Morgan Grenfell & Co Ltd v SACE - Istituto per i Servizi Assicurativi del Commercio

An insurer could not annul an Italian-law insurance contract under Article 1892 of the Italian Civil Code unless an undisclosed circumstance was objectively material, would have affected the insurer’s decision, and was withheld fraudulently or through gross negligence. An insurer’s questionnaire provides important evidence about materiality, but does not conclusively delimit disclosure.

Whether a foreign entity is an ente pubblico estero requires a contextual assessment of its legal status, functions, ownership, funding, control, insolvency regime and relationship with the state. State responsibility for its debts is relevant but not decisive.

Where export-credit cover applies to loans whose purpose is to finance Italian exports, the loan need only be intended for that purpose. Cover does not depend upon proof that every financed item was actually of Italian origin.

Morgan Grenfell provided buyer-credit finance for an hotel project in Equatorial Guinea and two industrial projects in Hungary. SACE, the Italian state export-credit insurer, insured the loans under policies governed by Italian law. The borrowers defaulted.

Timothy Walker J entered judgments for Morgan Grenfell totalling approximately £112 million. SACE appealed, alleging material non-disclosure, disputing whether the Hungarian borrower was an ente pubblico estero, and contending that cover did not extend to loan proceeds used to acquire goods of non-Italian origin.

The central questions were whether the policies could be annulled under Article 1892 of the Italian Civil Code, whether the Hungarian borrower possessed and retained the required public status, and whether the statutory and contractual purpose requirement depended upon the intended or actual use of the loans.

1. The appeals were dismissed unanimously. The court upheld the judgments for Morgan Grenfell, although it disagreed with parts of the judge’s reasoning and his assessment of several witnesses.

2. Foreign law must be pleaded and proved as a fact of a peculiar kind. An expert must identify the relevant legislation and authorities, explain their status and, where no authority is directly applicable, assist the English court to predict how the foreign court would decide. A trial judge should ordinarily evaluate each part of the competing evidence. Wholesale rejection of an expert’s evidence for partisanship will be justified only rarely.

3. Under Article 1892 of the Italian Civil Code, SACE had to establish objective materiality, subjective causation and fraud or gross negligence. Morgan Grenfell’s complete absence of due diligence increased the probability that poorly performing loans would be insured and was therefore objectively material. Nevertheless, SACE failed to prove that disclosure would have caused it to refuse cover or impose different terms. SACE’s questionnaire, manuals and underwriting conduct strongly indicated that such matters would not have affected its decision. Morgan Grenfell’s conduct also lacked the serious intensity required for gross negligence. SACE therefore had no right to annul the policies.

4. An insurer’s questionnaire supplies a framework guiding disclosure. Its scope carries potentially compelling evidential weight, particularly on subjective materiality and gross negligence, but does not conclusively exclude disclosure obligations concerning matters outside its questions.

5. The expression ente pubblico estero in Article 14.2 of Law No 227 of 24 May 1977 required consideration of both the language and legislative purpose of the provision. Relevant indicia included the entity’s public functions, legal status, creation, ownership, funding, state control, insolvency regime and the state’s legal or practical responsibility for its debts. No single factor was conclusive.

   EC was a Hungarian state body, founded and wholly owned by the state, capitalised with state assets and subject to significant state control. It was an ente pubblico estero when cover commenced and remained so until liquidation. Its possible insolvency and the absence of a state guarantee did not outweigh the other indicia. SACE could not withdraw cover under the contractual reservations or rely upon Articles 1895 or 1896 of the Civil Code.

6. The words describing loans as intended or destined to finance Italian exports stated their purpose, not a condition requiring proof of actual use. SACE could not reduce or deny cover merely because some financed goods were not in fact of Italian origin. Its late argument based on the “foreign disbursements” clause was not established on the available evidence and would in any event have failed on the court’s provisional construction.

1. Court of Appeal (Civil Division): The court unanimously dismissed SACE’s appeals and upheld the judgments for Morgan Grenfell: [2001] EWCA Civ 1932.
2. Commercial Court: Timothy Walker J held SACE liable under the Equatorial Guinea and Hungary export-credit policies and entered judgments for US$20,326,232.93 and DM177,293,981.21 inclusive of interest. No citation for those judgments is stated.