience of the court', I cannot, and this plea must therefore be struck out."


It was submitted by Mr Price in submissions adopted by Mr Goldblatt that the judge was, arguably, wrong. It was pointed out by reference to the case of National Westminster Bank Plc v Morgan [1985] 1 AC 686, [1985] 1 All ER 821 that the question of what is or is not an unconscionable bargain depends on the facts of the particular case, and that, by reference to the American Law Institute Restatement cited to the House of Lords in that case, undue influence can amount to unfair persuasion of a party. It was submitted by Mr Price that this was a case of undue influence as well as one of unconscionable bargain.


In their written submissions they relied also on the proposition that it could fairly be said that the Names were "bereft of advice" because their advisers did not have the information which was available to the Norwich Union if they are right in their primary allegation of the Norwich Union's knowledge of the impending losses.


I am wholly unpersuaded by this argument. It seems to me that whilst it is true that an unconscionable bargain is one which may depend on its particular facts, it is necessary to have some facts coming within the various categories of the disadvantage referred to by Rix J in his judgment. There is no suggestion of any such fact or such disadvantaged state in this case save for the fact that the knowledge alleged to be possessed by the Norwich Union was not disclosed to the Names' advisers. That, it seems to me, is wholly inadequate for founding a case for an unconscionable bargain if it cannot be used to found a more direct claim of failure to disclose. I would not give leave in respect of that particular claim, because it seems to me that, first, it has no reasonable prospect of success but, secondly, it would prolong the time taken for the hearing of the appeal which that would lead to some considerable extra expense if leave were given in relation to that point as well as to the others.


I turn to the fourth ground on which leave to appeal is sought in relation to the payment-out under the guarantees being made to Lloyd's at a time when, so it is alleged, the payer, Norwich Union, was aware of fraud in the insurance market in general and in Lloyd's in particular. This was rejected by Rix J at page 30 of his judgment where he said:


"I wish to say nothing regarding the allegations which have been made and which, despite the Lloyd's Settlement, may still be subject to adjudication here or abroad, save that subject to such adjudication they may remain allegations only, and contested ones. I am not aware of any adjudication that fraud has in fact occurred, and Mr Price has not suggested that there had been any such adjudication. I have to ask myself whether it is at all arguable that this material, put before NU Life, amounts to such evidence of fraud that the only realistic inference to draw is that of fraud, and fraud by the Society of Lloyd's. To that question, I have to answer that in my judgment the heavy burden of showing clear fraud has not even arguably been met. The plea is to my mind obviously unsustainable."


In their application for leave to appeal counsel have pointed out that the judge reached the conclusion that I have quoted based only on a summary of the relevant documents which had been put before him. It is submitted that the question is ultimately one of fact which can only be determined at the trial, and that the judge's conclusions, based on a summary only, are not adequate to reach a conclusion that the point is not arguable.


I do not accept the submissions made on part of the applicants. The summary which was put before the judge represented the applicants' own selection from the 700 documents available. It is reasonable to assume they put forward the best selection and that the other 630 pages will add nothing to what the judge already had. The judge was fully entitled to reach the view that the best documents provided by the applicants were wholly incapable of supporting the allegation of fraud and knowledge of fraud on which this particular cause of action depends. I see no reason why the full court should reach a different view.


As in the case of unconscionable bargain, it seems to me evident that if leave were given in relation to this point it would involve considerable additional cost in investigating the additional facts relied on. Given that, in my view, there is no reasonable prospect of success, there is every reason to refuse leave to appeal in relation to this point, even though leave may be granted in relation to the first two.


For all those reasons, I would grant leave in relation to s 47, leave in relation to uberrimae fidei and refuse leave in relation to unconscionable bargains and payment of knowledge of fraud.






TUCKEY LJ: I agree.




Leave granted in relation to s 47 and uberrimae fidei, and refused in relation to unconscionable bargains and payment on knowledge of fraud. Costs for each of the applicants to be costs in the appeal.



Harkavys; Norwich Union Group Legal Dept, Norwich