The question arose out of the following facts. The plaintiffs, the Bank of Nova Scotia, were mortgagees of vessels owned by the assured, the Good Faith Shipping Company. Good Faith insured their vessels against war risks with the defendants, the Hellenic Mutual War Risks Association (Bermuda) Ltd. During negotiations between the Bank and the assured for a rescheduling of the mortgages and for a draw-down facility, one of the vessels owned by the assured, the Good Luck, became a constructive total loss. She had been hit by missiles while proceeding up the Persian Gulf to the Iranian port of Bandar Khomeini. The Bank knew of the loss but agreed to the rescheduling and draw-down on the assumption that the Good Luck was properly insured.

In fact, this was not the case. For some time, Good Faith had been chartering its vessels to Iranian interests with the result that the vessels were being operated in the Persian Gulf—an additional premium area under the terms of their cover—and into Bandar Khomeini—a prohibited area under the cover. Good Faith did not comply with their obligation of notifying the defendant insurers whenever a vessel entered an additional premium area, and when their vessels entered a prohibited area this amounted to a breach of warranty which automatically suspended all cover for the vessel in question. The insurers relied on such facts, and upon evidence of a fraudulent declaration having been made, when they rejected the claim made in respect of the Good Luck.

The Bank sought to recover from the insurers the money which they had advanced to Good Faith. Although the Bank had mortgagee’s interest insurance, the Bank’s primary security was a possible right of recovery from the insurers. It appeared that the insurers knew that the assured were not complying with the terms of the insurance. Furthermore, by Letters of Undertaking entered into between the Bank and the insurers, the benefit of the insurance was assigned to the Bank. By para. 3 of the Letters there was an obligation on the insurers to report to the Bank any case in which they ceased to cover the assured. Against this background, the Bank argued that the insurers were in breach of contract to them and, furthermore, that they owed a duty of good faith to the Bank and/or a general duty to disclose the true facts. This duty was justified on the basis that, had the Bank been so informed, it would not have made the advances to Good Faith.

Hobhouse, J., effectively disposed of the case on a point of construction. Since the Good Luck had been in a prohibited area, the assured were uninsured at that