A2/2001/0066

Neutral Citation Number: [2001] EWCA Civ 1794
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEENS BENCH DIVISION
(JACKSON J)
 
                                  Royal Courts of Justice
                                  Strand
                                  London WC2
 
                                  Thursday 11 October 2001
 
B e f o r e :

THE VICE-CHANCELLOR

LORD JUSTICE BUXTON

-and-

LADY JUSTICE ARDEN

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DIRECT LINE INSURANCE PLC

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KHAN & ANR

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(Computer Aided Transcript of the Stenograph Notes of
Smith Bernal Reporting Limited
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MR ANDREW NICOL (instructed by MESSRS DASS JAKHU, BIRMINGHAM, B33 QE) appeared on behalf of the Appellant.
MR WILLIAM FLENLEY (instructed by MESSRS BEACHCROFT WANSBOROUGH, LONDON) appeared on behalf of the Respondent.

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J U D G M E N T
1.	THE VICE-CHANCELLOR: Lady Justice Arden will give the first judgment. 
2.	LADY JUSTICE ARDEN: This is an appeal by the second defendant, Mrs Waheeda Khan, from the order of Jackson J dated 21st December 2000 granting summary judgment against her and also her husband, the first defendant. The facts are that Mrs Khan and her husband own 22 Camborne Way, Hounslow. On 23rd July 1999 Mrs Khan took out a policy of insurance on the house and contents with the respondent in this appeal (“Direct Line”). Under the policy her husband was named as a joint policyholder and the interest of Barclays as mortgagee was noted. An endorsement on the policy stated:
“It is noted that the policyholder and the other interest(s) shown in the Schedule are joint policyholders for their respective rights and interests.” 
3.	On 8th January 2000 a fire occurred at the property and Mr and Mrs Khan lost certain of their possessions and had to move out. At all material times Mr and Mrs Khan have lived together as man and wife, but following the fire Mrs Khan has been depressed and the insurance claims arising out of the fire have been made by Mr Khan on behalf of them both.
4.	Mr Khan made a claim under the policy for rent alleged to be payable for alternative accommodation at 68 Standard Road, Hounslow. He pretended that the property belonged to a friend, Mr Gabriel, and he forged a receipt for rent and a deposit, alleged to have been paid to Mr Gabriel for this accommodation. He also proffered a false rental agreement to Direct Line.
5.	The rent was duly repaid by Direct Line. In point of fact no rent was payable because Mr Khan owned this property and Direct Line, therefore, brought these proceedings seeking summary judgment to recover all monies paid in respect of the fire, including payments for reinstatement of the property. Direct Line have made payments under the policy as follows: the reinstatement of the buildings £43,425.90; replacement of the contents, £18,915.95 and rent payable in respect of the alternative accommodation, 68 Standard Way, Hounslow, £8,257.47. Direct Line relies on the principle that an insured loses all right to recover in respect of a policy if a material part of the claim, that is a non de minimis part of the claim, which he makes is fraudulent (see Galloway v Guardian Royal Exchange UK Ltd [1999] Lloyds Reports 209).
6.	The judge applied the principle in the Galloway case. He rejected the argument that Mr Khan could have claimed for rental lost on 68 Standard Road as a result of having to use it for accommodation for himself and his wife and as a result of it therefore being no longer available for rent, as the claim which was made was for rent and it was made dishonestly.
7.	The judge rejected the argument that Mrs Khan was the sole policyholder and rejected the argument that she should be able to recover on the basis that the fraud had been committed by her husband without her knowledge; in fact their position in relation to the policy is as I have already set out. Jackson J, accordingly, gave judgment against Mr and Mrs Khan pursuant to CPR Part 24 in the sum of £69,045.60 plus interest, making a total of £72,267.73.
8.	Mrs Khan sought leave to appeal. It was refused by Simon Brown LJ on paper, but it was granted by Simon Brown LJ and Mance LJ after an oral hearing. Mance LJ gave the first judgment. He stated that he was prepared to assume at that stage that Mrs Khan's interest in 22 Camborne Way was as a tenant in common with equity with her husband. He said that it was arguable that the policy was a several one rather than a joint one with the result that it covered their separate interests with no joint element (see General Accident v Midland Bank [1940] 2KB 388). In that situation Mrs Khan would not be disabled from recovering under the policy in respect of her own loss merely because Mr Khan had put forward a fraudulent claim in respect of his own loss.
9.	Mance LJ also noted that it was arguable that even if the policy was a joint one, the law might be developed in such a way that the position of the non-fraudulent policyholder was not affected. However, it was not argued that the judge was wrong in his conclusion that it did not avail Mrs Khan to argue that they could have claimed for rental lost on 68 Standard Road.
10.	Counsel for Mrs Khan told the court on that occasion that Mrs Khan did not know of her husband's dishonesty. Mance LJ noted that there were evidential difficulties about this. She had herself chased reimbursements of the rent from the insurers. She also thought that what was being claimed was not rent but for loss of rent. Mance LJ noted that that still left the problem that her husband might have been making a claim on her behalf, in which case she would be affected by his dishonesty whether she knew of it or not. In that connection Mance LJ referred to Litsion Pride [1985] 1 Lloyds Reports 437 at 513-4. On the other hand he was prepared to give permission to appeal because it might be arguable by Mrs Khan that the accommodation claim was not put forward on her behalf. Simon Brown LJ agreed so, in conclusion, it was held by the court that Mrs Khan should have permission to appeal. I should add that in respect of alternative accommodation it has not been argued on the hearing of the appeal that the claim was not made on her behalf.
11.	The appellant was initially minded to apply to put in fresh evidence to show the nature of her interest in 22 Camborne Way. However, on the hearing of this appeal she did not proceed with that application. It was opposed by the respondent.
12.	On this appeal Mrs Khan accepts, first, that Mr Khan fraudulently exaggerated the insurance claim which he made on the defendant's behalf and, second, that as far as Mr Khan was concerned his fraud was sufficiently substantial to permit the claimant to terminate ab initio any contract between it and Mr Khan. 
13.	On this appeal, therefore, Mr Andrew Nicol, who appears for Mrs Khan, makes the following submissions: first, he submits that even if the policy was a joint policy Mrs Khan should be able to recover on the different heads of claim arising out of the fire because she did not know that the claim was put forward dishonestly; and secondly he relies on the Unfair Terms in Consumer Contract Regulations 1994.
14.	The court made it clear to counsel that for the purposes of the first submission which Mr Nicol made the court was prepared to assume, without of course deciding it, that the policy was a separate policy in respect of Mrs Khan's interest. Mr Nicol submits persuasively that whether the policy insures joint or several interests, Mrs Khan, who is innocent of any fraud, should be able to recover on the other heads as a matter of policy. He submits that this is the modern approach.
15.	In his skeleton argument, but not in court, he relies on two passages from the speeches of Viscount Cave and Lord Sumner in P Samuel & Co v Dumas [1924] AC 431. In that case there was one policy insuring both the mortgagee and the owner of the ship and it was held that the mortgagee was not affected by the owner's fraud in scuttling the ship. In the passage on which Mr Nicol relies Viscount Cave said:
“It may well be that, when two persons are jointly insured and their interests are inseparably connected so that a loss or gain necessarily affects them both, the misconduct of one is sufficient to contaminate the whole insurance: Phillips on Marine Insurance, vol.i.,235. But in this case there is no difficulty in separating the interest of the mortgagee from that of the owner; and if the mortgagee should recover on the policy, the owner will not be advantaged, as the insurers will be subrogated as against him to the rights of the mortgagee.” 
16.	In this passage, it seems to me, that, contrary to Mr Nicol's submission, Viscount Cave is dealing with a situation of two separate interests rather than the instance where both parties have connected or joint interests under the policy.
17.	Lord Sumner stated the proposition that a person could not take advantage of his own wrong and then continued:
“... or as it is sometimes put “Dolus circuitu non purgatur”. This, however, seems to me to be obviously a case of personal disability, which cannot affect persons, who are neither parties to the dolus nor stand in the guilty person's shoes. Fraud is not something absolute, existing in vacuo; it is a fraud upon some one. A man who tries to cheat his underwriters fails if they find him out, but how does his wrong against them invest them with new rights against innocent strangers to it?” (page 469) 
	that passage is relied upon by Mr Nicol to support his proposition, but the passage does not cover the situation where an insured has a disability attributed to him, for example, as a result of the law of agency, and I will have to consider that in a moment.
18.	Mr Nicol's skeleton argument also relies on a passage from the dissenting judgment of La Forest J in the Canadian Supreme Court in the case of Scott v Wawanesa [1989] 59 DLR (4th) 660 in which La Forest J says this:
“This approach, however, takes as its starting point the “fundamental principle of individual responsibility for wrongdoing”... Consequently in the interpretation of the insurance contract the courts have held that, absent unambiguous provisions to the contrary, a reasonable person... would view the obligations of the insurer as several as to each of the parties involved...
... in construing an insurance policy, the courts must be guided by the reasonable expectation and purpose of an ordinary person in entering such contract... Moreover, reasonable persons would expect that they would lose the right to recover for their own willful destruction. But the same persons would find it an anomalous result if informed that they stood to lose all if their spouse burned down their house.” 
19.	That, however, comes from the decision of the Canadian Supreme Court which is not, of course, authority in this jurisdiction, though it is persuasive.
20.	Mr Nicol criticises a policy in the law which penalises Mrs Khan. He submits that it is a flawed policy and results in a disproportionate penalty on her as an innocent party. The difficulty about this argument and indeed that raised on the Wawanesa case is that the court is in my judgment bound by the Galloway case to which I have referred above and on which Jackson J relied. I will now return to that case. In that case the plaintiff had filled in a proposal form for a home contents policy with the defendant. He had been asked to declare any conviction for fraud and he had replied, wrongly, “no”.
21.	On 27th and 28th May 1990 a burglary took place at his premises. The plaintiff made a claim for £16,000 odd but he included £2,000 in respect of a computer which he did not have. In the proceedings two preliminary questions were ordered to be tried, first whether despite the fraud in the claim relating to the computer, the plaintiff should recover any genuine loss which he could establish and which formed part of the same insurance claim and the trial judge, His Honour Judge Butter, answered that “no”. The second preliminary issue was whether the question on the proposal form extended to the offence of taking property by deception and the judge answered that question “yes”.
22.	The Court of Appeal took the view that the judge had reached the right answer on both questions, though the consequences of the answer to the second preliminary issue were not pursued before the court. In his judgment Lord Woolf MR referred at 213 to an extract from a text book Welford & Otter-Barry's Fire Insurance (4th Ed) by SH Noakes and the passage was as follows:
“Since it is the duty of the assured to observe the utmost good faith in his dealings with the insurers throughout, the claim which he puts forward must be honestly made; and, if it is fraudulent, he will forfeit all benefit under the policy whether there is a condition to that effect or not.” 
23.	Lord Woolf said this:
“It seems to me that passage of this textbook is wholly in accord with the view of His Honour Judge Butter, a view of the law which I would adopt...” 
24.	Millet LJ giving a second judgment expressed his full agreement with the judgment of Lord Woolf. He gave a judgment also of his own and Mummery LJ agreed with both judgments. As I see it that decision is binding on us in this case. The question which the court considered was whether, if any part of a claim was fraudulent, the plaintiff was prevented from making any claim in respect of the same occurrence and gave the answer that he was so prevented and as I see it that decision is binding in this court and, subject to two further submissions of Mr Nicol, must conclude the question on this case too with the result that we must find that Jackson J correctly applied the law.
25.	Mr Nicol submits that the Galloway case can be distinguished because there the fraud included fraud at the inception of the policy, and no agency relationship was involved. He submits that that is what led the Court of Appeal in that case to conclude that the contract was void ab initio.
26.	Mr Nicol then took us to Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd [2001] 2 WLR 170 to show us that it may be too extreme a view to say that the contract of insurance is avoided ab initio. The Manifest case was not a case of a fraudulent claim but of culpable non-disclosure. It will, for the purposes of this appeal, be sufficient to go to the speech of Lord Hobhouse to which Mr Nicol referred us. Lord Hoffmann and Lord Steyn agreed with the reasons given by Lord Hobhouse.
27.	Starting at paragraph 41, Lord Hobhouse considers the implications of section 17 of the Marine Insurance Act 1906. In the course of this analysis he considers the position relating to fraudulent claims. But the important point for present purposes is that he clearly considered that the principle that a fraudulent claim enabled the insurer to bring the policy to an end was a principle of law, see for example paragraph 46 where having referred to fraudulent claims which he says that he will discuss later, he says:
“But, apart from some dicta, this has still been as a matter of the application of a principle of law and not through an implied contractual term.”
28.	Later in this part of his judgment, which contains an analysis of section 17 and its consequences, Lord Hobhouse specifically refers to the Galloway case. This is at paragraph 67 where, having set out extracts from the judgment of the Court of Appeal, he says this:
“Whilst this case puts the principle on the basis of a rule of law not an implied term, it did not need to consider, nor is it clear that they were focussing on, the distinction between something which would defeat any claim under the policy and something which avoided the contract ab initio with all that that would entail. The case does not support the submission that something less than a fraudulent claim will suffice to give the insurer a defence.” 
29.	So too in this case there is no need for the court to distinguish between an avoidance of the contract ab initio and something which would defeat the claim arising out of the fire in January 2000. This is not a case where there was some prior claim which was duly settled which the insurers were trying to recover. So, as I see it, there is nothing in the Manifest case which detracts from the authority of the Galloway case and, as I see it, that case cannot be distinguished on the ground that it included a fraud at the inception of the policy. That point simply played no part in the reasoning of the Court of Appeal since the consequences of the answer to the second preliminary question were not addressed.
30.	Mr Nicol suggests that Mrs Khan's rights should not be affected by a principle which stems from the law of merchants and he relies for that submission on a passage from an early judgment of Lord Mansfield in which he treats the duty of good faith as stemming from the law of merchants. But, in my judgment, that submission is not open to Mr Nicol in this court in the light of the Galloway case. That leaves Mr Nicol's argument that the claim was not made by Mrs Khan but by her husband on their behalf and that she was innocent of his fraud.
31.	Mr Flenley appears on this appeal for the respondent. We have not called upon him, but we have had the benefit of his skeleton argument and indeed of the respondent's notice which was put in on behalf of Direct Line. In that respondent's notice Direct Line seeks to uphold the judge's decision on the basis that Mr Khan's actions which constituted fraudulent exaggeration of both the defendants' insurance claims were actions which Mr Khan carried out partly on his own behalf and partly as agent for Mrs Khan within the scope of Mr Khan's actual or apparent authority from Mrs Khan. Mrs Khan was, therefore, bound by the consequences of those fraudulent actions and that those consequences are as found by the judge.
32.	That contention in the respondent's notice is supported in Mr Flenley's skeleton argument. As I see it there is no answer to this point. The principles of agency law are well established and bind this court. There is one qualification that I must make, Mr Nicol put forward a submission that the principal is bound by the representations made by its agent, even if fraudulent, should not apply where there was a single policy simply as a matter of commercial convenience but, as Mr Nicol frankly accepted, there is no authority to support this proposition and, therefore, it is not one which, in my judgment, can be applied here.
33.	Mr Nicol made the point that the Litsion Pride case, on which Mance LJ relied, has been considered in the Manifest case (see per Lord Hobhouse at paragraph 71) but, as he accepts, it was disapproved on another aspect not on the agency aspect on which Mance LJ relied.
34.	Lastly, Mr Nicol relied on The Unfair Terms of Consumer Contracts Regulations 1994. Regulation 3 of these Regulations provide that subject to Schedule 1:
“... these Regulations apply to any term in a contract concluded between a seller or supplier and a consumer where the said term has not been individually negotiated”. 
35.	Paragraph (3) of Regulation 3 says:
“For the purposes of these Regulations, a term shall always be regarded as not having been individually negotiated where it has been drafted in advance and the consumer has not been able to influence the substance of the term.” 
36.	As I read these Regulations they do not apply to a situation where a contract is affected by a rule of law, even though the contract is made with a consumer and is otherwise within the purview of these Regulations. Such a term could not be described as one which has been “drafted in advance”. Moreover, I would find it a startling proposition if any rule of law could be reviewed under these Regulations. It seems to me to be well outside the purpose and spirit of the Regulations and might produce some surprising results. 
37.	Moreover, so far as any unfairness is concerned it would have to take into account that the rule of law set out in the Galloway case is furtherance of a policy of discouraging fraudulent claims.
38.	Mr Nicol has submitted that the law is effectively penal, but I would go back to what Lord Woolf said in the Galloway case that the policy of the law is to discourage fraudulent claims. Millet LJ was of the same view. He said this:
“The making of dishonest insurance claims has become all too common. There seems to be a widespread belief that insurance companies are fair game, and that defrauding them is not morally reprehensible. The rule which we are asked to enforce today may appear to some to be harsh, but it is in my opinion a necessary and salutary rule which deserves to be better known by the public. I for my part would be most unwilling to dilute it in any way.” 
39.	So it is not simply a question of the rule preventing recovery of a benefit to which the policyholder was not entitled. The rule is also directed to deterrence and to discouraging false claims. Contrary to Mr Nicol's submission, in my judgment this is a proper objective of the civil law in an appropriate case and this is one such case. A civil law sanction, particularly a financial one, made in an appropriate case may be more effective than a criminal sanction or other sanction.
40.	In all these circumstances and for these reasons I would dismiss this appeal.
41.	LORD JUSTICE BUXTON: I agree that this appeal should be dismissed. As my lady has described, Mrs Khan cannot escape from the application to her case of the combination of two legal principles: (1) a principal is bound by fraudulent acts committed by his agent unless he can show that that fraud was outside the scope of the agency, which Mrs Khan cannot demonstrate; and (2), as provided by Galloway, a claim which is fraudulent in any sufficiently substantial part is invalid in respect of the whole of the claim, and all monies paid under the claim are thereby recoverable. That is all that the insurer in our case needs to establish in order to succeed. Its claim for return of the payments that it has made does not depend on showing that because of the fraud the contract was rendered void ab initio. So whether or not this court in Galloway addressed that issue, it does not affect what the court did decide: which was that, as in the present case, there can be no valid recovery on a claim in respect of an insurable interest where any substantial part of such claim is fraudulently advanced. There is nothing else I wish to add.
42.	THE VICE-CHANCELLOR: I also agree that this appeal should be dismissed. The learned judge held, following Galloway v Guardian Royal Exchange UK [1999] Lloyd's Law Reports 209, that the fraudulent claim for rent tainted the whole of the defendant's claims. He rejected two counter arguments, in the case of the second one on the hypothesis that husband and wife were joint policyholders. Permission to appeal was refused by the judge and on the papers by Simon Brown LJ. The application was renewed in court before Simon Brown LJ and Mance LJ but by the wife alone. It was maintained by counsel on her behalf that she knew nothing about her husband's fraud, the husband was not a joint policyholder and the fraud of one insured under a composite policy does not affect the contractual rights of another insured under the same policy. Mance LJ, with whom Simon Brown LJ agreed, accepted for the purposes of the application that the wife did not know of her husband's fraud. In addition, he considered that it was arguable that the policy was composite not joint, so that summary judgment was, in the circumstances, inappropriate. Accordingly, permission to appeal was granted to Mrs Khan alone.
43.	Direct Line was not, of course, present or represented at that hearing. By a respondent's notice served on 15th April 2001 Direct Line sought to uphold the judge's judgment on a number of additional grounds, one of which is that the claim under the policy was made by the husband within the scope of his authority as agent for the wife so that in accordance with well-established principle the wife is fixed with the consequence of the husband's actions.
44.	For my part, I see no answer to that claim. There can be no doubt about the agency. The only claim was made by the husband and the benefit of it was taken by the wife. Even if the husband was to some extent acting on his own behalf, it is indisputable that he was acting on behalf of his wife as well.
45.	If one strips away the complication of whether the policy is joint or composite and assumes that the wife was the only policyholder and that the property insured was vested in her alone, one is left with the case of a fraudulent claim by an agent. It is quite simply not open to the wife to avoid the consequences which follow. Vis-a-vis the insurer, the claim is the act of the insured and, being fraudulently made, entitles the insurer to repudiate any liability to the insured (see Galloway v Guardian Royal Exchange UK Ltd 213 and Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd [2001] 2 WLR 170).
46.	I would add that if one adds to that simple scenario the undoubted ingredient that the husband and agent was also a joint owner at law of the insured property, I am unable to see how that factor can make any difference to the liability of the wife. Likewise, the question of whether the legal co-owners are beneficially entitled, jointly or as tenants in common, seems to me to be quite immaterial for the purposes of the questions we have to decide.
47.	For those reasons, in addition to those given by the other members of the court, I would dismiss this appeal.
(Appeal dismissed; with costs; costs subject to detailed assessment by Costs Judge; permission to appeal to the House of Lords refused.)