Persimmon Homes Ltd & Anor v Great Lakes Reinsurance (UK) Plc

Neutral Citation Number: [2010] EWHC 1705 (Comm) IN THE HIGH COURT OF JUSTICE QUEEN'S BENCH DIVISION COMMERCIAL COURT Case No: 2009 FOLIO 668 Royal Courts of Justice Strand, London, WC2A 2LL Date: 12/07/2010 Before : MR JUSTICE DAVID STEEL - - - - - - - - - - - - - - - - - - - - - Between : (1) PERSIMMON HOMES LTD (2) PERSIMMON (CITY DEVELOPMENTS) LTD Claimants - and - GREAT LAKES REINSURANCE (UK) PLC Defendant - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - MR DAVID CAVENDER QC (instructed by NABARRO LLP) for the CLAIMANTS MISS SUE CARR QC & MR JONATHAN HOUGH (instructed by DAVENPORT LYONS SOLICITORS) for the DEFENDANT Hearing dates: 10, 11, 12, 13 May 2010 - - - - - - - - - - - - - - - - - - - - - Judgment MR JUSTICE DAVID STEEL : 1. 2. 3. This action relates to an After-the-Event (“ATE”) insurance policy which the defendant underwriters have purported to avoid for material misrepresentation and non-disclosure. It has already gained a degree of notoriety as evidencing one of the potential difficulties with ATE insurance where an insured has been ordered to pay the costs of a successful defendant and in that context it is referred to at p.86 of the Review of Civil Litigation Costs by Lord Justice Jackson December 2009. The present action is brought by the successful defendant in the underlying proceedings (“Persimmon”) under section 1 of the Third Parties (Rights Against Insurers) Act 1930, the original claimant (“CPH”) having been wound up by an order of the Court dated 29 October 2008. It follows that Persimmon effectively stands in the shoes of its former opponent and thus, as appears below, is in the unusual position of seeking to adopt the rights of someone whose dishonest evidence it has established. The proceedings between CPH and Persimmon involved a dispute about a property transaction relating to a substantial site in Birmingham. In short, the position can be summarised as follows: i) ii) iii) CPH had the opportunity to purchase and exploit a development site owned by National Carparks Limited (“NCP”) at Navigation Road, Birmingham (“the Site”) and had done some preliminary work needed to obtain planning permission and had incurred professional fees for this purpose. CPH did not have funds to develop the Site or even pay the existing professional fees it had incurred, and during the course of 1999 NCP increasingly lost patience with CPH and its attempts to purchase the Site, and indicated that it was going to look for an alternative buyer. In those circumstances Persimmon (who had already expressed an interest in getting involved in the residential elements of the Site) had discussions with CPH in early August 1999, with a view to acceding to CPH’s negotiating position with NCP for the purchase of the Site. iv) What was agreed during these oral discussions was the first significant area of dispute. The respective positions were as follows: a) b) CPH’s case was that there was an “understanding” but not an agreement that Persimmon would accede to its negotiating position and buy the Site and that this was agreed during a series of telephone conversations between Bernard Tracey for CPH and Steve Watt for Persimmon. Its case was that it was agreed that Persimmon would pay their professional fees come what may but would also pay an introduction fee of 2%. Persimmon’s case was that there was a binding agreement reached at this time at a face to face meeting between Steve Watt and Paul Tracey (son of Bernard Tracey) that in exchange for taking over CPH’s negotiating position with NCP, Persimmon would upon exchange of contracts for the Site, discharge the Insured’s existing professional fees. v) Persimmon went on to exchange contracts on the Site on 11th November 1999 and there was then another meeting between CPH (Paul Tracey) and Mr. Watt on 1st December 1999. This was the second disputed meeting. The respective positions were as follows: a) b) CPH’s case was that at this meeting (but not previously) an agreement was reached as to the terms upon which Persimmon had been allowed to take over its negotiating position as set out in a manuscript note prepared during the meeting by Paul Tracey and a letter to Persimmon dated 16th December 1999. Persimmon’s case was that at this meeting the earlier agreement relating to professional fees was reiterated and that most of the matters referred to in the manuscript note and letter of 16th December 1999 were discussed, but no agreement was reached on any of them. Application for funding the claim 4. 5. 6. 7. In November 2003, CPH sought junior Counsel’s advice on the prospects of success in a claim against Persimmon. In his written advice, Counsel expressed the opinion that the chances of success on establishing the December contract were 60%. In the alternative, the prospects of success on a quantum merit claim, to which he could not presently see any defence, were 70%. In expressing his view, Counsel drew attention to the fact that the determination of the issues depended very heavily on the oral evidence of Mr. Paul Tracey. He also recognised that some of the contemporary documents were not easy to reconcile with his account. But nonetheless he expressed the view that, although not having met him, “his account of the meeting [in December] is likely to be believed”. Nonetheless, he was not willing to act on a conditional fee basis both because of the heavy reliance on oral evidence and the absence of any clear information of the basis of the defence. On 23 January 2004, Messrs. Edwin Coe, who had been retained as solicitors for CPR, wrote a letter before action. This contended that the terms of the agreement between Paul Tracey and Mr. Watt for Persimmon were set out in a letter from Paul Tracey to Mr. Watt dated 16 December 1999. This, it was claimed, summarised the topics agreed at a meeting on 14 December 1999. Attached to the letter before action were the manuscript notes “of the meeting” said to have been made by Paul Tracey. As regards quantum, the claim was put forward in the region of £450,000 on either basis. In response, Persimmon, in a letter written by Mr. Francis its group legal director, contended that no contractual arrangements had been entered into in December although Mr. Tracey had put forward various proposals for an introduction fee. It was contended that this had been made clear as Persimmon’s position in Mr. Watt’s letter of 20 December 1999 in response to CPH’s letter of 16 December in which he said: “I regret that I am unable to agree all of the contents as I am still endeavouring to reach agreement with some of the parties to the relevant jigs1 involved. ” 8. 9. The next stage was that on 4 May 2004 Messrs. Edwin Coe entered into a Conditional Fee Agreement with CPH. The success fee was set at 68% (8% relating to the cost of the postponement of payment of costs and disbursements). The rationale for this figure was said to be set out in a schedule. In particular, reference was made to the firm’s assessment of the “risks” of the claim including the fact that “the claim depends quite heavily on oral evidence, the prospect of security for costs and the events are several years ago”. There followed the initial application to underwriters for ATE Insurance Cover dated 2 June 2004. That application incorporated a number of documents. First there was a proposal form signed by Paul Tracey and by Joanna Osborne, a partner of Edwin Coe. This recorded that a “successful outcome” was anticipated in the form of an award of £650,000 damages with an estimate of achieving this as between 51% and 60%. The likely costs of Persimmon up to trial were estimated at £90,000. The proposal form expressly referred to the requirement to disclose all material facts. 10. There was also a “chronology of facts” in which two dates were highlighted: “12.08.99 BT [Bernard Tracey] agrees with SW [Stephen Watt] that Persimmon would take over as purchaser and an outline remuneration package agreed. 1.12.99 Meeting CPH and Persimmon when detailed terms of remuneration package agreed.” 11. A “summary of evidence in support” was included which made specific reference to the manuscript note made by Paul Tracey at the December meeting although in this regard, Messrs. Nabarro Nathanson, who had been retained by Persimmon, in their own response to the letter of claim had said this: “2.2 Mr Watt has confirmed that as far as he can recall Mr Tracey did not appear to be taking any detailed notes at the meeting. We note from paragraph 14 of your letter dated 23 January 2004 that you do not state when your client is alleged to have made the notes (i.e. during or after the meeting). 2.3 There is no dispute that the matters set out in your client’s letter to Persimmon dated 16 December 1999 were discussed at the meeting. It is however denied that these matters were agreed with your client.” Also attached were Counsel’s advice and a clip of some of the contemporary correspondence. At this stage Edwin Coe had yet to prepare witness statements. 1 “jigs” was typographical error for “figs” i.e. figures 12. The placing file was put before a Mr. Mike Fallon, a member of the defendant’s underwriting team. His manuscript notes make it plain that he considered the material with some care. On 23 June 2004 Mr. Fallon spoke to Joanna Osborne. Her note records that Mr Fallon thought it “not a bad case”. Miss Osborne made the comment that her reading of the documents made it appear that Mr Watt “was prepared to lie on this one”. Her note went on: “I said that in relation to the oral evidence, we also have a contemporaneous note which we took and which the other side did not have anything to contradict. I also said that the more and more that I spoke to witnesses they confirmed the client’s viewpoint and my view on the case became stronger and stronger.” 13. Mr. Fallon’s reaction was set out in his own e-mail dated 23 June 2004: i) ii) iii) the case had enough merit to consider offering terms. given the level of cover required there was a need to refer to a higher managerial level. Also given the reliance on oral evidence further advice from Counsel might be required. It appears that given the proposal was above the limit of Mr Fallon’s authority it was referred to his superior, Mr Smith. Mr Smith had no actual recollection of reviewing the file but I see no reason to reject his assumption that he did so including the material referred to above. The outcome was that Mr. Fallon sent a further e-mail on 19 August 2004 asking whether counsel might be prepared to enter in a CFA as well the solicitors. However, there followed some delay as by this time underwriters were waiting for the outcome of a legal challenge to the terms of their ATE policy. This was a reference to the litigation covered by the detailed judgment of Senior Costs Judge Hurst entitled The RSA Pursuit Test Cases [2005]EWHC 90003 (Costs) handed down on 27 May 2005. In due course the application for cover was renewed in August 2005. The new proposal form revealed that the success fee for Edwin Coe had increased from 68% to 100%. The prospects of success however, were put more precisely at 60%. Significantly by this time junior counsel had entered into a CFA. The prospects of success as estimated by him in relation to his success fee of 100% was 50%, purportedly as more fully set out in a “risk assessment”. The attached risk assessment records that, since his advice in November 2003, he had a clearer appreciation of the defendant’s position and had met Paul Tracey. Indeed by now, draft witness statements had been taken by Edwin Coe, in particular from both Bernard Tracey and his son, Paul Tracey. The latter confirmed that his notes of the December meeting were made during the meeting, that Mr. Watt had actually helped him to write them and that they recorded what Mr. Watt had offered and what Paul Tracey had accepted. 14. 15. 16. 17. 18. Counsel’s risk assessment summarised the position as follows: “2. I now confirm that I am willing to act on a Conditional Fee basis. I consider that the appropriate uplift is 100%. This is because, so far as the alleged contract is concerned, the Claimant’s case depends on what view is taken of the evidence of Paul Tracey and Steve Watts. So far as the claim based on quantum meruit is concerned, the points raised by Nabarro Nathanson in their letter of 17th June 2004 (see especially para.3.1.3) suggest that there will be a conflict of evidence as to whether services were provided, or what their value was. Although I have no doubt about Mr. Tracey’s honesty, he would be the first to admit that there are gaps in his recollection, and I also have concerns about how confident he will be in the face of aggressive cross-examination. It is therefore impossible to be confident that his account will be accepted in its entirety.” 19. The underwriters duly issued cover under a policy dated December 2005. The scope of the cover was unlimited. The premium was 73% of normal fees. The main provisions went as follows: “INSURED The term used to denote collectively both the Insured Litigant and the Insured Solicitor in their capacity as beneficiaries under this Policy. INSURED LITIGANT The individual, business or other organisation named as the Insured Litigant on the Schedule. INSURED SOLICITOR The Solicitor representing the Insured Litigant under the Condition Fee Agreement and named on the Schedule. ADVERSE COSTS The net costs of the Opponent in the Legal Proceedings to the extent that the Insured Litigant is legally liable to discharge them, after taking account of any costs awarded against the Opponent or agreed to be paid by the Opponent. No cover is provided in respect of any success fee to which the Opponent or Opponent’s solicitor or Opponent’s barrister may be entitled. NORMAL FEES The costs of the Insured Solicitor acting for the Insured Litigant under the Conditional Fee Agreement and which form the basis for the calculation of the Success Fee. COVER Section A Where the outcome of the Legal Proceedings is not a Success the Insurer will, subject to the Limit of Indemnity, indemnify the Insured Litigant in respect of Adverse Costs provided that 1. the Court makes an award of Adverse Costs against the Insured Litigant or.. Section B Where the outcome of the Legal Proceedings is not a Success the Insurer will, subject to the Limit of Indemnity and the Insured Solicitor’s Contribution, indemnify the Insured Solicitor in respect of his entitlement to Normal Fees GENERAL EXCLUSIONS This insurance does not cover… 12. Any payment by the Insurer under the Policy where there has been misrepresentation or material non-disclosure by the Insured Litigant or Insured Solicitor. CONDITIONS 2. Insolvency of Insured Litigant If the Insured Litigant is bankrupt, insolvent or becomes bankrupt or insolvent during the Period of Insurance the Insurer shall have the right to withdraw its support of the Legal Proceedings. 3. Termination The Policy will terminate if the Insured Litigant or Insured Solicitor terminates the Conditional Fee Agreement. We may cancel the Policy by giving fourteen days’ notice in writing to the Insured Litigant and Insured Solicitor if…. c) the Insured Litigant does not follow Our recommendations with regard to settlement of the Legal Proceedings.. 6. Fraudulent Claims If the Insured Litigant or Insured Solicitor makes any request for payment under the Policy knowing it to be fraudulent or false in any respect (or circumstances where it ought reasonably to be known so) or where there is collusion between the parties to the dispute the Policy shall be voidable at the Insurer’s option. 8. Provision of information The Insured Solicitor must a) provide to Us regular progress reports on the Legal Proceedings and associated costs and when specifically requested by Us. b) advise Us in writing as soon as an offer to settle the Legal Proceedings or a payment into Court is made by the Opponent… f) provide Us promptly with any requested information. 10. Conduct of Legal Proceedings a) All information to be given to the Insured Solicitor The Insured Litigant must give all information and assistance required by the Insured Solicitor. This must include a complete and truthful account of the facts of the case and all relevant documentary or other evidence in the Insured Litigant’s possession.” Security for costs 20. On 7 September 2005, Edwin Coe made a CPR Part 36 offer in the sum of £180,000. In the meantime on 30 August 2005 Nabarro Nathanson wrote to Edwin Coe on various topics. In particular, given that CPH appeared to have negligible assets, they gave notice that they proposed to seek security for costs in the region of £60,000. Following further exchanges Edwin Coe served a Notice of Funding on 23 December 2005. Thereafter, on 18 January 2006, Edwin Coe asked whether, in the light of the fact that their client had unlimited adverse costs cover, it was still proposed to seek security for costs. 21. The response from Nabarro Nathanson dated 16 February 2006 was somewhat prescient: “We do not regard an After the Event Insurance Policy as being adequate security for costs. One of our fundamental concerns arises out of the fact that such policies normally contain provisions which entitle the insurer to avoid the policy as a result of any material non-disclosure. Our client would have no assurance that grounds do not exist (or will not arise) entitling insurers to avoid the policy. We trust therefore that your client will not seek to offer any AEI policy as security for costs.” Thereafter, Nabarro Nathanson asked for copies of the policy documents which were duly provided. No doubt active consideration was given as to whether underwriters could realistically avoid its contractual liability to pay Persimmon’s costs if the claim was unsuccessful: see Michael Phillips Architects Ltd v. Riklin [2010] EWHC 834 (TCC). However, following it would appear gloomy advice from counsel, Persimmon decided not to pursue an application for security. In due course, in July 2006, leading counsel for CPH also entered into a CFA. The agreed uplift was 100% the reasons for which included reference to the prospects of success estimated by junior counsel as being 50%. On 1 August, Persimmon made a CPR Part 36 offer in the sum of £30,000. On 5 September 2006, junior counsel for CPH expressed his views on disclosure. He expressed concern centring on some additional correspondence written after the December meeting which might well give rise to the assertion that the agreement was on the Traceys’ part ‘an after-the-event’ reconstruction. Thus he suggested that the quantum merit claim assumed greater importance. On 22 November 2006, Edwin Coe served a draft amendment to the particulars of claim which included a proposed Pallant v. Morgan claim. In January 2007 Mr. Fallon left the employ of the defendant underwriters, leaving a note for the file which estimated the exposure to Persimmon’s costs at about £100,000 rising to £160,000 if it was to be extended to be inclusive of a success fee. (The understanding at this stage was that Persimmon’s own legal team had entered into a CFA). 22. 23. 24. 25. 26. 27. Mr. Ian Coleman took over responsibility for the file. He told the Court that he studied the file. Indeed in an internal memorandum to him dated 10 January 2007, concern was expressed by a colleague as to whether the right decision had been taken in regard to Persimmon’s Part 36 offer given that it was “really a 50/50 case” despite junior counsel’s continued estimate of 60% chances of success. 28. The question that had then arisen was whether in fact to extend cover to Nabarro Nathanson’s success fee. A note of Edwin Coe’s request in that regard was endorsed by Mr. Smith as follows: “....... 2. 3. I have no appetite to extend our exposure, so I support your view of sitting tight. I am nervous about a 50/50 case based on oral testimony but we are on cover and can only hope for a win.” 29. Persimmon thereafter made an increased Part 36 offer of £33,000 and in July 2007, CPH increased its Part 36 offer to £550,000. In the meantime, in June 2007, there was an unsuccessful mediation between the parties. By the time of the mediation, the thrust of CPH’s case was emerging as follows: a) b) The only note of the December meeting was that of Paul Tracey. It reflected the scope of the agreement reached. Mr Watt’s response to Paul Tracey’s letter summarising the terms which had been “discussed and agreed” fell well short of any convincing challenge to Mr. Tracey’s description of the outcome of the meeting. 30. By now the quantum of the claim based on the alleged agreement had increased to over £1 million. CPH’s position statement for the mediation pointed to the fact that inclusive of interest, costs and a 100% success fee, Persimmon’s exposure was in the region of £2.2 million whilst given their insurance cover CPH had little if any exposure. 31. In response Persimmon pointed out: i) ii) iii) a) Any agreement reached in December 1999 would have required a formal legal agreement. The ensuing correspondence was inconsistent with any agreement having been reached. CPH had conferred no benefit to support the quantum merit claim: they had only approached Persimmon because they were under pressure to finalise an agreement with NCP but had no funds to be able to do so. The proposed Pallant v. Morgan claim would fail as none of the required constituents of such a cause of action could be made out. During the unsuccessful mediation, CPH’s claim increased yet again and was put forward at £3 million on the basis of an alleged increased profit level derived from commercial space in the development. 32. CPH’s amended particulars of claim, including the Pallant v. Morgan claim, was served on 7 September 2007 following a CMC. The new cause of action was based on an alleged agreement reached during telephone calls between Bernard Tracey and Mr. Watt on 11 or 12 August 1999. In their amended defence, Persimmon denied that there had been any discussions with Bernard Tracey on those dates. There had it was accepted been a meeting with Paul Tracey at which it had been agreed that Persimmon would pay the professional fees incurred by CPH, if and when Persimmon bought the site. This agreement or arrangement was, it was claimed, acceptable to Paul Tracey: a) because his father was ill: and b) because CPH had no funds to meet its existing commitments let alone fund a purchase. 33. On 26 October 2007, Mr. Coleman observed in an internal e-mail that costs were building up and thus “this will therefore either be a glorious win or a very big loss”. It went on: “There are no good grounds to pull cover but it is a question now of managing the case as far as we can.” 34. Mr. Coleman was hoping for a conference with the legal team on 12 December 2007. The conference duly took place. Junior counsel still put the prospects of success on the contract claim at 65%. The participants in the conference had copies of a small bundle of documents relating to the key dates of 12 August 1999 and 1 December 1999 which, according to Joanna Osborne’s attendance note, junior counsel went through with those present. 35. 36. 37. 38. 39. This formed the basis of some considerable debate before me as one of the letters was a handwritten fax from Bernard Tracey to a Mr. Dorin dated 12 August 1999. Having referred to problems with what he called “our Fund” and the need to “switch horses” (to Persimmon) for the purchase of the site, the fax went on to refer to an alleged agreement by Persimmon to pay Mr. Dorin’s “fee” (Mr. Dorin being an employee of NCP) and to ask Mr. Dorin to send a back dated letter confirming his fee at 2% of the purchase price. The parties exchanged witness statements on 7 March 2008. CPH served statements from a number of witnesses in addition to the Traceys’, including Mr. Dorin, although none of them had any direct evidence of any discussions or meetings in August and December 1999. Persimmon served a supplemental list of documents on 14 April 2008. This included confirmation of a bankruptcy order made against Mr. Bernard Tracey on 30 April 1999. A supplemental statement was taken from Bernard Tracey and served on 1 May 2008 in response to the statements served by Persimmon. Two features of this statement gave rise to submissions before me. First, Bernard Tracey stated in terms at paragraph 36 that he had a tendency to “talk things up”. The example given was to refer to something as “sold” when in legal terms the sale had not gone through. As regards the bankruptcy order, Bernard Tracey asserted that it was discharged in 2002 and was not relevant to any issue. He was not a director of CPH and the funding difficulties related to the delay in getting planning consent not his personal financial position. 40. These topics were referred to in Edwin Coe’s letter of 6 May 2008 to Mr. Coleman as follows: “We have also received some further documents from Nabarro by way of disclosure and amongst these is a bankruptcy order, which confirms that Bernard Tracey was made bankrupt on 30 April 1999. As a result, we have prepared a further supplemental witness statement for Bernard Tracey, which I enclose. Mr. Tracey’s bankruptcy does not have any bearing on the contractual aspects of the case, but undoubtedly Persimmon are going to assert that this had some impact on the funding position and that this supports their case that Paul Tracey pleaded with Steve Watt for Persimmon to take over the case. The fact is of course that the intention was for the company, CPH Enterprises Limited, a solvent company of which Bernard was not even a director, to purchase the site and of course that any funders would have ensured their security was linked into the company’s interest in the site in any event.” 41. 42. It was also reported that it was clear from a doctor’s report that Mr. Bernard Tracey was not fit to attend the trial and give evidence. In fact his supplemental statement was not included but forwarded later. In the meantime Mr. Coleman had told Edwin Coe, in response to their query, that he did not need copies of all the other witness statements that had been served but did require an “overview of matters as they now stand.” In her response, Joanna Osborne stated that the key issue remained largely dependent on whether the judge preferred the evidence of the Traceys to that of Mr. Watt. In that regard: a) Mr. Watt’s recollection was “very poor” and unlike the Traceys’ did not tie up with the time sheets of the architects. b) There might, it was thought, be something involuntary about Mr. Watt’s departure from Persimmon. c) Mr. Bernard Tracey’s first witness statement was prepared before he fell ill and could not be challenged on that basis. d) There were independent witnesses who supported Mr. Tracey’s account. 43. Mr. Coleman in turn responded: “I am pleased that the case continues to enjoy good prospects of success and there are avenues for opening up the opponent’s weaknesses.” This response was important in that it was in due course submitted by Persimmon that it constituted an election to affirm cover (or at least as a representation that it would not be avoided). 44. On 30 May (the trial being due to commence on 4 June 2008) Edwin Coe forwarded CPH’s skeleton to Mr. Coleman followed by Persimmon’s skeleton. They were substantial documents. Persimmon’s skeleton made a number of points: i) ii) As regards the contract claim, no agreement was reached, Paul Tracey’s note was not contemporaneous, the subsequent correspondence was not consistent with any agreement having been reached and, in any event, there was no consideration. As regards the Pallant v. Morgan claim, the evidence of Bernard Tracey was not reliable. He was responsible for encouraging a false letter from Mr. Dorin. He was taking part in the management of CPH but was bankrupt. iii) The quantum meruit claim was not supported by any benefit. 45. The trial duly began on 4 June 2008 before HHJ Pelling. Bernard Tracey did not give oral evidence. Paul Tracey on the other hand was cross-examined for over a day. In the event, it was submitted by Persimmon that he had exhibited “a systemic attempt to not tell the truth” both in conniving with deceit on the part of his father but also on his own account. This point was summarised in Persimmon’s closing submissions as follows: “46J. This is not a case of a witness who lies once about one matter but is otherwise to be regarded as reliable. The extent of falsehoods engaged in by Paul Tracey and indeed by Bernard Tracey render the whole of their evidence unreliable. Not only did they create false documents Paul Tracey in the witness box was clearly not telling the truth about a whole range of issues. He was for instance given the opportunity to say that the letters he wrote to Persimmon (referred to above) claiming that he had to cure “obstacles” in the way of the transaction was part of his tendency to talk things up. He did not do that. He sat in the witness box and sought to pass this off as truth. Such an ingrained inability to tell the truth makes it very difficult for the Court to accept any of his evidence unless corroborated by a truthful document.” 46. In his evidence, Paul Tracey had conceded that a large number of documents created by his father contained lies, in particular, the regular suggestion that funding was available to the claimants to purchase the property. It was submitted that this was deception on such a scale and over such a prolonged period and directed at so many people that it could not be explained away as a little bit of “talking up”. 47. The trial was completed on 12 June 2008. With remarkable dispatch Judge Pelling gave judgment a week later. As regards the Traceys, he found as follows: a) The correspondence demonstrated that Bernard Tracey “lied in business correspondence…wherever and whenever he perceived it to be in his best interests to do so.” The judge held that he could not accept anything said by him unless corroborated by reliable independent evidence or was against his interest. b) Paul Tracey was a witness who’s “evidence needs to be treated with enormous caution”. He had also acted deceitfully in relation to the project on occasion. c) Paul Tracey’s evidence that he had had no involvement in discussions with Mr. Watt on 11/12 August 1999 was untrue. Equally, the evidence of Bernard Tracey that he had telephone conversations with Mr. Watt at that time was untrue. d) As regards the meeting on 1 December 1999, Paul Tracey’s note was not made at the meeting, but some time after 27 January 2000 in circumstances “which have not been truthfully explained”. e) The subsequent correspondence (including internal notes between the Traceys) was entirely inconsistent with an agreement having been reached on 1 December. 48. Following the reading of the judgment, Persimmon made an application for indemnity costs. The basis of this application was as follows: a) The claim had been deliberately inflated from £450,000 to £3.2 million. b) The claim was hopeless from outset. c) The evidence relied on by CPH was dishonest in substantial part. d) Documents had been manufactured. e) Paul Tracey had lied in the witness box. f) Although for the purposes of seeking to recover indemnity costs it was only necessary to establish the case was “outside the norm”, the circumstances went well beyond that. 49. In his ruling, Judge Pelling said that: “112. I return to the facts of this case. I have had, in the course of this case, to make some wide-ranging findings, frankly of dishonesty in the way in which evidence has been given and of documents which have been created after the event for the purpose of creating a false impression. I have to say those are not facts or conduct which are normally found in commercial or Chancery litigation; on the contrary, in my judgment they take “…the situation away from the norm.”. This trial lasted for the number of days it took up and had to be rigorously defended essentially because of that dishonest conduct. 113. An order for costs on the indemnity basis is not a punishment. The usual outcome will be that, whereas costs on a standard basis will enable a party to recover a proportion, perhaps 70 per cent or thereabouts, of its actual costs of litigation, the effect of an indemnity costs order is to allow a party to recover slightly more than it would be recovered on the standard basis but does not, in any sense, allow them to recover more than the costs actually incurred. It seems to me that the defendants have been put to the expense of defending this claim, to which, to the knowledge of the Traceys, was a claim that could not succeed.” 50. The judge duly made a costs order on an indemnity basis. There immediately followed an application by Persimmon for a payment on account of costs. In the course of argument leading counsel said this: “This is a case which my learned friend has indicated we have been fighting on a CFA. Therefore, there are insurers behind us for recovery of costs by the other side. We have made inquiries. They will submit to any order which your Lordship makes in relation to that. The usual order is a 14 day order.” I mention this because in due course it was submitted in the course of the present trial that, in the alternative, this constituted an election not to avoid the policy or alternatively an unequivocal representation that the policy would not be avoided. 51. 52. An order for a payment on account of costs in the sum of £175,000 was made. On learning of the outcome, Ian Coleman e-mailed on 23 June 2008 to Edwin Coe to “reserve insurer’s position” and again on 30 June 2008 to make it clear that underwriters were “not in a position to meet the interim costs award” until inquiries into possible misrepresentation and non-disclosure were complete. On 1 August 2008, Messrs. Hextalls who had now been retained by underwriters wrote to Edwin Coe avoiding the policy on the basis of a breach of the duty of the utmost good faith in regard to the dishonesty of the Traceys. In doing so, Hextalls accurately summarised the judge’s findings as follows: “In summary, the court held your clients’ representative Bernard Tracy to have been dishonest in that: 1. He lied in business correspondence wherever and whenever he perceived it to be in his best interest to do so (paragraph 17); 2. He represented untruthfully that your clients were being funded in relation to the acquisition of the site by a merchant bank, which was never the case (paragraphs 18(a) – (d) and (f), 30 and 47); 3. He corresponded on company notepaper which identified him as a director, despite being prohibited by statute from being a director or concerned in the management of companies, as an undischarged bankrupt (paragraph 18(e)); 4. He claimed untruthfully that pre-lettings had been granted on the block of flats and hotel to be built on the site (paragraphs 18(f) and 38); 5. He created a false document backdated for the purposes of evidencing an oral agreement which was not subject to a written confirmation at the time it was made (paragraph 22); The court held your clients’ representative Paul Tracy to have been dishonest in that: 1. Like his father, Paul Tracy also claimed untruthfully that there was bank funding when there was none (paragraph 26(b)); 2. He also stated that a deal had been struck with Persimmon for use of most of the residential space, when this was not the case (paragraph 26(c)); 3. He claimed that a document was a contemporaneous note of a meeting on 1 December 1999, whereas the judge concluded he had in fact created it retrospectively and improperly (paragraphs 77 and 99); 4. He made untrue statements giving oral evidence at trial about his dealings with NCP, the payment of professional fees, and his dealings with Persimmon (paragraphs 26, 28 and 41 – 42 respectively). 53. This letter went on to assert material non-disclosure in regard to: i) ii) The bankruptcy of Bernard Tracey. The presentation of the risk without reference to the untruthful statements of the Traceys and their fabrication of evidence. Further it was asserted that there had been material misrepresentation in regard to: iii) iv) Bernard Tracey’s relationship to CPH. The fact that CPH had been incorporated not because of Bernard Tracey’s ill- health but because he was in fact bankrupt but nonetheless thereafter acted in fact as a shadow director. Reliance was also placed on the terms of the policy including General Exclusion 12 and Conditions 6, 10(a) and 7. 54. 55. On 6 August 2008, Nabarro Nathanson wrote to Edwin Coe referring to the order for payment on account of costs and giving notice of an intention to serve a winding up petition on CPH. Pending underwriters’ decision (not as yet notified to Persimmon) Nabarro Nathanson reserved any rights to join Paul Tracey, Edwin Coe and counsel to proceedings under Section 51(3) of the Senior Courts Act 1981. In response by letter of 11 August 2008, Edwin Coe notified Nabarro Nathanson that they no longer acted for the claimants. It was explained that the firm was “genuinely shocked at the way in which the trial progressed” given the belief that Paul Tracey had been telling the truth. It concluded with this telling passage: “The source of your clients’ current problems is their failure to obtain an order for security of costs. The only way your clients were ever going to win was if Mr. Tracey was disbelieved at trial and therefore the potential insurance consequences of a victory at trial should have been obvious. No doubt you advised your clients accordingly.” 56. In October 2008 CPH was wound up and notice of the proposed claim under the 1930 Act was given on 5 November 2008. In response, Hextalls sent to Nabarro Nathanson a copy of their letter of 1 August. The claim form in the present proceedings was issued on 21 May 2009. The pleadings 57. It is of some note that in their Particulars of Claim, Persimmon asserted that, as regards inducement and waiver, “matters which do not adversely affect the prospects of success are unlikely to represent grounds to avoid the policy.” It was further pleaded that “the prospects of success and changes thereto are the province of the insured solicitor who acts as an adviser to the insured and its agent in this regard”. 58. The defendants pleaded the following material misrepresentations: a) That Bernard Tracey had reached an understanding with Steve Watt in mid-August 1999. b) That Paul Tracey had not been involved in any substantive discussions with Steve Watt at that time. c) That CPH (through Paul Tracey) had entered into a binding oral contract with Persimmon on 1 December 1999. d) That Paul Tracey’s note of the meeting was a contemporaneous record. 59. As regards non-disclosure, the defendants relied on a large number of matters including the following: a) Failure to disclose Bernard Tracey’s bankruptcy. b) Failure to disclose Bernard Tracey’s continued participation in the management of the claimants. c) Failure to disclose the breach by Bernard Tracey of the Company Directors’ Disqualification Act 1986. d) Failure to disclose dishonest statements by Bernard Tracey in documents relating to the site. e) Failure to disclose Bernard Tracey’s request to Mr. Dorin to draft a false document. f) Failure to disclose Mr. Dorin’s compliance with that request. g) Failure to disclose dishonest statements by Paul Tracey in regard to the site. h) Failure to disclose that Bernard Tracey had not been in contact with Mr. Watt after 24 June 1999. i) Failure to disclose that by August 1999 the claimants were in serious financial difficulties. 60. The claimants in their reply denied that the matters pleaded were material. Their point was put this way: “5. As such, the prudent underwriter would be unconcerned about individual facts being disclosed at inception of the Policy. He would be concerned as to material developments and more particularly, the opinion of “Insured Solicitor” and of counsel (provided and updated under clause 8 of the Policy) in light of such developments. In the premises in the context of ATE insurance the Claimant has to show that the material misrepresentation and/or non-disclosure would have affected the opinion of the “insured solicitor” and /or retained counsel if it had been made known. The Claimant will contend that such an approach is justified by the nature of ATE insurance and/or on the basis that the Insured Solicitor acts as the Insurer’s agent when performing this reporting role under clause 8 of the Policy. As such when matters are disclosed to the Insured Solicitor they are also thereby disclosed to the Insurer.” The witnesses 61. The claimants called one witness to give oral evidence. He was Mr. Gerald Francis, Company Secretary and Legal Director of Persimmon. The underwriters called two witnesses: a) Mr. Peter Smith, a director of First Assist Insurance Services, the cover holder for the underwriters. b) Mr. Ian Coleman, ATE Technical Manager at First Assist. 62. 63. All three witnesses sought to assist the court. Their evidence was, however, somewhat at the periphery of the issues in respect of which there was a wealth of contemporary documents. Both parties had leave to adduce expert evidence. The claimants retained Mr. Jason Smart, Chief Executive of Elite Insurance Company. The underwriters retained Mr. Matthew Williams, an underwriter with AmTrust Europe. In the event, following a meeting, they were able to agree on almost all the topics on which they had been asked to advise. In particular, they accepted that the representations and non- disclosures relied upon by underwriters (if established) were all material. The only issue on which they were called to give evidence was whether the policy was the outcome of negligent underwriting. This was said to be relevant to the issue of inducement and is a topic to which I will revert. The fact that the experts were able to agree that all the alleged misrepresentations and non-disclosures were material led inexorably to the abandonment of Persimmon’s pleaded case that a special approach was needed in the context of ATE insurance to the effect that the factual account of the underlying events was not material but only the risk assessment of the legal team retained. This concession was rightly made as a matter of law: Al-Koronky v. Time-Life Entertainment Group [2006] EWCA Civ 1123. No genuine belief in claim 64. In the result, Persimmon’s case focussed on two matters:- i) ii) Inducement. Waiver. As regards inducement it was contended that, in the absence of any evidence from Mr. Fallon (and in any event), underwriters had not established that they were induced to enter into the policy on the relevant terms by the alleged misrepresentations or non- disclosure. In short it was boldly contended that underwriters would have entered into the policy on the same terms even if all the material facts had been disclosed: Assicurazioni General SpA v. Arab Insurance Group [2003] Lloyd’s Rep IR 131, North Star Shipping v. Sphere Drake Insurance [2005] 2 Lloyd’s Rep 76.. 65. However, in one respect, inducement was conceded and that was if underwriters were able to establish that the whole claim was bogus in the sense summarised by the judge, namely that the Traceys had put forward a claim which to their knowledge could not succeed. 66. Persimmon, however, submitted that the judge’s finding, which was in effect that the claim was fraudulent, should be disregarded: a) Such had not been pleaded or argued at the trial. Indeed, as the judge said, it was not a fraud claim. b) All that had been suggested was that the claim was “misconceived” and to that extent “hopeless”. c) Although it had been successfully contended that the Traceys had lied and had produced documents which were untrue, it had never been suggested that there was no honest belief on their part in the truth of the claim. d) The true position was that, being dyslexic and in-experienced, Paul Tracey had convinced himself as to the legitimacy of the claim. e) The judge’s finding in the course of his judgment on costs was “out of the blue” and constituted a throwaway line in an extempore judgment. 67. I am quite unable to accept that analysis: i) ii) The judge had just conducted the trial during which he heard the evidence of Paul Tracey and considered the statement of Bernard Tracey. He had been in an ideal position to assess their evidence and the whole background to the claim in the light of their cross-examination, in the light of the contemporary documents, the probabilities and the motives of those involved. iii) iv) v) vi) vii) He had prepared a full and detailed judgment in which his findings on the key facts were decisively influenced by his findings of dishonesty and the manufacture of documents on the part of the Traceys in the respects set out. As appears from their skeleton argument it had been Persimmon’s submission that the Traceys were involved in systemic dishonesty. As developed in oral submissions, matters went way beyond “talking up” matters into the territory of going out dishonestly to deceive and to fabricate documents. These submissions were accepted in their entirety by the judge. As the judge put it, if a party wished to bring an exaggerated claim based on false evidence, they could expect to pay more on costs. It followed that in the judge’s view the claim had been inflated in the sense of being put forward dishonestly. Indeed his award of indemnity costs was premised on his finding of dishonesty. No challenge was raised to the finding, either at the hearing or thereafter, although the risk as regards insurance cover associated with a finding of dishonesty had been fully aired in correspondence and must have been well in mind at the hearing. To the extent that it is relevant, it is difficult to see how the judge could have come to any other conclusion given the systemic dishonesty exhibited by the Traceys in regard to the evidence in the case and the associated fabrication of documents. 68. It was also accepted by Persimmon that on this basis there had been no waiver of the right to avoid. The underwriters had no knowledge of the systemic dishonesty involved and equally made no representation that any such factor would not be relied upon by way of avoidance or otherwise. 69. This is, in my judgment, the short answer to this case and must lead to the dismissal of the claim. Negligent underwriting 70. In case I am wrong I will need to turn to various individual aspects of the allegations of misrepresentation and non-disclosure on the basis that nonetheless the Traceys had a genuine belief in their claim. But before doing so, I must deal with another submission made by Persimmon to the effect that there had been negligent underwriting having regard to the material that was in fact disclosed and that accordingly it can be inferred that the additional disclosure would have made no difference. This, it was submitted, was a conclusion that could be more readily reached given the absence of Mr. Fallon although ironically he had left the underwriters to join Elite, the ATE insurers headed up by Persimmon’s expert. 71. With some justification, underwriters complained that this was a topic which had not been covered in the original report of their expert for the simple reason that the fact of negligent underwriting was not a pleaded issue. Nonetheless, I allowed evidence to be called on the topic and will express my conclusions on it. 72. It was common ground that an ATE insurer should exercise some caution when faced with a case which turned in large part on oral evidence. In this respect the defendant’s underwriting manual was instructive: “Total Reject List There are no risks which we are unwilling to consider for pursuit. However, there are some preliminary checks we must always carry out, which may lead us to decline the proposal. These include: Cases where the solicitor is not acting on a CFA Cases where we have insufficient confidence in the ability of the solicitor to handle the case satisfactorily Cases with merits at or below 50 % (our assessment) Cases with an estimated exposure of over £250,000 Construction cases Cases primarily dependent on oral testimony Cases where there are doubts as to the solvency of the opponent Cases which have the hallmarks of “David v Goliath” We should swiftly agree our stance on such cases, so as not to waste the time of the proposer or ourselves.” 73. In this regard, Persimmon contended that three of these factors were present in the ATE insurance proposal made by the Tracey’s: a) A case with merits at 50%. b) A case primarily dependent on oral testimony. c) The hallmarks of a ‘David v. Goliath’. This is correct so far as they go and thus, in the words of Persimmon, furnishing three amber lights to warn against writing cover. 74. However: a) Whilst counsel had given an assessment of a 50% prospect of success in respect of their conditional fee agreement, of greater significance was the assessment of the merits by both counsel and solicitors in the region of 60% or more. b) Whilst the claim was mainly dependent on the resolution of a dispute between the witnesses, the dominant issue was the outcome of the December 1999 meeting in respect of which CPH had an apparently contemporary note written by Mr. Paul Tracey with Mr. Watt’s assistance. c) There was an element of inequality of arms, but that would seem to be true of any claim for which a claimant was in need of a CFA in order to prosecute it. 75. It was Mr. Smart’s evidence, reiterated in the joint memorandum, that no prudent underwriter would have written the risk. I have some difficulty in reconciling that view with the body of his report. Mr. Williams’ view was much more tentative: “As a prudent ATE underwriter I may well have underwritten this risk. I would perhaps have wanted to meet the Traceys beforehand to assess their credibility as witnesses. This could potentially have had a bearing on my ultimate decision.” 76. In analysing the underwriting decision involved, Mr. Smart identified various factors which have influenced him: a) The “extremely” positive factor of both counsel acting on a CFA in a commercial case where there was an oral dispute in regard to a meeting some 6 years earlier thus demonstrating a view that it was more likely to succeed than fail. b) Although there was a need to have an explanation for the Part 36 offer being initially at £180,000 being some £270,000 below the solicitor’s view of the minimum level of recovery, this was duly furnished in a letter from Edwin Coe to Mr. Fallon dated 7 September 2005 to the effect that it was the lowest recovery anticipated on the fall back quantum meruit claim. c) Although there was a vigorous challenge on the key factual issues by Nabarro Nathanson, that was only a “typical response from an aggressive defendant legal team”. d) The rejection of cover by other ATE insurers was not unusual and may have simply reflected lack of ability to write a large risk. e) The rating at 73% was not unusual. 77. He concluded as follows: “6.6.10: In view of the foregoing, it is likely that a prudent ATE insurer would have wanted to review all documentation in this matter and possibly may even have wished for the solicitor to attend upon a meeting to discuss the case generally before accepting the risk” I accept this analysis. Although many underwriters might (and indeed did) reject the risk, I am unable to accept the proposition that underwriters would certainly have rejected it as too risky. Indeed Mr. Smart’s original report was inconsistent with that conclusion. 78. I have not forgotten that the underwriter should make some attempt to make his own assessment of the merits. Indeed in the underwriting manual there is the following section: “Merits Whilst the underwriter should of course look to see the solicitor’s risk assessment or Counsel’s advices regarding the merits of an action, the underwriter must also form their view, as it will ultimately be the underwriter who determines the merits of the action on behalf of the Insurer. It is therefore for the underwriter to justify their assessment… It is a useful approach when looking at a Proposal, if appropriate, to read through the Particulars of Claim and then the Defence and relevant expert evidence in order to form your own opinion on the merits before reading Counsel’s opinion. This helps the underwriter understand the case and the likely strengths of the defence, which can then be compared with Counsel’s views. Above all, the underwriter should understand the basis of the claim and how it arose. Does it make sense or is there something which does not ring true? Any cases with merits under 60% need to be given extra consideration, and the underwriter must ask themselves “do we really want to run this risk?”” 79. 80. 81. It is by no means clear to what extent Mr. Fallon made his own assessment. The question of expert evidence did not arise. The pleaded case made clear the dependence upon oral testimony for success. His contemporaneous note is pretty thorough. He adopted a figure of 65% in his premium calculation for which purpose he had specific regard to counsel’s advice that the contractual claim had a 60% prospect of success and the quantum merit claim 70%. His notes summarise counsel’s advice and then go on to refer to the letter before action. He noted in particular the reference to Paul Tracey’s handwritten notes. It is difficult to see how he could form an entirely independent view of the merits, save by reference to his general experience in the field. He obviously was cautious in the face of the dispute on the oral evidence and in the result insisted on a CFA on the part of counsel. This was intended to flush out any further reservations on the part of counsel. Their willingness to act on the basis of CFAs would inevitably have strongly enhanced his confidence in the suitability of furnishing cover. Despite the fact that Mr. Fallon was not called to give evidence. I see no grounds for concern that he was imprudent, let alone negligent in agreeing to accept the proposal. But for present purposes it is more important to emphasise that I reject the contention that the assessment of the risk by Mr. Fallon was so imprudent as to give rise to the conclusion that he would have had no regard to full disclosure and accurate representations. Non-disclosure but genuine belief 82. 83. 84. 85. This part of the case proceeds on the basis that the Traceys had, contrary to my earlier finding, a genuine belief in the legitimacy of the claim and that any untruthful evidence or fabrication was simply by way of improperly seeking to bolster the claim. As already recorded the pleaded misrepresentations and non-disclosures are all accepted to be material. The theme of the submission advanced by Persimmon was that during the currency of the policy underwriters came to know of the true facts. This in turn created the necessary threshold for an election to affirm the policy but, more importantly for present purposes, it was also said to be relevant in a separate respect, namely that the reaction (or lack of it) to learning of such matters demonstrated that there was no inducement as a result of any such misrepresentation or non-disclosure. As already noted it was Persimmon’s original case that the pleaded misrepresentations and non-disclosures were not material in the context of ATE insurance. That position had to be abandoned in the light of the agreed expert evidence. Indeed the entirety of the non-disclosure and representations relied upon by the underwriters were agreed to be material. For convenience these were divided into five categories, but it had to be borne in mind that the underlying question is whether there had been a fair presentation of the risk. Accordingly, it is the overall impact of any representations (if untrue) and any non-disclosures (if established) which has to be considered. As explained I do this on the basis that underwriters have failed to establish that the claim was fraudulent in the sense that the Traceys were fully aware that it was bound to fail. As I understand it, it would be Persimmon’s position for this purpose that neither dishonesty in correspondence relating to the transaction, nor dishonesty in the preparation and conduct of the trial supported the conclusion that the claim was known to be bogus. It could and should be treated as improper embellishment of a genuine claim. 86. The five categories are as follows: a) b) c) d) e) The dishonest statements of both Traceys about their financial backing and the extent to which the site had been pre-sold or pre-let. The production of the dishonest note by Mr. Dorin on the instigation of Bernard Tracey. The spurious contemporary note of the meeting of 1 December 1999. The bankruptcy of Bernard Tracey and the financial difficulties faced by the Traceys in 1999. The dishonest account of Bernard and Paul Tracey regards the key events of 11 – 12 August and 1 December 1999. 87. 88. 89. 90. 91. 92. It is in this arena that the submission is made that (a) the true facts were in due course furnished to underwriters after inception and (b) the reaction of underwriters at that stage demonstrates that the non-disclosures and misrepresentations could not be said to have induced the offer of cover on the relevant terms. Category (a) - dishonest statements. During 1998 and 1999, the Traceys made persistent and dishonest statements to the effect that their purchase of the site was supported by a “Fund” and that specific parts of the site had been pre-let or pre-sold. A good example is to be found in the letter from Paul Tracey to Mr. Watt dated 22 September 1999: “I have been closely monitoring the progress of the purchase of the above site. Gordon Allison of NCP Midlands has been phoning me very regularly to ascertain whether Persimmon are definitely intent on proceeding with the purchase of this site on the latest terms agreed by ourselves.” This was entirely untrue yet was set out extensively in the “Summary of Evidence in Support” furnished with the proposal form. As I understood it, it was contended by Persimmon that the dishonest habits on the part of Bernard Tracey in the writing of correspondence were revealed to underwriters in his supplementary statement dated May 2008 without provoking adverse comment or even a request to see the statement of Mr. Watt to which he was purporting to reply. The passage in his statement was in response to a suggestion in Mr. Watt’s witness statement that he (Bernard Tracey) had “a tendency to refer to things being agreed when they are not”. In this respect, Bernard Tracey accepted that “in common with a lot of people in the property business I have a tendency to “talk things up”. The proposition that thereby underwriters were put on notice that the written and oral statements made by Bernard Tracey were, as categorised by HHJ Pelling, wholly untrue, is not arguable. Optimism and exaggeration are not the make up of dishonesty. In any event, the admission has no bearing on Paul Tracey’s position. The reality is that the whole purpose of lying about the ‘Fund’ and the pre-sales was to hide the financial difficulties of the Traceys. This was not “talking things up”. The true position was that the Traceys (and their companies) were unable to meet even the professional fees incurred. Any fair presentation would have required full and frank disclosure of that fact. Next category (b) – the Dorin Note. Leaving aside the unsatisfactory nature of any agreement between the Traceys and Mr. Dorin for the payment of any introduction fee at all, given that he was an employee of NCP, a fair presentation of the risk would have excluded the false representation which was solemnly set out in the “Chronology of Facts”, that Mr. Dorin agreed an introduction fee of 2% of the ultimate purchase price on 15 October 1998. 93. The true position was: a) The agreement was for a 1% fee. b) c) Bernard Tracey had sent a fax to Mr. Dorin in August 1999 asking him to create a back-dated letter detailing a purported agreement at 2%. The letter of “15 October 1998” was the outcome of that request. 94. It was suggested by Persimmon that the bogus nature of the 15 October 1998 letter was revealed once the fax from Bernard Tracey to Mr. Dorin dated 12 August 1999 was disclosed. The principle thrust of the fax was: (a) (b) (c) The Traceys Fund and their lawyers were not being helpful and thus Bernard Tracey had had to “switch horses in mid-stream”. Persimmon had agreed to pay Mr. Dorin’s fee. The fee had altered to 2%. No disclosure was made as to the untruthfulness of all these points. What is relied upon is simply the revelation that the Traceys were a party to an invitation to backdate a letter recording the altered fee. 95. In my judgment it is not realistic to expect underwriters to peruse the entirety of the disclosure to unearth evidence of a potentially dishonest practice when the legal advisers make no point about it. It was suggested that Mr. Coleman had the content and the significance of the fax specifically spelt out to him at the conference with junior counsel held in December 2007. It certainly appears that the fax was in the bundle of documents available to those attending the conference and indeed Edwin Coe’s attendance note records counsel as having taken Mr. Coleman through such documents as touched on the ‘key’ date of 12 August. 96. Mr. Coleman in his evidence says that he has no recollection of being taken through the fax, let alone his attention being focussed on the unsatisfactory and disreputable course of action being recommended by Mr. Bernard Tracey on the second page. I accept that evidence. In my judgment he would have remembered any discussion centring on doubts about Bernard Tracey’s credibility derived from his fax and the bogus nature of the letter written by Mr. Dorin as a result. 97. 98. It is of particular note that none of the notes made of the conference record any discussion of the topic which would be expected to feature high in the bullet points to emerge. Indeed counsel appears to have confirmed his estimate of success at 65% which is wholly inconsistent with him having expressed any concern about the credibility of Bernard Tracey. Category c- the contemporary note. As regards the note of the meeting on 1 December 1999, the true position was that this had been written later and not, as represented, at the meeting. Yet: a) Paul Tracey’s draft statement stated in regard to the progress of the meeting: “We then sat down and I wrote notes as he talked me through the various figures. He confirmed to me that we would need an up front payment of 2 percent based on the purchase price….” b) This account was duly repeated in the Summary of Evidence in Support: “manuscript note of the meeting between Paul Tracey of CPH and Steve Watt of Persimmon at which agreement was reached for payment terms to CPH”. 99. It was Persimmon’s submission that the note was only of marginal significance in that there was no issue between Persimmon and the Traceys as to what topics had been discussed at the meeting and that was all the note purported to record. But, in my judgment, this fails to begin to grapple with the obvious significance of the bogus nature of the document: a) The whole point of the note was to give credence to the proposition that agreement on the computation of various Indeed, in his payments was reached at the meeting. supplementary statement Paul Tracey stated: “ The meeting on 1 December 1999 took place at Persimmon’s office at Kardelton House, Windsor. The agreement as to CPH’s involvement was reached in principle on 12 August 1999 and firmed up in the meeting on 1 December 1999. If these terms had been complete fiction, then Steve Watt’s reply to my letter of 16 December 1999 would merely have been to deny that any such terms were agreed. That was not the case. I took contemporaneous notes at the meeting on 1 December 1999 and Steve Watt actually assisted me in completing my personal notes by leaning over me and explaining the way in which the figures would be computed. Why, if it was the case that Persimmon were not to pay CPH any more than the discharging of the professional fees, were the other items set out in my letter to Steve Watt of 16 December 1999 discussed at the meeting? It is simply not credible that Steve Watt would have taken the trouble to discuss such terms if he had no intention of honouring any of them…” b) Such was exactly how the document had been viewed by Edwin Coe. Indeed it is not remotely surprising that the availability of an apparently contemporaneous note was regarded as a formidable support to the claim. 100. In my judgment it is scarcely arguable that the non-disclosure did not induce the offer of cover. A fair presentation would have involved a statement to the effect: i) ii) The note was a forgery. It was written to bolster the story that an agreement had been reached on the terms suggested. Furthermore, it was not suggested that the underwriters became aware of the fact of forgery until the judgment was handed down. 101. Category d - bankruptcy. Bernard Tracey had been declared bankrupt in April 1999. This was not disclosed to underwriters prior to the inception of cover. This fact itself was material in that he had continued to participate in the management of the claimants in the original action and, by doing so, committed a criminal offence under the Company Directors’ Disqualification Act 1986. But more important was the associated point that it elided with the fact that the companies were themselves in serious financial difficulties. This was not disclosed although it was highly relevant to the question whether, as Persimmon contended, the approach to them in August 1999 was by way of seeking a distress arrangement. 102. It is true that in May 2008 Persimmon obtained and disclosed the bankruptcy order. This duly was reported to Mr. Coleman. Edwin Coe took a further statement from Mr. Bernard Tracey which touched amongst other things on the topic. He claimed (quite untruthfully) that his bankruptcy was irrelevant since the difficulties over funding were connected to the site and in particular the need for more time to deal with planning permission. Concurrently with the drafting of this statement, in their letter to Mr. Colman dated 6 May 2008, Edwin Coe gave assurances that the question of the bankruptcy had no bearing on the contractual claim. This was on the basis that as regards the discussions in August, it was accepted that CPH would be the purchaser, that it was solvent and that there were “funders”, all being points on which they too had been misled by the Traceys. 103. In response Mr Coleman asked for an “overview” and in her long reply Mrs. Osborne commented: a) b) that Mr. Watt had a poor recollection of events. that the independent witnesses supported the Traceys. 104. It was thus not remotely surprising that there was no reaction to the information about the bankruptcy. In any event it gives no clue as to what reaction there would have been in the event of full disclosure in the first place. Whilst it is true that the revelation of the bankruptcy did not give rise to any complaint, the fact remains that the true financial picture remained undisclosed namely that at the relevant time the Traceys and their companies had no funds to cover the deposit or even the professional fees, let alone the purchase. 105. Category e – the meetings in August and December. An accurate and truthful account of the meetings in August and December 1999 would have stated: i) ii) iii) that Paul Tracey (not Bernard Tracey) had had a substantive meeting with Mr. Watt on 12 August and had reached agreement for Persimmon to take over as purchaser. that the only consideration for that agreement was the discharge of outstanding professional fees. that in December a range of possible financial rewards for the Tracey and their companies was discussed but no agreement was reached. 106. None of this was disclosed. To the contrary, the materials attached to the proposal set out an entirely dishonest account whilst the true position did not emerge until the trial. Paul Tracey must have known the account was untrue. Even if in some strange way he convinced himself that it was true, the presentation was not fair and complete. 107. The absence of any reaction by the underwriters to these matters is of no assistance either in indicating what reaction there would have been to full disclosure at inception or in establishing subsequent knowledge on the part of the underwriters of the true state of affairs:- i) ii) iii) The issue was which account of the meetings in August and December 1999 was more accurate. The underwriters’ legal advisors remained of the view that the Traceys’ account was probably correct. It is wholly unrealistic to expect underwriters to embark on their own detailed analysis of the statements and the documents so as to second-guess the legal advisors whilst unaware: a) b) c) that the Traceys were in desperate financial straits in mid-1999 but prepared to lie systematically about the position. that the Traceys were prepared to manufacture documents and persuade others to do the same. that the Traceys’ account of the meeting was untrue. 108. Some emphasis was placed on the absence of Mr. Fallon as a witness and the resulting difficulty from the underwriters’ point of view in establishing inducement. That difficulty is, in my judgment, largely illusory: a) b) c) The misrepresentation and non-disclosure on any view went to the heart of the risk, namely that of the claim failing. Furthermore, I accept the proposition (which in any event was not in dispute) that the misrepresentation and non-disclosure also went to moral hazard: see ICCI v. Royal Hotel [1998] Lloyd’s Rein. LR 151. Mr. Fallon was an experienced underwriter who, as already demonstrated, appears to have approached the underwriting task with diligence and care: thus the task of persuading the court that the misstatements and non-disclosure made no difference to him becomes formidable, if not, insuperable: Pan Atlantic Insurance Ltd v. Pine Top Ltd [1995] 1 AC 501 at p.551. d) Both Mr. Smith, the underwriting manager, who had reviewed the original proposal and the accompanying documents, and Mr. Coleman gave evidence that they would not have written the risk if full disclosure had been given. 109. As already explained the reaction of the underwriters to the emergence of some matters that should have been disclosed (or not misstated) (e.g. the bankruptcy of Mr. Bernard Tracey) falls well short of evidencing any lack of interest in the material at the proposal stage: a) b) c) d) By definition, the approach to disclosure before and after inception must be different. Late disclosure does not give rise to a process of re-writing of the risk. The only immediate issue at that stage is the decision whether to avoid cover (or withdraw the same under the contractual terms). This in turn raises a number of broader considerations spoken of by the experts such as market reputation and the threat of the involvement of the Financial Ombudsman Service or the FSA. Any consideration of avoidance should be undertaken against the background of what would have constituted full disclosure in the form of a fair presentation. The later disclosures were, however, piecemeal and incomplete. Although it was suggested that the underwriters could have invoked condition 3(c) of the policy to cancel the policy for failure to follow underwriters’ recommendations as to settlement, such a power would not be available (or not at least realistically exercisable) when solicitors and counsel reassured the underwriters that the prospect of success remained good in the light of the independent and documentary evidence. 110. I accept that in addition to their common law right of avoidance, underwriters were entitled to exercise their contractual rights to reject the claim: a) b) General Exclusion 12 excluded cover where there had been misrepresentation or material non-disclosure (on the face of it even absent inducement). Condition 10 required a “complete and truthful account of the facts of the case”. Waiver 111. Persimmon argue that nonetheless the underwriters have affirmed the policy. This proposition faces overwhelming difficulties. First there is the threshold requirement that the underwriters must have actual and not constructive knowledge of the facts founding the right to avoid: ICCI v. Royal Hotel [1998] Lloyd’s Rep. IR 151. Apart from the bankruptcy of Bernard Tracey, underwriters did not know any of the matters discussed earlier. 112. Secondly the election must be communicated unequivocally to the other party. In this regard, there are two features: a) b) that the communication (or the surrounding circumstances) must demonstrate objectively that the party affirming was making an informed choice. that such in turn required an assessment of the impact of the relevant conduct on a reasonable person in the position of the other party to the contract. 113. Persimmon’s pleaded case was remarkably silent on the issue of election as regards the conduct relied on. In due course three matters were relied upon: i) ii) Mr. Coleman’s e-mail of 20 May 2008. The failure to avoid in late May 2008 in the run up to the trial. iii) Counsel’s submission to the trial judge in the wake of the costs ruling. 114. In my judgment all these matters are not remotely susceptible of being treated as an election: i) ii) Mr. Coleman’s e-mail merely acknowledged receipt of earlier letters and enclosures from Edwin Coe with the coda that it was pleasing that the case still “enjoyed good prospect of success” and asking for an update. It is quite impossible to treat that communication as giving any indication that underwriters were aware of a ground of avoidance and were electing not to exercise it. To the contrary, it was all premised on the Traceys’ account being truthful and accurate and thus likely to succeed. Equally the impact on a reasonable person in the position of the then claimants could not conceivably be to that effect. It is true that the detailed Persimmon skeleton for the trial set out some of the submissions that would be advanced to the effect that the Traceys were dishonest. But in forwarding a copy, Edwin Coe expressed no concern. The resulting absence of any comment by underwriters cannot amount to an election nor could it reasonably be viewed as such. 115. As already noted, following the costs ruling, a question arose as to an interim payment. Counsel for the Traceys said: “This is a case which my learned friend has indicated we have been fighting on a CFA. Therefore, there are insurers behind us for recovery of costs by the other side. We have made inquiries. They will submit to any order which your Lordship makes in relation to that. The usual order is a 14 day order.” 116. After the present trial commenced and after I had asked for a copy of the transcript of the costs hearing this remark was put forward as an affirmation. Indeed at the end of trial, Persimmon sought leave to amend to rely on it. This was not merely opportunistic, it was also far too late. Counsel at the trial was presumably reporting on information from his solicitor. Whether underwriters had actually been asked about an interim payment, let alone in the light of the judgment, is wholly unclear and the underwriters had had no opportunity to deal with it. Given Mr. Coleman’s immediate reaction to the report on the outcome of the case as regards the dishonesty of the Traceys and the award of indemnity costs, I infer that Counsel was referring to some understanding of the position of the underwriters in earlier discussions prior to judgment. In any event, I am wholly unimpressed with the suggestion that the comment was an objective demonstration of an informed choice or that it was (or could be) treated as such. Estoppel 117. Again this requires an unequivocal representation on the part of underwriters that they would not rely on the right of avoidance. The preceding paragraphs apply with equal force. Furthermore: i) ii) The “representations” relied upon contain nothing to suggest the underwriters were aware of their rights: this, taken with the absence of any evidence from the Traceys, greatly undermines any case of reliance. There is nothing inequitable or unconscionable in allowing the underwriters to resile from any indication of an intention not to rely on the right of avoidance given the dishonesty of the Traceys. Conclusion 118. For all these reasons the claim must be dismissed.