House Of Lords Phoenix Decision Fails To Give Clear Guidance

Author:Mr Michael Graham
Profession:Barlow Lyde & Gilbert
 
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Co-authored by Michael Ginn

ART practitioners have been eagerly waiting for the decision of the House of Lords in HIH Casualty & General Insurance Limited v. New Hampshire (the "Phoenix" case). Those who hoped that the House of Lords would definitively answer the question of whether a watertight waiver clause excluding all the insurer's special remedies for non- disclosure and/or misrepresentation can be drafted, will be disappointed.

The key issue which the markets wanted answered was whether a party to a contract can exclude the consequences of its agent's fraud. The issue is particularly important in ART transactions where the lending institution is unlikely to participate unless it is provided with an unconditional insurance "guarantee" that it intends will pay out whenever the borrowing entity defaults on its obligations to repay under the relevant financial instrument. To do the deal the insurer will be required to waive all its remedies under the insurance contract it writes (save where the insured itself has fraudulently induced the contract) including any remedies for the fraud of the insured's agent.

The Court of Appeal's decisions in 2001 in the "Rojak" (HIH & Ors v. Chase & Heaths) and "Phoenix" cases addressed the issue of whether the remedies for breach of warranty, non-disclosure and misrepresentation could be excluded in an insurance contract and if so, what form of words should be used to achieve this effectively. The issue has become particularly important in the raft of film finance cases that are currently jamming the courts. In the Phoenix case, insurance policies were purchased by the Chase Manhattan Bank in order to guarantee reimbursement of capital and interest loaned to various production companies to produce and market films in the event that that the films did not achieve their anticipated level of sales. The Court of Appeal in Phoenix concluded that waiver clauses in (re)insurance contracts did not have to distinguish between different types of non-disclosure or misrepresentation in order to be effective. Thus to exclude negligent misrepresentation or negligent non-disclosure by the insured or its agent, the word "negligent" did not have to be used. But what about fraud?

It has been a long established rule of law that a party to a contract, as a matter of public policy, cannot exclude the consequences of its own fraud. In the Phoenix case, the allegation of fraud centred on the brokers, Heaths. Thus a...

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