Agapitos v. Agnew(1)

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Konstantinos Agapitos v. Agnew and Others

English Court of Appeal: Brook, Mance and Park LJJ: March 2002
Geraldine Andrews QC, instructed by Memery Crystal, for Agapitos
Andrew Popplewell QC and Claire Blanchard, instructed by Ince & Co, for Agnew

What Did the Case Decide (or what was tentatively suggested)?
1. The fraudulent claim common law rule should apply as much to the fraudulent maintenance of an initially honest claim as to a claim that the insured knew from the outset to be exaggerated.
2. The use of fraudulent devices or means to promote a claim should be treated as a sub-species of making a fraudulent claim, at least for the purpose of forfeiture of the relevant claim.
3. The common law rule governing the making of fraudulent claims should be treated outside the scope of s. 17.
4. The duration of the common law rule should be (similarly to s.17 ) restricted to the pre-litigation period.

Case Note contributed by Dr. Aleka Mandaraka Sheppard  
DMC Category Rating: Developed

Summary of Facts
The claimants in this case were the owners of the passenger ferry "Aegeon". She was insured for six months as at 9th August 1995 against hull and machinery port risks whilst she was laid up and undergoing maintenance. The policy included a warranty that there would be no hot works. After a spell of 6 months the policy was renewed on 12th January 1996 with an endorsement that "maintenance works have recommenced and hot works on decks is due to commence soon". It further provided "warranted LSA (London Salvage Association) certificate and all [recommendations] complied with prior to commencement of hot work". Notice was given to the insurers through the brokers that "as from 24 January, hot works are carried out", to which the insurers replied reminding that coverage was subject to "LSA certificate updated and all recommendations complied with prior to hot work commencing". By a further endorsement on 6th February, the insurers agreed to extend cover for a further two months from 9th February on terms "[warranted] LSA certificate updated". On 19th February 1996, a fire occurred on board during hot works, following which the ship became a total loss.

A salvage association surveyor had been instructed but he did not actually survey or issue a certificate until after the fire occurred on 19th February 1996.

The claim under the policy was met with the defence of breach of warranty. Underwriters contended that the hot works had commenced without the approval of the LSA surveyor. They also claimed that the witness statements taken from workmen immediately after the casualty established that the assured shipowners had lied about the date of the commencement of hot works. In particular, the insurers argued that the assured fraudulently misrepresented, after litigation commenced, that no hot works had started before the 12 February. They therefore sought to amend their pleadings to include also the defence of breach of the duty of utmost good faith under section 17 of the Marine Insurance Act.

The application to amend was refused at first instance by Toulson J. Considering the case on the hypothesis that the insurers had a valid defence of breach of warranty, he concluded that any continuing duty not to deceive underwriters was discharged by the breach of warranty and any additional plea of breach of a continuing duty under s.17 would be superfluous.

Issues on Appeal

1. whether and in what circumstances the common law rule and/or s.17 can apply in the event of use of fraudulent means/devices to promote a claim, which claim may prove at trial to be in all other respects valid;
2. whether the application of that rule or section ceases with the commencement of litigation; and
3. whether in the light of the answers to these questions, the judge should have allowed the insurers to amend their defence, namely to assert that during litigation the claimant maintained a case involving lying representations.

As to 1), Mance LJ examined the scope and inter-relationship of the common law rule and s. 17. That s. 17 has post-contractual application was accepted in The Star Sea and Longmore LJ in The Mercandian Continent proceeded on that basis.

The common law rule, as derived from Britton v. Royal Insurance (1866), is that if there is wilful falsehood and fraud in the claim, the insured forfeits all claim upon the policy.

However, Mance L.J., as did the judges in the two previous cases, recognised that the common law rule is not entirely clear.

He raised two points which were relevant to this case:
a) whether a claim, honestly made originally, becomes fraudulent if the insured realises subsequently that the claim is exaggerated but continues to maintain it;
b) whether the fraud must relate to the subject matter of the claim or may go to any aspect of its validity, including a defence.

An affirmative answer to the first point was given as derived from the House of Lords decision in Lek v. Mathews (1927) 29 Ll.R. 141. As to the second point, fraud in relation to a defence would also seem to fall within the fraudulent claim rule.

He then examined:
(a) the relationship needed between fraud and the claim;
(b) the position where there is use of a fraudulent device designed to promote a claim;
(c) the application of the fraudulent claim rule after litigation;
and decided:

(a) The application of the fraudulent claim rule flows from the fact that a fraudulent claim was made; whether or not it misled the underwriter is beside the point. The only further requirement is that the part of the claim which is non-existent or exaggerated should not itself be immaterial or unsubstantial.

(b) The proper approach to the use of fraudulent devices or means is much freer from authority, he said. His tentative view of an acceptable solution was this:
(i) to recognise that the fraudulent claim rule applies as much to the fraudulent maintenance of an initially honest claim as to a claim which the insured knows from the outset to be exaggerated;
(ii) to treat the use of a fraudulent device as a sub-species of making a fraudulent claim, at least as regarded forfeiture of the claim itself in relation to which the fraudulent device or means was used;
(iii) to treat as relevant for this purpose any lie, directly related to the claim to which the fraudulent device relates, which is intended to improve the insured’ prospects of obtaining a settlement or winning the case and which would, if believed, have tended, objectively - but prior to any final determination at trial of parties’ rights - to yield a not insignificant improvement in the insured’s prospects;
(iv) to treat the common law rule governing the making of a fraudulent claim (including the use of fraudulent device) as falling outside the scope of s.17; on this basis no question of avoidance ab initio [from inception] would arise.

(c) As regards the application of the fraudulent claim rule after litigation, he considered that The Star Sea contained powerful dicta that the duty under s.17 was superseded by rules of litigation. Although there was room for doubt about the precise position because the point was not critical to the Star Sea case, he was inclined to agree. Similarly, he thought, if the duty under s.17 was limited to the pre-litigation period, the same policy considerations militated strongly in favour of a similar restriction to the duration of the common law rule of fraudulent claims (including the use of fraudulent devices to promote a claim). This point was completely free from authority.

For this reason, the appeal to amend the defence was dismissed.

Since the common law rule governing fraudulent claims (which will now include fraudulent devices used to promote the claim) is restricted to the pre-litigation period, then "any lie" or fraudulent device used during litigation would be caught by the procedural rules. The sanction will presumably be the striking out of the claim, with an additional penalty of making the claimant liable to pay all legal costs. Applying the same logic, a defendant who lies or uses fraudulent devices to prosecute his defence should be treated in the same way. A warning to litigants to beware of lying may be appropriate at this juncture!!


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