Background
The case concerned five film finance insurance policies that covered the insured (a syndicate of banks represented by Chase that provided funding for the film projects) against the risk that revenues from the finished films would be insufficient to repay the loan.

As Lord Hoffman put it, this is a "form of insurance in which the players need to have their wits about them". The commercial success of a film is notoriously difficult to predict, and a great deal will depend on how the lender’s revenue entitlement is defined – in particular, what prior deductions are made before he gets his share.

This type of insurance product was first developed about ten years ago by a company called Screen Partners Ltd and a specialist subsidiary of Heath Insurance Broking Limited. Lenders taking part in such a scheme would make it a condition of their loan that the borrower (the production or distribution company) had to obtain this insurance and pay the premium and any other expenses. Heaths would then act in a traditional broker role in presenting the risk to underwriters on behalf of the prospective insured.

In this case, contracts of insurance for five films were placed between June 1996 and March 1997. Two (for The Mirror has Two Faces and The People vs Larry Flynt) were placed facultatively, and the remaining three by declarations off a line slip. The terms of all three policies were identical in all material respects.

Unfortunately, there were substantial shortfalls in the revenue assigned to Chase in respect of all five films. Chase claimed under the policies, but insurers repudiated liability on the grounds of misrepresentation and non-disclosures, either fraudulent or negligent, made, not by Chase, but by Heaths.

Insurers alleged that Heaths had misrepresented that the risk was substantially the same as a previous arrangement set up in 1992, when in fact crucial details had changed. In particular, the revenue stream was now subject to numerous prior deductions of uncertain amount. They also claimed that Heaths had failed to disclose a number of material facts, including that the scale of these deductions made a shortfall virtually certain, and the reasons why the original lead insurer had chosen to withdraw. Chase, however, argued that insurers were not entitled to avoid because, even if there had been non-disclosures and misrepresentations, a Truth of Statement clause in each policy expressly waived insurers’ rights to rely on misrepresentations and non-disclosures made by Chase, or by Heaths acting as their agents.

The Truth of Statement clause
The Truth of Statement clause in each policy (broken down into numbered phrases by the court) read as follows:
"[6] the Insured will not have any duty or obligation to make any representation, warranty or disclosure of any nature, express or implied (such duty and obligation being expressly waived by the insurers) and
[7] shall have no liability of any nature to the insurers for any information provided by any other parties and
[8] any such information provided by or non-disclosure by other parties including, but not limited to [Heaths]… shall not be a ground or grounds for avoidance of the insurers' obligations under the Policy or the cancellation thereof".

Were it not for the Truth of Statement clause (and assuming they could prove the alleged misrepresentations and non-disclosures), insurers would have been entitled to avoid the policy for breaches of the duty of utmost good faith. This duty, set out in full in the Marine Insurance Act 1906, requires that any material representations made by the insured or his agent during negotiations for the contract must be true (section 20) and that the insured has a positive obligation to disclose all material circumstances (section 18). In addition, an agent such as a broker has an obligation to disclose to the insurer any material circumstance he knows about - and he will be deemed to know every circumstance, which, in the ordinary course of business, he ought to know, or which ought to have been communicated to him (section 19).

The scope of the clause
To what extent did the Truth of Statement clause protect Chase from the consequences of any misrepresentation or non-disclosure by Heaths or any other agents? In particular, did the clause operate in respect of any negligent or fraudulent (as opposed to innocent) misrepresentations or non-disclosures Heaths may have made?

The Court of Appeal held that the effect of the clause was to waive any remedies insurers had against Chase for Heaths’ negligent misrepresentation or non-disclosure, but that it did not operate to waive insurers’ remedies if they were able to prove Heath had acted fraudulently. If that were the case, insurers would be able to avoid the contract and claim damages against Chase in the tort of deceit. Both parties appealed to the House of Lords.

It was accepted that the general intention behind the clause was to prevent Chase from losing the benefit of the policies because it had failed to disclose material circumstances which it was deemed to know or because of innocent misrepresentations or non-disclosures on the part of its agents. Chase was not in the usual position of an insured, who normally can be expected to have special knowledge of the risk. In this situation, Chase was in no better a position to assess the film projects than the insurers were. Insurers, however, did not accept that the clause covered negligent or fraudulent misrepresentations or non-disclosures by Heaths.

House of Lords Judgment
Dealing firstly with phrase 6 of the clause, this clearly relieved Chase of its obligation to make any representation, warranty or disclosure, but did it also operate indirectly to waive any such obligation on the part of Heaths acting as its agent? The House of Lords held it did not. Whilst it made commercial sense to distance Chase from the details of this particular transaction, phrase 6 made no mention of waiving the obligations of the broker.

Chase argued that, although the broker had a duty to disclose that was independent of the insured’s duty, it made no sense to say the broker was bound to disclose something that, had it been disclosed by the insured, would have been subject to this waiver. One of the provisions of section 18 of the Marine Insurance Act is that the insured need not disclose "any circumstances as to which information is waived by the insurer".

The House of Lords rejected this argument. Had insurers waived disclosure of a particular circumstance by the insured because they were prepared to treat that circumstance as not being material then, the House agreed, it would be illogical to say that the broker had to disclose it on the insured’s behalf. But this all depended on being able to identify the circumstance in question. Phrase 6 could not be construed as a waiver of any particular circumstance, or of all circumstances. The waiver was personal to the insured and did not impinge on Heaths' duty of disclosure

Phrase 7, however, went on to say that Chase would have no liability "of any nature" in respect of any information provided by any other parties, and phrase 8 provided that such information provided by or non-disclosure by other parties would not be grounds for insurers to avoid the policy.

Chase argued that these phrases protected them from liability for any representation or non-disclosure, whether fraudulent, negligent or otherwise, because the wording was wide enough to cover all such representations. Insurers, however, maintained that, although phrases 7 and 8 covered innocent misrepresentations or non-disclosures by Heaths, they could not be stretched to cover negligence or fraud. Well-established guidelines on restricting liability for negligence provide that such clauses will always be very narrowly construed. If the clause does not expressly exclude liability for negligence, the court will be very reluctant to find that it does so impliedly, unless there is no other possible interpretation. If, therefore, the clause can be construed to cover some other cause of action, it will not be found to cover negligence as well (Canada Steam Ship Lines Limited v The King [1952] AC 192). As for fraud, Insurers argued that it was public policy that a party could not exclude liability for its own fraud, and this clearly extended to the fraud of its agent.

On the question of negligence, the House of Lords unanimously agreed that phrases 7 and 8 barred insurers from seeking any remedy for the negligent misrepresentations or non-disclosures of Chase’s agents. It was true that neither phrase expressly mentioned negligence and that, following the Canada Steamship guidelines, this would ordinarily mean liability for negligence was not excluded. But it was not appropriate to follow a mechanistic construction. The clause had to be read in the context of the whole agreement and against the admissible background.

Applying this approach, the comprehensive wording ("no liability of any nature") had clearly been chosen to provide Chase with extended immunity from insurers avoiding the contract and also for any liability for damages that, in theory at least, might be awarded under section 2(1) of the Misrepresentation Act 1967. There was nothing in the wording to suggest the parties had not intended the exemption to include negligent misrepresentation or non-disclosures by Heaths.

As for fraud, the majority of the House of Lords agreed with the Court of Appeal that the clause did not cover liability for fraudulent misrepresentations by Heaths as Chase’s agent. Fraud "is a thing apart". A party entering into an agreement is entitled to assume the honesty and good faith of the other. Consequently, public policy dictates that a contracting party cannot exclude liability for his own fraud. The question here, however, was whether this rule extended to the party’s agent.

The Court of Appeal decided it did not, but the majority of the House of Lords avoided resolving this issue, relying instead on the absence of any express exclusion. If a party intends to exclude his liability for the fraudulent misrepresentations of his agent, he must use the clearest, most unmistakeable terms in the contract. The Truth of Statement clause contained no such clear wording. Fraudulent misrepresentations made by Heaths, therefore, would, if proved, entitle insurers to avoid the contract and claim damages in the tort of deceit.

The House was uncertain whether fraudulent non-disclosure could exist independently of fraudulent misrepresentation but a majority of the Law Lords decided that if such a thing did exist, it, too, would not be excluded under the Truth of Statement clause.

The answer to the preliminary issues, therefore, was that insurers would be entitled to avoid the policy only on the grounds of fraudulent misrepresentation or non-disclosure by Heaths as Chase’s agent, and would be able to seek damages for fraudulent misrepresentation or for fraudulent non-disclosure amounting to fraudulent misrepresentation.

The dissenting voice was Lord Scott’s, who thought that the clause also covered the fraudulent actions of the agent. In his view, the literal meaning of the words used included all information supplied or withheld for whatever reason, and there was no basis on which to give the words a restricted scope. The commercial purpose of the clause was to insulate Chase from the entire broking process. Whilst he accepted the need for a rule that a party cannot be allowed to exclude liability for his own fraud, he could see no reason why a party should not be able to exclude his contractual liability for fraudulent misrepresentation by his agent.