Norwich Union Life Insurance Society v Qureshi and another
QUEEN'S BENCH DIVISION (COMMERCIAL COURT)
 Lloyd's Rep IR 263, (Transcript)
HEARING-DATES: 8 JUNE 1998
8 JUNE 1998
This is a signed judgment handed down by the judge, with a direction that no further record or transcript need be made (RSC Ord 59, r(1) (f), Ord 68, r1). See Practice Note dated 9 July 1990,  2 All ER 1024.
R Hildyard QC and N Cox for the Plaintiffs; A Leolin Price CBE QC and R D'Cruz for the Defendants; M Swainston for the Third Party, Heath Consulting Co Ltd
PANEL: RIX J
JUDGMENTBY-1: RIX J
RIX J: In November 1989 the first defendant, Mr Qureshi, a name at Lloyd's, entered into an arrangement with the plaintiffs, then called The Norwich Union Life Insurance Society, now, following the reorganisation inherent in the demutualisation of the Norwich Union Group, called Norwich Union Life & Pensions Limited ('NU Life'), under which NU Life provided to the Society of Lloyd's a guarantee in the sum of £400,000 in respect of Mr Qureshi's liabilities as a name, against the security of a mortgage on Mr Qureshi's home and of an endowment policy on Mr Qureshi's life.
Unfortunately for Mr Qureshi, he was caught up in the recent well-known troubles at Lloyd's and was a member in particular of a number of the Gooda Walker syndicates which suffered so disastrously as a result of the effect of catastrophic losses such as Piper Alpha upon underwriters participating in London Market Excess of Loss ('LMX') business. As a result, Lloyd's made calls upon the guarantee provided by NU Life, until it was exhausted. Mr Qureshi was unable or unwilling to maintain both the premiums payable upon is life policy and the interest payable upon the sums which NU Life debited to the mortgage on his home, so that on 2 August 1995 NU Life commenced possession proceedings in the Croydon County Court against Mr Qureshi and his wife, who was also a party to the mortgage. The sum claimed is £381,500 in principal (Mr Qureshi had repaid the first advance made by NU Life under the guarantee in the sum of £18,500) and arrears of interest. Credit is given for the value of the life policy, now paid up for failure to maintain the premiums payable under it.
NU Life's claim was in due course transferred first to the Chancery Division and then to the Commercial Court. By then there had been a defence and counterclaim, an amended defence and counterclaim, and a reply and defence to counterclaim. On 17 February 1998 NU Life took out the summons which has been argued before me, to strike out Mr Qureshi's amended defence and counterclaim and for 'final judgment' in the action against Mr Qureshi on the money claim. It is accepted that the claim for possession, which also involves Mrs Qureshi and which raises additional issues, must abide a separate determination. Mrs Qureshi is not a party to the present summons.
There are apparently a number of Lloyd's names in a similar position to Mr Qureshi in that they have entered into identical arrangements with NU Life, who have formed themselves into an action group, known as the Norwich Union Action Group. It is also suggested that this is in the nature of a test case. I do not know about that.
There is a dispute as to whether the summons solely raises a striking out application under Rules of Supreme Court 1965 Ord 18, r 19, with a request for final judgment merely as a consequence, or also claims summary judgment under Ord 14 as an independent ground for judgment. In any event, on behalf of NU Life Mr Hildyard QC accepts that under Ord 18, r 19 I am only concerned with the question whether Mr Qureshi's pleadings disclose a reasonable defence or (on the counterclaim) cause of action, and not whether they are frivolous or vexatious or otherwise amount to an abuse of the court. It may be that the test for these purposes under Ord 18 and Ord 14 may make little or no difference. I propose to deal with the issues, and return to this dispute at the end of my judgment. I shall assume for the purposes of this hearing that any matter of fact raised by Mr Qureshi in his pleadings is true.
For the purpose of this hearing a draft reamended defence and counterclaim has been served on Mr Qureshi's behalf. I shall take full account of the additional matters raised in it.
The NU Life Property Backed Guarantee Plan
The guarantee, the mortgage, and the policy were all part of a Plan which NU Life marketed to Lloyd's names. The three elements of the Plan were linked: the name had to take out an endowment life policy, and provide a legal charge over his home and the policy. The offer made to Mr Qureshi provided for a policy in the sum of £69,504, which would mature in thirty years and which incurred monthly premiums in the sum of £257.67. If any payment was made under the guarantee, it could be treated as a sum advanced under the mortgage on which interest would be payable at 2.5% above the gross redemption yield on a 10 year high coupon gilt stock used as the basis of NU Life's mortgage interest rates as at the time the advance was made, or 4.5% if payment was not made punctually. The guarantee was to last for ten years from 1 November 1989.
Mr Qureshi entered into this Plan in replacement of a guarantee which Barclays Bank had previously provided for him in favour of Lloyd's in the sum of £200,000.
Schedules of Mr Qureshi's Lloyd's losses provided by him in the form of further and better particulars of his amended defence and counterclaim indicate that in 1988 his total premium limit over 9 separate syndicates was £250,000, in 1989 he was writing a limit of £500,000 over 19 syndicates, in 1990 he doubled up again to a limit of £990,000 over 40 syndicates, and in 1991 his limit rose again to £1,250,000 over 54 syndicates. I will assume that at least one reason why he chose to ask NU Life to provide a guarantee in the sum of £400,000, twice the limit of the Barclays Bank guarantee, was to enable him not only to continue his underwriting at Lloyd's, but to increase the level of it.
"Information Regarding Impending Losses"
Mr Qureshi alleges, and for present purposes I assume it to be true, that at all material times the Norwich Union Group, of which NU Life was a part, included two affiliate or subsidiary companies, Norwich Winterthur Re-Insurance Corporation ('NWRE') and Stronghold Insurance Company Ltd ('Stronghold'), which conducted insurance and reinsurance business, either actively or in run-off, with persons operating within the Lloyd's market; that Mr Michael Falcon, NU Life's chairman, and Mr Allan Bridgewater, NU Life's chief executive, were at all material times respectively directors of NWRE and Stronghold; that Mr Falcon was also NWRE's chairman; that through Mr Falcon and Mr Bridgewater NU Life had 'actual or imputed knowledge' of all matters known to NWRE and Stronghold; and that by reason of their business NWRE and Stronghold were well aware, at the time in November 1989 when Mr Qureshi entered into his arrangements with NU Life, that substantial losses were about to be incurred by several underwriting syndicates operating in the Lloyd's market, and in particular those involved in asbestosis liability, pollution risk liability, stop-loss risk liability and LMX reinsurance. Mr Qureshi's pleadings define such knowledge as knowledge of 'Information Regarding Impending Losses'.
Those allegations, which are broadly put and barely particularised, are sought to be supported by affidavit evidence from Mr Peter Fryer, who has worked in insurance and reinsurance companies in the Bahamas, New York and London, and who has been retained as an expert witness in recent years in trials within the Lloyd's Litigation. He deposes as to a growing realisation by the late 1980s as to the risks of accumulating losses in the latent disease and toxic tort insurance markets and of the risks involved in the LMX spiral in the case of catastrophe. He describes the way in which under-reserving and the RITC (reinsurance to close) technique were liable to pass on to successive syndicate years the liabilities of earlier years. As to the Norwich Union Group, he writes:
37. The Head offices of Norwich Union Holdings PLC, Norwich Winterthur Holdings Limited, NU Fire, NW Re and Stronghold were all in Norwich together with those of NU Life. These companies had certain common directors and shared certain common services. In my opinion they made up an integrated group of companies. Companies in the group were members of the Association of British Insurers ('ABI'), the ILU and the London Insurance and Reinsurance Market Association ('LIRMA') and members of their management served on the councils of these industry associations. Their executives attended the seminars and meetings of these bodies and were involved in technical study groups set up by them. They would have had access to all the publications and trade journals which circulated within the industry. These companies share the professional knowledge of the markets in which they operated and would have had knowledge in particular of those matters described to in paragraphs 8 to 32 above. It is likely in my opinion that the Norwich Union Life Insurance Society through its affiliates and/or subsidiaries would have been aware that a Lloyd's Name such as Mr Qureshi who joined syndicates involved in underwriting latent disease and/or toxic tort risk and/or LMX spiral, especially through a Members' Agency which had common ownership and management as the syndicates in to which he was placed, would have exposed himself to a very high risk of significant losses because of the substantial losses already affecting or about to affect the Lloyd's market in these areas."
Mr Fryer concludes:
39. At the time Mr Qureshi entered into the plan for 1989 it was known or should have been inferred by an organisation with intimate market knowledge such as was available within the Norwich Union group of companies that losses arising out of under reserved liabilities from toxic tort and environmental impairment were likely to continue to be incurred by Names at Lloyd's. It was also known that major catastrophes such as '87J' ('87J' refers to the hurricane which hit northern France and southern England in October 1987.) and 'Piper Alpha' had occurred and may have been likely to occur again, and that a number of companies and Lloyd's syndicates were known to have sustained losses well in excess of the reinsurance available to them.
40. The facts available to NU were sufficient for them to seriously call into question whether Mr Qureshi's continued membership of Lloyd's was as a result of an informed decision and whether, as a non-professional outside Name, he had been properly advised, and in particular informed about the impending losses, by his Members' Agent. I say this because had Names known of the impending losses it would have followed as a matter of common sense, in my opinion, that one would have expected a substantial number of them to have ceased underwriting on a scale that would have become apparent to the market as a whole. The fact is that in the late 1980s and early 1990s, including 1989 when Mr Qureshi entered into the plan, there was no such trend. An organisation with the information that NU would have had should have concluded from this that Names were not being informed of the impending losses."
It may well be that much of this is more or less controversial. In particular, NU Life have exhibited a Financial Times article of July 1988 headlined 'Surge in Names quitting Lloyd's', which refers to "reports about troubled syndicates and large losses, culminating in last week's Piper Alpha oil rig disaster . . .", I will nevertheless assume that what Mr Fryer deposes as to the likely state of NU Life's knowledge is true, and supplements Mr Qureshi's rather jejune pleadings.
Mr Qureshi's pleaded defences and counterclaim
It is Mr Qureshi's case that if he had been aware of the so-called Information Regarding Impending Losses, he would have forthwith ceased his underwriting activities at Lloyd's or at any rate ceased participation in syndicates involved in insuring asbestosis risk liability, pollution risk liability, stop-loss risk liability and LMX reinsurance; and would not have entered into the Plan.
It is the essence of Mr Qureshi's defence and counterclaim that NU Life, because of the knowledge which they had or which is to be imputed or attributed to them, owed him a duty of disclosure, which they failed to observe. This fundamental notion is reflected in a number of separate pleas which have been debated before me.
The first is that because the Plan involved as one of its elements a life policy, therefore NU Life, as the insurers of Mr Qureshi's life, owed him a duty, uberrimae fidei, to disclose to him what they knew about the Lloyd's market.
Secondly, it is said that by encouraging Mr Qureshi to enter into the Plan, which it is alleged was 'aggressively marketed', for their own commercial benefit, without disclosing to him their knowledge about the Lloyd's market or ensuring that he was aware of what they knew, NU Life were taking unfair advantage of a position of inequality, so much so that the Plan was an unconscionable bargain.
Thirdly, Mr Qureshi alleges that by reason of their non-disclosure NU Life were in breach of a statutory duty under s.47(1) of the Financial Services Act 1986 (the 'FSA') in that they 'dishonestly concealed' the Information.
Fourthly, it is alleged that by reason of information and evidence provided by Mr Qureshi to NU Life between April 1992 and June 1995, as well as by reason of their own knowledge of the Information Regarding Impending Losses, NU life were aware of clear fraud on the part of Lloyd's such as to make the guarantee void ab initio.
It is submitted that each of these four pleas provides Mr Qureshi with a defence. Furthermore, the counterclaim pleads that by reason of such matters Mr Qureshi 'has incurred loss and damage', namely the losses arising out of his 1990 and 1991 underwriting.
Before turning to deal with each of those points, I should say something about remedies. Mr Qureshi's pleadings are not very forthcoming about the nature of the remedies which flow from any of these allegations. The counterclaim merely repeats the substantive parts of the defence and adds a plea of loss and damage. How many of the four points made by way of a defence, however, sound in damages?
As for the first point, breach of the duty of good faith in the making of an insurance contract, it is alleged that that duty is founded on an implied term (or a duty in equity). But in the course of argument Mr Price QC, who appeared for Mr Qureshi, accepted that the pre-contractual duty of good faith in the insurance context is an obligation at law which provides in the case of breach a remedy in avoidance, but does not sound in damages: Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd  1 QB 665,  2 All ER 923 at page 777/781 of the former report,  2 AC 249,  2 All ER 947, pages 280B, 281F of the former report.
As for the complaint that the Plan was an unconscionable bargain, Mr Price again did not suggest that such a point if made good would give any relief other than rescission, or the setting aside of the bargain in equity, and restitution. It would follow that if restitutio in integrum were not possible, then prima facie rescission could not be granted. In order to achieve restitutio in integrum, however, Mr Qureshi would have to be able to repay to NU Life the net payment of £381,500 which NU Life have made to Lloyd's under the guarantee. That payment has gone directly to reduce Mr Qureshi's underwriting liabilities at Lloyd's, and therefore, other things being equal, has gone to his benefit.
The question of restitutio in integrum, which is relevant both to the plea of non-disclosure and to the plea of unconscionable conduct, was not much debated before me. Mr Price relied on the passage on the subject beginning at para 6-070 of CHITTY on CONTRACTS, 27 Edition, 1994, and in particular on para 6-071. I note first of all that para 6-070 states the primary rule that since the purpose of rescission is to restore the status quo ante:
the remedy will not lie if the parties are not in a position to make restitutio in integrum. In Clarke v Dickson Crompton J said that when a party 'exercises his option to rescind the contract, he must be in a state to rescind; that is he must be in such a situation as to be able to put the parties into their original state before the contract'."
Mr Price did not dispute that principle, but he relied on para 6-071 for the submission that at any rate in equity restitution need not be precise, as long as practical justice is done between the parties. For this purpose, equity was prepared to undertake an accounting and adjusting process so that, in the words of Lord Blackburn in Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218, at page 1278/9:
the practice has always been for a court of equity to give this relief whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract."
In this connection Mr Price submitted that a practically just accounting for the purpose of restitution would have to take into account that, by reason of entering into the Plan in ignorance of the impending losses, Mr Qureshi had incurred substantial further losses in 1990 and 1991, and that those losses reflected to some material, although uncertain, extent not merely the pure underwriting experience of the 1990 and 1991 years, but also the outcome in those years of transferring forward by means of the RITC process the losses of previous years. It would be unfair, he submitted, if such losses, especially when caused ex hypothesi by NU Life's unconscionable conduct, could be ignored for the purpose of the restitution accounting which equity required.
In my judgment there are grave difficulties with that submission. In the first place, it in essence amounts to an assertion that NU Life's unconscionable conduct constituted in itself an independent cause of action which would found relief in respect of the losses caused thereby. I do not think that such an independent cause of action has been pleaded, and I doubt that it could be made good if pleaded, or that the doctrine whereby equity will set aside unconscionable bargains can be stretched that far. I have already pointed out that breach of the pre-contractual duty of good faith gives rise to no cause of action for damages. Secondly, I doubt that it can properly be said that NU Life's conduct would have caused Mr Qureshi to have suffered such additional losses: the Plan may have enabled Mr Qureshi to continue his underwriting and thus to have been the occasion of or opportunity for such losses: but it was Mr Qureshi's independent decision to continue and to increase the level of his underwriting, in itself the premise of his entering into the Plan, which may be said to have caused his losses: see Galoo Ltd (in liq) v Bright Grahame Murray (a firm)  1 All ER 16,  1 WLR 1360 at page 1374H/1375B of the latter report. Thirdly, it appears from the schedules provided by Mr Qureshi himself that NU Life's payments to Lloyd's were probably (but I cannot say certainly) in respect of his 1988 and 1989 losses, rather than in respect of 1990/1991. Thus his losses in respect of the 1988 year are shown as a net £58,216, and his losses in respect of the 1989 year are shown at £572,767, with an estimated deterioration on open syndicates in the further sum of £162,875. To the extent of such losses, there could in any event be no connection between NU Life's conduct and Mr Qureshi's Lloyd's losses.
Having said that, I do not think that I would solely on this ground, of the difficulties that Mr Qureshi might experience in the matter of vindicating rescission through providing restitution, strike out Mr Qureshi's pleadings or withhold leave to defend. Rather, as will appear below, I do not think there is any prospect at all of Mr Qureshi making good his allegations of material non-disclosure or unconscionable conduct.
As for Mr Qureshi's third point, that NU Life are in breach of a duty under s.47(1) of the FSA that is actionable in a civil suit for damages, Mr Hildyard submits that no such right of suit exists, but that remedies by reason of s.47(1) are limited to criminal sanctions and to a form of 'class action' at the suit of the Secretary of State under s.61 of the FSA.
Section 47(1) itself provides as follows:
Any person who-
(a) makes a statement, promise or forecast which he knows to be misleading, false or deceptive or dishonestly conceals any material facts; or
(b) recklessly makes (dishonestly or otherwise) a statement, promise or forecast which is misleading, false or deceptive,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 person (whether or not the person to whom the statement, promise or forecast is made or from whom the facts are concealed) to enter or offer to enter into, or to refrain from entering or offering to enter into, an investment agreement or to exercise, or refrain from exercising, any rights conferred by an investment."
The language 'Any person who . . . is guilty of an offence' is the typical language in which criminal offences are created.
It is of course possible that a statutory prohibition expressed as sanctionable by the criminal law may yet give rise to a right of action for breach of statutory duty vested in persons who may be injured by the contravention of that duty, where upon the true construction of the statute the prohibition was imposed for the benefit or protection of a particular class of individuals: see Lonhro Ltd v Shell Petroleum Co Ltd (No 2)  AC 173,  2 All ER 456 at page 185 of the former report per Lord Diplock, referring to the Factories Acts and similar legislation and to the dictum of Lord Kinnear in Butler (or Black) v Fife Coal Co Ltd  AC 149 at page 165. That is the case here, submits Mr Price. I will assume that the investing public, which in a sense is as wide as the public at large, is nevertheless in the case of s.47(1) a 'particular class of individuals' for the purpose of this doctrine, confined to those investors or potential investors targeted by an offender. Nevertheless, I have to take into account that the FSA, in s.62, makes express provision for 'Actions for damages' without mentioning s.47. Thus s.62(1) provides:
Without prejudice to section 61 above, a contravention of-
(a) any rules or regulations made under this Chapter;
(b) any conditions imposed under section 50 above;
(c) any requirements imposed by an order under section 58(3) above;
(d) the duty imposed by section 59(6) above,
shall be actionable at the suit of a person who suffers loss as a result of the contravention subject to the defences and other incidents applying to actions for breach of statutory duty."
If there had been any intention that the offence created under s.47(1) should give rise to a similar action for damages, then it may be thought that it would have been mentioned in s.62. The absence of s.47(1) from mention in s.62 therefore places a heavy burden of explanation on Mr Price, which I do not think he overcame. In this connection s.61, to which s.62(1) refers in its opening line, is also illuminating. Section 61(1), unlike s.62(1) does mention s.47 among others, and makes detailed provisions for injunctive and restitutionary or compensatory relief which may be available 'on the application of the Secretary of State'. In effect, the Secretary of State may bring proceedings in the public interest, either to prevent offending or to collect from an offender 'such sum as appears to be just' having regard inter alia to his profits or to the 'loss or other adverse effect' which one or more investors have suffered.
Nevertheless, Mr Price points to s.61(9) and submits that it reflects a right for individuals to bring actions for damages based upon duties to be derived from the sections mentioned in s.61 including s.47. Section 61(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 relates."
In my judgment, however, that subsection is given sufficient content if one ascribes to it an intention to preserve common law rights and remedies or any other statutory rights which may cover the same ground as s.47 and the other sections dealt with in s.61. After all, false or deceptive statements, promises or forecasts may well give rise to remedies at common law, eg in fraud, or for misrepresentation or breach of contract. There is no need, therefore, to see in sub-section 61(9) any conflict with the clear inference from s.62 that there is to be no statutorily derived action for damages in the case of breaches of s.47.
It may be observed that, by way of contrast, ss 56, 57 and 59, which are specifically referred to in s.62(1), deal with prohibitions on matters which would not be likely if at all to give rise to common law remedies, viz unsolicited calls (s.56), prohibited advertising (s.57) and employment of prohibited persons (s.59).
I note that the learned editors of LOMNICKA & POWELL, Encyclopedia of Financial Services Law, 1987, at para 2-126, take the same view, stating:
nor may an aggrieved person bring a civil claim under s.62 (but he may under the common law for fraud etc.)"
A similar point about s.61(9) is made at para 2-193 (at page 2-210). I do not read what Scott LJ said in Securities and Investments Board v Pantell SA (No 2)  Ch 256,  1 All ER 134 at page 272 of the former report as intended to suggest that s.62 does give an action for damages under s.47: he was concerned rather with analysing s.61 and emphasising that an investor's common law rights for misleading statements, eg for rescission, lay entirely outside the statutory framework.
Mr Price submits that this question is an example of a difficult and novel point of law which should normally be left to trial: see Lonrho plc v Tebbit  4 All ER 973,  BCLC 66 at page 979F of the former report per Browne-Wilkinson V-C. However, the learned Vice-Chancellor there goes on to say:
But, if in a particular case the judge is satisfied that the decision of the point of law at that stage will either avoid the necessity for trial altogether or render the trial substantially easier and cheaper, he can properly determine such difficult point of law on the striking-out application: see Williams & Humbert Ltd v W & H Trademarks (Jersey) Ltd  1 All ER 129 at 139, 143,  1 AC 368 at 435-436, 441 per Lord Templeman and Lord Mackay."
It seems to me that the point of law is a short one, and self-contained, and not of particular difficulty, being dependant 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 s.47(1) of the FSA.
The absence of an action for damages under s.47(1) means that Mr Qureshi loses his set-off and the only potentially proper basis for his counterclaim. It follows that his counterclaim must be struck out. It also means that there is no cause of action in damages which can provide a financial recovery to feed his prima facie obligation to give restitution to NU Life in the event of avoiding or rescinding the Plan.
Fourthly, there is Mr Qureshi's plea that by reason of NU Life's knowledge, prior to payment, of clear fraud on the part of Lolled's, the guarantee was void ab initio. I asked Mr Price how it was that, even upon the hypothesis of clear fraud, he supported the plea that the guarantee was void ab initio. After all, there was no plea that NU Life had knowledge of Lloyd's fraud at the time that the Plan was entered into, only that it came to NU Life in the form of information supplied to it by Mr Qureshi between 22 April 1992 and 16 June 1995. Mr Price accepted that the allegation of original voidness could not stand: he sought by submission to substitute for it the plea by way of defence that a guarantor who paid out in the face of the clear fraud of the beneficiary of the guarantee was acting outside the contemplation of the guarantee and was not entitled to be indemnified. It follows that the plea of clear fraud remains a matter of pure defence, and does not enter into the counterclaim.
Breach of the obligation of good faith
I turn next to the four defences prayed in aid by Mr Qureshi, first of which is that NU Life were in breach of the obligation of good faith which arises in the context of insurance.
Mr Price submits that the three elements of the Plan were so inextricably linked that NU Life should be treated as responsible, in good faith, as the insurers of Mr Qureshi's life, for failing to disclose to him their knowledge about the impending losses at Lloyd's on certain types of insurance business.
Mr Hildyard submits that there is no adequately pleaded case that NU Life possessed, actually or by attribution, the relevant knowledge; and that, even if there were, the Information Regarding Impending Losses was not relevant to the limited insurance element in the Plan, Mr Qureshi's life policy.
In my judgment, the question of NU Life's knowledge is not fit for these summary proceedings. It raises questions of fact and law. The questions of fact cannot be resolved on the pleadings, or even, to the extent that it may be permissible to consider them, on the affidavits. The questions of law are the never easy ones relating to the attribution or imputation of knowledge, and Mr Hildyard, for understandable tactical reasons, has not seen fit to enter in any detail upon them. The essential thrust of Mr Qureshi's pleadings are that, through Mr Falcon and Mr Bridgewater, NU Life had actual or imputed knowledge of all that was known to NWRE and Stronghold and thus of the relevant Information. It is true that it is not expressly pleaded that even Messrs Falcon and Bridgewater had actual knowledge of the Information, and it is therefore left uncertain whether their knowledge is itself actual or imputed. Mr Hildyard also submits that nothing is said about the knowledge of those individuals within NU Life, who are in any event unidentified, who were personally concerned in agreeing the Plan with Mr Qureshi. Nevertheless, Mr Qureshi does plead that NU Life had actual knowledge of the Information, and I would infer therefore, in context, the intention to plead that that knowledge was acquired by reason of Messrs Falcon's and Bridgewater's knowledge. Mr Hildyard submits that knowledge acquired by those gentleman in one capacity cannot be attributed through them to another company in which they are also concerned in another capacity: see El Ajou v Dollar Land Holdings plc  2 All ER 685,  1 BCLC 464. That may of course be true as a general proposition, but El Ajou itself indicates how much the application of such a principle may be bound up in the facts of the case. In the present case NU Life, NWRE and Stronghold were it is to be assumed all part of the Norwich Union Group: and although I may assume that NU Life were in no way involved with actual underwriting, it appears that the Plan was specifically marketed to Lloyd's names and I would therefore be prepared to assume at any rate for present purposes that NU Life would, as a matter of business prudence, want to take some view as to the prospects for such names. After all, it might be thought that NU Life would not want to put themselves, with their eyes open, in a situation where they were going to be shortly compelled to enforce the mortgages of their Plan's customers.
For these reasons I do not think that on the question of the requisite knowledge I can agree with Mr Hildyard that Mr Qureshi's plea cannot succeed.
However, the requisite knowledge must be material. That raises the entirely separate question of the scope of NU Life's duty of disclosure in good faith. Mr Hildyard submits that in this context I must have 'tunnel vision' and look at the matter as simply a question of an insurance policy on Mr Qureshi's life. How could the prospects at Lloyd's be relevant to that? Mr Price on the other hand underlines the ('inextricably') interconnected nature of the three elements of the Plan. The policy must therefore be seen in the context of a Plan which was designed to assist or even encourage the life assured to underwrite at Lloyd's.
It seems to me that at any rate for present purposes I should regard the life policy as an element in the overall Plan. The question remains whether information which might be material to a prospective Plan customer's decision whether to underwrite as a name at Lloyd's is information which must be divulged in good faith to that customer, in circumstances where the requirement of good faith only enters into the picture at all because of the life policy.
In my judgment, the requirement of good faith does not extend that far. Mr Price accepts that a lender who abstains from entering upon the position of an adviser owes no duty of care or disclosure to its borrower: see for instance Williams and Glyn's Bank Ltd v Barnes (1980) 10 Legal Decisions Affecting Bankers 220. Thus Mr Price agreed that a mortgage lender who knew that the property concerned was worth substantially less than the borrower was paying would owe no duty of disclosure to his borrower. I asked Mr Price whether it made any difference that the mortgage lender in such a position stipulated that the borrower must take out fire insurance from him. Mr Price agreed that it made no difference: there was still no duty to disclose the lender's knowledge about the value of the property. I asked him, therefore, why he submitted that NU Life had a duty to disclose their information about the Lloyd's market. Mr Price answered by submitting that NU Life's long-standing experience of the Lloyd's market and their specialised understanding of it was to be contrasted with the speculative nature of a property valuation. It seems to me, however, that that answer provides no distinction as a matter of principle. One may debate whether a professional mortgage lender has a lesser understanding of the nature of property valuation than a life insurer has of Lloyd's underwriting. That, however, is not in my judgment the point. Rather, Mr Price's concession about the mortgage lender who requires a fire insurance policy to be taken out as a term of the mortgage offer indicates that, even where such transactions are linked, the duty of disclosure which applies to the insurance contract does not necessarily spill over into the wider aspects of the linked transaction.
In my judgment Mr Price's concession was in principle properly made (It occurs to me that there is an entirely separate reason, unconnected with the prudence of the borrower's purchase, why the value of the property may nevertheless be material, and that is because the premium may be levied by reference to the property's value (although more usually I think it is levied by reference to the cost of rebuilding). If so, however, the point remains good in principle: the knowledge is not material because it goes to the borrower's prudence, but because it is relevant to the risk covered.) and is reflected in one of the very few cases which is concerned with the duty of good faith as it affects the insurer as distinct from the insured. I refer to Banque Financiere de la Cite SA (formerly Banque Keyser Ullmann SA) v Westgate Insurance Co Ltd  2 AC 249, where a bank taking out credit insurance was deceived by the fraud of its insurance broker who represented that cover was complete when it was not. The insurer, after discovering the fraud of the insured's broker, kept this information to itself when underwriting further loans of the insured. In the courts below it was conceded that the broker's fraud gave to the insurer a defence under the policies' fraud exclusion clause. It was therefore held that the non-disclosure was material and in breach of the insurer's duty of good faith. In the House of Lords, however, it was held that this non-disclosure was immaterial, since the broker's fraud could not after all have availed the insurer under the fraud exclusion clause.
It is important to note that it was found by Steyn J at first instance  1 QB 665 that the non-disclosure was causative of the insured's making of further loans, so that the insured was entitled to recover its business losses in damages for breach of both the duty of good faith and a duty of care. The court of appeal held that the duty of good faith could not sound in damages, and that there was no liability in negligence for pure economic loss caused by non-disclosure in the absence of a voluntary assumption of responsibility to make such disclosure: therefore the insured failed. But the finding of causation was not upset. Therefore, the fact that it could be contemplated by the insurer that the insured would not have entered into a business transaction if disclosure had been made was not enough in itself to make the withheld information material, even though that business transaction was the subject matter of the insurance.
The insured's failure in that case was because the information which was not disclosed was material neither to the nature of the risk to be covered by the insurance nor to the recoverability of a claim under the policy. It follows that there is no general principle of fairness in the wider business setting. Lord Bridge of Harwich said (at page 268F/269A):
Slade LJ, delivering the judgment of the Court of Appeal, said  1 QB 665, 772:
'In adapting the well established principles relating to the duty of disclosure falling upon the insured to the obverse case of the insurer himself, due account must be taken of the rather different reasons for which the insured and the insurer require the protection of full disclosure. In our judgment, the duty falling upon the insurer must at least extend to disclosing all the facts known to him which are material either to the nature of the risk sought to be covered or the recoverability of a claim under the policy which a prudent insured would take into account in deciding whether or not to place the risk for which he seeks cover with that insurer.'
I do not dissent from this statement of the ambit of the duty. But an obligation of Mr Dungate to disclose what he knew of Mr Lee's first fraud could only fall within the ambit of the duty as 'material . . . to the recoverability of a claim under the policy' if Mr Lee's frauds were such as would entitle the insurer to repudiate liability. Having concluded that they were not, it follows, in my opinion, that Mr Dungate's failure to disclose to the banks the dishonesty of their agent, whatever may be said about it as a matter of business ethics, did not amount to a breach of any legal duty."
Lord Jauncey of Tullichettle put the matter in this way (at page 281H/282E):
The duty is, however, limited to facts which are material to the risk insured, that is to say, facts which would influence a prudent insurer in deciding whether to accept the risk and, if so, upon what terms and a prudent insured in entering into the contract on the terms proposed by the insurer. Thus any facts which would increase the risk should be disclosed by the insured and any facts known to the insurer but not to the insured, which would reduce the risk, should be disclosed by the insurer . . .
. . . Although there have been no reported cases involving the failure of an insurer to disclose material facts to an insured the example given by Lord Mansfield in Carter v Boehm, 3 Burr. 1905 is of an insurer who insured a ship for a voyage knowing that she had already arrived. Another example would be the insurance against fire of a house which the insurer knew had been demolished. In these cases the undisclosed information would have had a material and direct effect upon the risk against which the insured was seeking to protect himself. Indeed the insured would have said that the risk no longer existed. In the present case the risk to be insured was the inability, otherwise than-by reason of fraud, of Ballestero and his companies to repay the loan to the banks. Lee's dishonesty neither increased nor decreased that risk. Indeed it was irrelevant thereto. It follows that the obligation of disclosure incumbent upon Dungate, as the insurer, did not extend to telling the banks that their agent Lee was dishonest. If the obligation of disclosure incumbent upon parties to a contract of insurance could ever per se create the necessary proximity to give rise to a duty of care, a matter upon which I reserve my opinion, it is clear the scope of any such duty would not extend to the disclosure of facts which are not material to the risk insured. It follows that the appellants' reliance on the duty of disclosure does not assist them to establish negligence on the part of Dungate."
In the present case, Mr Qureshi's underwriting at Lloyd's was not material to the risk on his life, nor was it relevant to his ability to recover a claim from NU Life under his policy: nor was it suggested otherwise. Instead, Mr Price's submission sought in effect to turn NU Life, by reason of their assumed knowledge and their position as Mr Qureshi's life insurers, into someone who had the responsibility of advising Mr Qureshi on his underwriting at Lloyd's. Of course, Mr Qureshi had agents whose responsibility it was to advise him about underwriting at Lloyd's, but NU Life were not among them. In my judgment the Information Regarding Impending Losses relied on by Mr Qureshi was not material to the insurance transaction undertaken by NU Life, however widely the context of that transaction is put, and it follows that on this point Mr Qureshi's attempt to avoid the Plan must fail. It matters not therefore what consequences any difficulties over the achievement of restitutio in integrum might have for the prima facie right to avoid. In my judgment this plea is doomed to fail.
I have considered those of the leading cases on the subject of unconscionable conduct and unconscionable bargains as the parties have put before me, cases such as Fry v Lane (1889) 40 Ch D 312, Multiservice Bookbinding Ltd v Marden  1 Ch 84,  2 All ER 489, Alec Lobb (Garages) Ltd v Total Oil (Great Britain) Ltd  1 All ER 944,  1 WLR 87,  1 All ER 303,  1 WLR 173 (CA), National Westminster Bank plc v Morgan  AC 686,  1 All ER 821, Hart v O'Connor  AC 1000,  2 All ER 880, Boustany v Pigott (1993) 69 P&CR 298. It is I think sufficient for present purposes to set out the principles with which Lord Templeman in the last of those cases said that their Lordships were in general agreement (at page 303):
(1) It is not sufficient to attract the jurisdiction of equity to prove that a bargain is hard, unreasonable or foolish; it must be proved to be unconscionable, in the sense that 'one of the parties to it has imposed the objectionable terms in a morally reprehensible manner, that is to say, in a way which affects his conscience,' Multiservice Bookbinding v Marden.
(2) 'Unconscionable' relates not merely to the terms of the bargain but to the behaviour of the stronger party, which must be characterised by some moral culpability or impropriety: Lobb (Alec) (Garages) Limited v Total Oil (Great Britain) Limited.
(3) Unequal bargaining power or objectively unreasonable terms provide no basis for equitable interference in the absence of unconscientious or extortionate abuse of power where exceptionally, and as a matter of common fairness, 'it was not right that the strong should be allowed to push the weak to the wall': Lobb (Alec) Garages) Limited v Total Oil (Great Britain) Limited.
(4) A contract cannot be set aside in equity as 'an unconscionable bargain' against a party innocent of actual or constructive fraud. Even if the terms of the contract are 'unfair' in the sense that they are more favourable to one party than the other ('contractual imbalance'), equity will not provide relief unless the beneficiary is guilty of unconscionable conduct: Hart v O'Connor applied in Nichols v Jessop.
(5) In situations of this kind it is necessary for the plaintiff who seeks relief to establish unconscionable conduct, namely that unconscientious advantage has been taken of his disabling condition or circumstances: per Mason J in Commercial Bank of Australia Ltd v Amadio."
Mr Price reminded me that the categories of unconscionable bargains are not closed (Multiservice Bookbinding  1 Ch 84, at page 110G); and submitted that the difference between NU Life's knowledge and Mr Qureshi's (asserted) ignorance created a position of substantial inequality, which the former had exploited by the aggressive marketing of the Plan, and that the security which it obtained under the Plan in the form of life premiums and mortgage emphasised the unconscionability of the bargain. Even though Mr Qureshi might have been entitled to and might even have obtained independent advice, which the cases emphasise is a factor to be taken into account, it is to be assumed that such advice was inadequate or negligent, and that NU Life must have realised that to be so. The plea was therefore something which could only be properly investigated at trial.
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 that 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.
Section 47(1) of the FSA
I have already held that this plea must fail on the ground that s.47(1) affords an investor no private action for damages. I do not think that I therefore need say anything further under this heading, save perhaps that in the circumstances where I have also held that there was no duty of disclosure, I cannot see how it can be suggested that any non-disclosure by NU Life amounted to the offence where it 'dishonestly conceals'. There is no plea of any misleading, false, or deceptive statement, promise or forecast.
Finally, Mr Qureshi pleads that NU Life had been notified of clear fraud before payment under the guarantee. Mr Price submits that this plea requires a detailed examination of voluminous evidence, and that it would be wrong in principle to deal with that evidence summarily. He accepts that Mr Qureshi, as an accepting name under the Lloyd's Settlement of 1996, has compromised any claim of fraud against his agents and Lloyd's: but he says there is nothing to prevent him raising a case of fraud on the part of Lloyd's so as to defeat NU Life's claim.
Mr Hildyard submits that the guarantee was intended to be as good as cash. Under its clause 3, Mr Qureshi's default to the Society of Lloyd's "shall be conclusively proved by a certificate signed by a duly authorised officer or employee of the Society", and that under its clause 1, after such default NU Life:
will on demand in writing being made of it pay to the Society such sum or sums as may from time to time be specified in any such demand not exceeding the sum of £400, 000."
Therefore, Mr Hildyard submits, the principles applicable to such instruments as letters of credit and performance bonds apply equally to the guarantee. Those principles are well known: see, for instance, Edward Owen Engineering Ltd v Barclay's Bank International Ltd  1 QB 159,  1 All ER 976, Bolivinter Oil SA v Chase Manhattan Bank NA  1 All ER 351,  1 Lloyd's Rep 251, and United Trading Corporation v Allied Arab Bank Ltd  2 Lloyd's Rep 554. In the last of those Ackner LJ said (at page 561):
The evidence of fraud must be clear, both as to the fact of fraud and as to the bank's knowledge. The mere assertion or allegation of fraud would not be sufficient (see Bolivinter Oil SA v Chase Manhattan Bank NA  1 Lloyd's Rep 251 per Sir John Donaldson, MR, at page 257). We would expect the Court to require strong corroborative evidence of the allegation, usually in the form of contemporary documents, particularly those emanating from the buyer. In general, for the evidence of fraud to be clear, we would also expect the buyer to have been given an opportunity to answer the allegation and to have failed to provide any, or any adequate answer in circumstances where one could properly be expected. If the Court considers that on the material before it the only realistic inference to draw is that of fraud, then the seller would have made out a sufficient case of fraud."
I have read the letters to NU Life pleaded as notice of the fraud. The relevant payments to Lloyd's were made on 28 November 1994 and 12 June 1995. In his letter of 22 April 1992 Mr Qureshi merely said that the nature of the losses is dubious, indeed suspicious. On 14 July 1992 he wrote briefly to notify Lloyd's of 'a prima facie case of fraud on the part of Lloyd's and its Market Operators'. On 10 August 1994 Messrs Epstein Grower & Michael Freeman wrote on behalf of Mrs Qureshi to refer to pleadings settled on behalf of Canadian names:
signed by both Leading and Junior Counsel as an indication that they are satisfied from the evidence in their possession that the Names are able to allege fraud."
The letter went on to refer to the role of five Canadian banks which had pleaded that they had been provided with sufficient material to amount to notice of clear fraud, to the decision of Saville J in Society of Lloyd's v Canadian Imperial Bank of Commerce  2 Lloyd's Rep 579 that such a plea, without a plea of actual fraud, could amount to no defence, and to the fact that the Canadian banks had decided in the event not to plead the fraud themselves. On 10 November 1994 the same solicitors wrote again to NU Life, on this occasion on behalf of Mr Qureshi: they referred to the fraud allegations in pleadings on behalf of a Lloyd's name called Mr GCA Mason, and also to a decision by a US District Court in Southern Texas that:
the great weight of the evidence presented by Mr Leslie indicates potentially fraudulent actions on the part of Lloyd's . . ."
Finally, on 9 December 1994 the solicitors sent to NU Life a folder of further documents in support of the allegations of fraud. I have been provided with the contents of that folder. It contains an overview of the Association of Non-North American Names's complaints, a summary of the allegations in Mr Mason's pleadings, and various historical documents, minutes, memoranda or reports, for instance regarding the reserving for asbestosis claims, or the LMX spiral.
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 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.
It follows that in my view Mr Qureshi's reamended defence and counterclaim would have to be struck out, even if leave were given to serve it. In the circumstances, I do not think it necessary to decide whether NU Life's summons also contained an alternative application under Ord 14. Certainly Mr Lingwood's third affidavit sworn 23 April 1998 on behalf of NU Life contains a section which is headed 'Application for Summary Judgment' and which is in form modelled on the requirements of Ord 14. Mr Qureshi's affidavit in answer sworn 15 May 1998 also contains a section headed 'Application for Summary Judgment and for Strike out of the Counterclaim' and refers to Mr Lingwood's statement of his belief that Mr Qureshi has no defence to NU Life's claim. It seems to me, however, that whether the test is that under Ord 14, where Mr Qureshi bears the burden of satisfying the court that there is an issue or question in dispute which ought to be tried or that there ought for some other reason to be a trial, or whether the test is that under Ord 18, r 19, where NU Life bears the burden of showing that Mr Qureshi's pleadings disclose no reasonable defence or (on the counterclaim) cause of action, I am bound to hold that NU Life succeed and Mr Qureshi fails in their respective burdens. In the circumstances I shall order that his pleadings be struck out.
I have great sympathy for Mr Qureshi, whose brief period as a Lloyd's name has brought him such losses and misfortune: but as between NU Life and him, it follows that NU Life are entitled to final judgment on their monetary claim.
Judgment for the plaintiff.
Norwich Union Group Legal, Norwich; Ambrose Apple be; Cameron McKenna