No clear mistake and no clear cure – disappointing result in the Court of Appeal for W&I policyholder
A recent decision of the Court of Appeal, Project Angel Bidco Ltd (In Administration) v Axis Managing Agency Ltd & Ors [2024] EWCA Civ 446, provides guidance in relation to the interpretation of exclusion clauses and alleged drafting errors in warranty and indemnity (“W&I”) policies.
Background
The Parties
The Appellant, Project Angel Bidco Ltd (“PABL”), was insured under a W&I policy (“the Policy”).
PABL had purchased the shares in Knowsley Contractors Limited (trading as King Construction) (“King”). The Share and Purchase Agreement (“SPA”) included a number of warranties, listed in a Cover Spreadsheet to the Policy, including in relation to anti-corruption legislation.
King in fact became embroiled in allegations of corruption. It went into liquidation and PABL itself went into administration. PABL had paid £16.65 million for the shares. It claimed that the warranties had been incorrect, such that the true value of the shares was negligible or at most £5.2 million, and accordingly made a claim against the Respondents, Axis Managing Agency Limited and others (“Insurers”), for an indemnity under the Policy.
The Cover Spreadsheet
The Cover Spreadsheet contained a list of “Insured Obligations” which included warranties 13.5 (a) to (h) (“Warranty 13.5”). The spreadsheet contained the following rubric:
“Notwithstanding that a particular Insured Obligation is marked as “Covered” or “Partially Covered”, certain Loss arising from a Breach of such Insured Obligation may be excluded from cover pursuant to Clause 5 of the Policy.”
The Insured Obligations at Warranty 13.5 were all marked as “Covered”.
ABC Liability
The Policy stated that:
“The Underwriters shall not be liable to pay any Loss to the extent that it arises out of…
5.2.15. any ABC Liability” (“the ABC Liability Exclusion”).
ABC Liability was defined as "any liability or actual or alleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws”. [Emphasis added.]
The Overarching Issue
This appeal was concerned with the conflict between the “Covered” Insured Obligations at Warranty 13.5 and the ABC Liability Exclusion.
PABL argued that the scope of the Insured Obligations at Warranty 13.5 contradicted the ABC Liability Exclusion, as no loss arising out of a breach of Warranty 13.5 would ever be covered by the Policy. The Court explored the alleged conflict by asking four questions:
- Was there an inconsistency as alleged by PABL?
- If there was inconsistency, did the Policy resolve it?
- Was there something wrong with the language of the ABC Liability Exclusion?
- If a mistake had been made, was there a clear cure?
Was there an inconsistency?
Insurers argued that Warranty 13.5(e) (that the company maintained a record of all entertainment, hospitality and gifts received from a third party) and 13.5(h) (in relation to the award of contracts under the Public Contracts Regulations 2006) fell outside the exclusion. However, the Court of Appeal accepted there was a conflict between the entirety of Warranty 13.5 and the ABC Liability Exclusion.
Did the Policy resolve the inconsistency?
Insurers argued the structure of the Policy meant that the Cover Spreadsheet was subordinate to the ABC Liability Exclusion. This relegated the Cover Spreadsheet to being a “summary document”, purely intended to show which warranties were in scope of the Policy. The Court of Appeal disagreed, noting that the definition of “Insured Obligations” was linked to the Cover Spreadsheet.
Secondly, Insurers argued that the ABC Liability Exclusion was a heavily negotiated term and therefore more significant than the Cover Spreadsheet. The Court of Appeal accepted this, since the definition of ABC Liability was “detailed and wide ranging”, whereas the classification of warranties as “Covered”, “Excluded” or Partially Covered” was much broader.
Thirdly, Insurers argued the rubric in the Cover Spreadsheet showed that the ABC Liability Exclusion would take precedence, and the Court of Appeal agreed.
Was there something wrong with the language?
The Court of Appeal emphasised that, in order to correct an alleged error in a contract, it has to be clear there has been a mistake. In the first instance decision, the Judge had interpreted the ABC Liability Exclusion as follows:
“As drafted the definition would appear to cover three different species of ABC liability being:
- i) Any liability … in respect of Anti-Bribery and Anti-Corruption Laws;
- ii) Any … alleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws; and
iii) Any … actual … non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws.”
PABL objected to this interpretation on the grounds that a reasonable reader would expect the word “liability” to be used in the sense of liability “for” something, suggesting that the word “or” had been included by mistake and the ABC Liability definition should be interpreted as "any liability [f]or actual or alleged non-compliance …”.
The Court of Appeal concluded that, although liability would often be referred to in the context of responsibility “for” something, it would not be unusual to refer to liability “in respect of”, “arising from” or “in connection with” an excluded peril. Therefore, despite the apparent contradiction, there was nothing wrong with the language of the ABC Liability Exclusion and no drafting error could be established.
Was there an obvious cure?
For completeness, the Court of Appeal went on to consider whether there was a “clear cure” for the alleged mistake. Assuming that there was a contradiction between the ABC Liability Exclusion and Warranty 13.5 because of a drafting mistake, Insurers had a coherent and rational reason for wanting to avoid liability for loss arising out of ABC Liability, and it was unclear whether any supposed error was in the drafting of the ABC Liability exclusion or the Cover Spreadsheet. It was held therefore that no clear cure existed for the alleged mistake.
The Decision
In summary, the Court of Appeal by majority (Lewison LJ, with whom Arnold LJ agreed) found in favour of Insurers and the appeal was dismissed.
In a dissenting judgment, Phillips LJ found in favour of PABL, concluding that there was a “fundamental inconsistency” between the ABC Liability Exclusion and Warranty 13.5. This was highlighted by the fact that the Policy exclusion did not define “liability” and losses arising from non-compliance were excluded.
Impact on policyholders
The decision illustrates the importance of careful drafting of policy wordings to avoid ambiguity, with particular attention to the interaction of potentially overlapping insured and excluded perils. The scope of coverage may be significantly impacted by minimal changes to punctuation or connecting words.
The English Courts are likely to uphold the literal effect of contract terms even in the face of apparent inconsistency, in the absence of compelling evidence for a clear cure in respect of an obvious drafting error.
Ayo Babatunde is an Associate at Fenchurch Law
Establishing Liability under the TPRIA 2010
A recent decision of the Scottish Court of Session (Outer House), Scotland Gas Networks plc v QBE UK Limited & QBE Corporate Limited [2024] CSOH 15, gives helpful guidance on the operation of the Third Parties (Rights against Insurers) Act 2010 (“the 2010 Act”).
Background
Scotland Gas Networks plc (“SGN”) operated a pipeline running adjacent to a quarry, operated by D Skene Plant Hire Limited (“Skene”). A landslip occurred at the quarry, causing damage to part of the pipeline. SGN claimed the damage was a result of quarrying operations carried out by Skene. It had to divert the pipeline away from the quarry and incurred costs in doing so.
SGN brought a claim against Skene for £3 million for damage to the pipeline. A decree by default was granted against Skene, as a result of failing to appear at a procedural hearing.
Skene was insured under a public liability policy (“the Policy”). SGN claimed against the defendants (“Insurers”) under Section 1(4) of the 2010 Act (which gives third parties rights against insolvent persons) as Skene was in liquidation.
The TPRIA
Under Section 1(2) of the 2010 Act, the rights of a “relevant person” (i.e. the insolvent insured party) are transferred to the third party who has suffered loss for which the relevant person is liable.
Section 1(3) of the 2010 Act states that an injured party can bring proceedings against an insurer without first establishing the insured’s liability.
For the purposes of Section 1(4) of the 2010 Act, liability is proven only if the existence and amount of liability are established by way of a judgment or decree, arbitral award, or binding settlement).
The main issues explored in this case were:
- Whether the decree by default “established” Skene’s liability?
- Whether SGN’s claim against Skene was excluded by terms of the Policy?
Did the decree by default “establish” Skene’s liability?
Insurers’ Argument
Insurers argued that the granting of a decree by default did not establish liability under the Act. This was on the basis that the decree granted to SGN established the loss suffered, but did not establish the actual liability of Skene. Insurers relied on case law applicable to the Third Parties (Rights against Insurers) Act 1930 (“the 1930 Act”) suggesting that it is necessary to show how Skene was liable to SGN. In addition, Insurers argued that establishing liability must take into consideration the merits of the dispute.
SGN’s Argument
SGN argued that Insurers’ position did not take into account the innovations of the 2010 Act and the effect of Section 1(3), which meant that proceedings could be brought without liability being established. Under the 1930 Act, the insured’s liability to a third party had to be established by judgment, arbitration or agreement before proceedings could be brought. By contrast, Section 1(4) of the 2010 Act already addresses how that liability is established. Sub-section 1(4)(b) confirms that this can be established by a decree and therefore the old case law referred to by Insurers was irrelevant.
The Decision
The Court noted that there are two elements to Section 1(4) when considering the establishment of liability:
- Firstly, the existence of liability and the amount; and
- Secondly, how the existence and amount of liability is established.
Both these elements were satisfied based on the existence of Skene’s liability in the amount of £3 million, established by decree.
Therefore, it rejected Insurers’ arguments that “establish” requires a consideration of the merits and instead concluded that “establish” does not require any additional elements apart from those contained in Section 1(4).
Was SGN’s claim against Skene excluded?
Clause 3.1.1 of the Policy provided that Insurers would indemnify the policyholder for loss resulting from damage or denial of access.
Insurers’ Argument
Insurers argued that liability founded upon a decree by default was not covered; and that the decree effected a “judicial novation” which meant that the rights SGN were enforcing against Skene through litigation were replaced with the right to enforce the decree, which did not fall within Clause 3.1.1. Further, Insurers argued that the pipeline had not suffered “damage” as defined under the Policy, and that instead SGN was claiming for pure financial loss. Clause 7.11 of the Policy contained an exclusion for financial loss not consequent upon bodily injury or property damage.
SGN’s Argument
SGN argued that the terms of the decree were “in full satisfaction of the summons” and this meant that the liability which the decree created fell under Clause 3.1.1 of the Policy. The requirements for Section 1(4) had been satisfied and this superseded the judicial novation. Insurers were wrong to say that financial loss consequent upon damage to property of a third party fell within the scope of the exclusion, taking into account the express provision for indemnity with respect to denial of access liabilities.
The Decision
The Court concluded that the decree by default “established” Skene’s liability to SGN for purposes of Section 1(4), and that Skene’s liability arguably fell within the scope of the Policy. A decree by default cannot be viewed in isolation, and in this case it was granted in an action brought by SGN against Skene. A judicial novation could not extinguish the underlying liability for the purposes of Section 1(4) of the 2010 Act. The Insurers’ motions for dismissal were rejected and SGN’s overall claim under the Policy was held over to trial.
Impact on Policyholders
The decision is helpful for policyholders in demonstrating that a judgment (or decree, in the Scottish parlance) in default will suffice to establish liability for purposes of a claim under the 2010 Act. The statutory provisions operate as an exception to the general rule that insurers are entitled to ‘look behind’ underlying claims to evaluate policy indemnity based on a merits assessment of legal liability, highlighting the risks faced by insurers where insolvent insureds fail to defend incoming claims in full, or at all.
Ayo Babatunde is an Associate at Fenchurch Law.