HT-2022-000022 - [2025] EWHC 1238 (TCC)

Accor contends that its right to draw down under the AAE could be challenged if Lloyds loses because Lloyds’ factual allegations by its key witnesses (and former directors of Lloyds) are not believed. It could then be the case that Lloyds was reckless or dishonest in presenting the risk to the Insurers when procuring the AAE, as Lloyds would necessarily not have disclosed the true status of its claim (i.e. that it was untrue) to the Insurers.

This is not, in itself (and subject to the Insurer’s ability to take the point) an inherently implausible scenario. In Persimmon Homes Ltd v Great Lakes Reinsurance (UK) Plc [2010] EWHC 1705 (Comm) an insurer successfully avoided an ATE policy, essentially because the claimant had failed to disclose to the insurer that its claim, based on an alleged oral agreement, was not true.

This issue has been considered in a number of other cases. In Lewis Thermal Ltd v Cleveland Cable Company Ltd [2018] EWHC 2654 O’Farrell J concluded that where (as in this case) a claim raises serious allegations of fraud by way of fraudulent misrepresentation which are stated in terms by the defendant to be unjustified, it is very likely that there will be allegations of dishonesty made against the witnesses on both sides. “In those circumstances, it is not beyond the realm of possibility that a finding might be made that one of the witnesses has misled the court in its evidence. If that were to be the case, it would give rise to an argument by the insurer that there was a misleading representation entitling it to avoid liability …” The question is, therefore, the extent to which this scenario presents a realistic risk that insurers may seek to avoid the policy on these grounds.

In Premier Motorauctions Ltd & Anor v Pricewaterhousecoopers LLP & Anor [2017] EWCA Civ 1872, Longmore LJ held that a policy did not give sufficient protection where neither the defendants nor the court had been provided with the placing information put before the insurers but, even if that had been provided, it was unlikely that the court could be satisfied that the prospect of avoidance is illusory. However, the policy being considered did not (it seems) have an AAE.

In Candy & Ors v Holyoake & Anor [2017] EWCA Civ 92 the claimants obtained an injunction to prevent the defendant dealing with certain assets. In giving a cross undertaking in damages, they were ordered to give fortification for that undertaking and obtained insurance against that liability. This featured an anti-avoidance provision which said “The Insurer will not exercise any right to void, reduce or deny its liability to pay on the Insured's behalf Loss on any grounds whatsoever”. The Court of Appeal held such insurance was not reasonably satisfactory fortification because, as was common ground, a possible scenario in which insurers might challenge the defendants’ rights to draw down under the policy would be if, after trial, the principal of the claimant was to be found to have been fraudulent and dishonest. It might then be the case that the claimants had also been dishonest in presenting the risk to the insurer when procuring the policy, on the basis that the claimants had necessarily not disclosed the true status of their claim (on this hypothesis, that it was a dishonest claim) to the insurer. The defendants identified two arguments by which the insurer might seek to deny liability in this situation, suggesting that the policy was thereby rendered objectively unsatisfactory: (i) The terms of the policy did not expressly preclude the insurer from avoiding for fraud; therefore the insurer would be entitled to do so; (ii) even if the policy terms purported to do so, an insurer’s right to avoid the contract for fraud of the insured could not be restricted, as a matter of public policy. The claimants submitted that there was no real prospect of an insurer succeeding on either argument, in that the only sensible construction of the policy, read in the relevant context, was that it did exclude the right to avoid for fraud, and that such an exclusion was not contrary to public policy.

The claimants’ arguments did not succeed. Of particular relevance to Gloster LJ’s reasoning were the general principles relevant to the construction of clauses said to exclude remedies arising for fraud, articulated in HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2003] 1 All ER (Comm) 349, para 16, by Lord Binghamof Cornhill who said:

As Mr Blackett pointed out in his written submissions, there are a number of cases in which this approach has been confirmed, and where, specifically, general language of exclusion was not construed to extend to fraud (e.g. Regus (UK) Ltd v Epcot Solutions Ltd[2008] EWCA Civ 361; Trident Turboprop (Dublin) Ltd v First Flight Couriers Ltd[2008] EWHC 1686 (Comm)).

In light of this general principle, Gloster LJ held that there was (at a minimum) a real risk of the insurer properly arguing that as a matter of construction it would be under no liability in the case of fraud by the insured in placing the policy. She observed (at [96(ii)]):

Although the judge also concluded that there is at least a real prospect that (on the hypothesis that the respondents lose the action and are found to have been dishonest) the insurer could properly argue that there is a rule of public policywhich would entitle it to avoid on the grounds of the insured's fraud, regardless of the policy terms, the judge also said (at [107]):

That such a policy may exist was confirmed in the decision of ICC Judge Raquel Agnello in Saxon Woods Investments Ltd v Costa & Ors [2023] EWHC 850 (Ch). In this case, the claimant originally had an ATE policy which said: “If an Insured fails to provide a fair presentation, but such failure was neither deliberate nor reckless, then notwithstanding any provision of the Insurance Act 2015, the Insurer shall indemnify the Insured in full, subject to the other conditions of the Policy”. Thus, the original policy (absent an AAE) provided that the policy would not be avoided for non-deliberate or non-reckless non-disclosure (and by implication that the policy could be avoided for deliberate or reckless non-disclosure). There was, however, an AAE in identical terms to Clause 3 of the AAE in the present case, as I have set out above.

In concluding that the ATE policy, together with AAE, was sufficient, the Judge held as follows (which I quote in full given the centrality of this reasoning to the parties’ arguments):

Mr Blackett argues that the judge’s conclusion that the policy offered sufficient protection was incorrect because the clause uses general words and there is (at a minimum) a real risk of the Insurer properly arguing that as a matter of construction it is under no liability in the case of fraud by the insured in procuring the policy and endorsement. In the alternative, insofar as the construction in Saxon Woods was correct, it was the result of having read the clause against the background of other terms, and a particular factual matrix, both absent in the present case. As to the first point, the clause was read against the pre-existing clause in the policy which had preserved the right to avoid the policy on grounds of deliberate or reckless non-disclosure (which would include fraud), such that the express exclusion of the ability to rely upon any exclusion or provision of the policy could be taken as a clear reference to fraud. As to the factual matrix, Mr Blackett points to the fact that, contrary to the judge’s conclusion in Saxon Woods at [70], this very much is (at least potentially) a case where there is a diametrically opposed choice for the Court as to the truth telling in the context of a case of fraudulent misrepresentation.

Mr Webb KC seeks to frame the ratio of the judgment as the reasoning contained in paragraph 65, which deals in principle with the adequacy of the wording of the AAE, which wording is identical to the wording before me. He contends that the consideration of the interaction between the AAE wording and the policy wording in paragraph 66 and the further considerations of the factual matrix in [70] are very much subsidiary to the reasoning in paragraph 65. Mr Webb KC also argues that it produces a peculiar result where in the Saxon Wood policy, there was an express right to vitiate the policy for fraudulent inception, and in the instant policy there is no such right; yet by insertion of the identical AAE into each policy, under the instant policy that (unexpressed) right remains, and where it was expressly referenced, the right is lost. A similar peculiarity, he says, arises when considering the fact that whilst the instant policy does not have a clause dealing expressly with fraudulent inception, it does (at Clause 11.15) deal with fraudulent claims. It would be odd, it is said, if the proper construction of the policy and AAE together was that the right to vitiate for a fraudulent claim had been expressly waived, but the (unexpressed) right to vitiate for fraudulent inception remained. In other words, why would the insurer be taken to have waived one type of fraud and not another? These peculiarities, Mr Webb KC contends, demonstrate the artificial and somewhat strained construction of Clause 3 of the AAE (particularly when read together with Clause 2) unless it is construed as removing all rights of the insurer to avoid a claim, including in circumstances of either fraudulent inception or claim.

Mr Webb KC also argues that the fact that it is now proposed that it is the Litigation Funder who would be incepting the policy, rather than the Claimant, reduces the potential that an adverse finding as to the truthfulness of the Claimant’s principals would give rise to an ability to avoid the policy.

As to these arguments, first, I do not accept that Saxon Woods is on all fours with the present circumstances, even if the wording in Clause 3 of the AAE is identical. The ratio of the case cannot be confined to [65] of the decision. Even if it was, it is clear from the first few and last few sentences, that the judge was even in [65] construing the wording of the AAE in the context of the other terms in the policy. Similarly, I do not consider that her views about the nature of the underlying dispute at [70] can be considered subsidiary when reaching her overall conclusion. In other words, the answer in Saxon Woods cannot simply be transplanted to the present case.

Second, whilst there is undoubtedly some force in the points of construction made by Mr Webb KC, it is to be remembered that, in considering the policy, it is not for this Court to determine the outcome of any argument which may be adopted in due course by an insurer seeking to avoid making what is likely to be a substantial payment under a policy of this nature. It may be that the insurer would have what I described in argument as an uphill struggle in seeking to argue that Clause 3 of the AAE had not removed its rights at general law to avoid the policy for fraud at the point of inception or indeed at any other point. However, even the prospect of a dispute with insurers, providing that prospect is not fanciful, means that the security provided by an ATE insurance policy is materially less beneficial to a defendant than a payment into Court. It would require a defendant to be subjected to a collateral dispute to recover the costs to which it is entitled following lengthy litigation in which it had succeeded. Whilst a Court should not allow fanciful risks prevent sensible alternative security for costs to be put in place – particularly where a requirement to do so would or might stifle a genuine claim – the bar for demonstrating a material risk is a relatively low one.

It is unarguable in the present case that, contrary to the clear guidance of the Court of Appeal in Candy and the well-established general principles of construction when it comes to the framing of an exclusion clause so as to respond to fraud, the AAE is in ‘general’ terms. It may be that insurers have been overly reliant upon the decision in Saxon Woods to frame the AAE in this way. The AAE is plainly wide enough to encompass fraud, but it does not do so in terms. Why not simply refer in clear and express terms to excluding the right to avoid for fraud if that is the intention? As a matter of construction, if it did so, the ATE insurance would meet the concern head on. As to general public policy, in circumstances where such fraud as there may be, on the hypothesis which underlies this debate, is, by definition, not fraud by the person seeking to benefit from the insurance, it is not realistic that a general ‘public policy’ argument would enable insurers to avoid being held to the effect of a clearly expressed anti-avoidance clause which expressly refers to fraud. This is particularly so in circumstances where there is clear public policy in positively enabling products like ATE insurance to allow claims to be brought where the provision of security might otherwise be impossible.

In these circumstances, I consider that, by reason of the generality of wording, there is (at a minimum) a realistic risk of the insurer properly arguing that as a matter of construction it would be under no liability in the case of fraud by the Claimant (or its principal or agents) in placing the policy, whether or not the insurance was placed in the name of the Claimant or the litigation funder. It is unnecessary for me to decide whether I would have decided Saxon Woods differently on the (different) facts of that case, and I am not, in any event, bound to follow it.

Whilst therefore this is an insufficiency which means that I am not prepared to order that ATE Insurance in line with this draft policy may be an adequate alternative to paying into Court, for the reasons that I have already explained, I am prepared to give Lloyds some time to seek to deal with the point by introducing express wording to reflect that which it says, in any event, is the true construction of the AAE.