Obvious mistake? English Court of Appeal clarifies position on alleged drafting “errors” in warranty and indemnity insurance policies

With limited case law on the interpretation of warranty and indemnity (W&I) insurance policies in Australia, the decision in Project Angel Bidco v AXIS considers the construction of a W&I policy and is a reminder of the relevant principles of correcting drafting errors.

Key findings

• Simply because a warranty is marked as “covered” in the policy warranty spreadsheet does not mean that there is indemnity available for any breach of that warranty.
• Courts are reluctant to find that policy wordings contain errors unless both the mistake and correction are clear and obvious.
• Courts will apply established principles of contract to the interpretation of insurance policies, particularly exclusions.

The facts

Background

Project Angel Bidco Ltd (Insured) entered into a Share Purchase Agreement (SPA) with various sellers for purchase of the entire issued share capital of Knowsley Contractors Limited, trading as King Construction (King Construction) for approximately £16.7m. King Construction was a provider of civil engineering and general construction services mainly to local authorities and principally to Liverpool City Council (LCC). The Insured purchased a buyer-side W&I policy (Policy) to insure against the risk of loss as a result of the seller breaching warranties or indemnities in the SPA.

Following completion of the purchase, the Insured became aware that King Construction was subject to certain allegations relating to its compliance with anti-bribery legislation (Allegations). The Allegations were not disclosed to the Insured prior to completion of the purchase. The Insured submitted that as a result of the Allegations:

• LCC effectively ceased or severely reduced its business with King Construction; and
• LCC’s reduction in business rendered the true value of the shares of King Construction as nil, or at most, approximately £5.2 million.

While the Insured asserted that they had suffered a loss of at least £11.5 million, the limit of liability in the Policy was £5 million and therefore this was the amount claimed.

The Policy

The SPA contained numerous warranties in relation to “Bribery and Corruption” (ABC Warranties), which were represented as ‘Covered’ in the Cover Spreadsheet to the Policy. The Policy contained an exclusion in respect of non-compliance with anti-bribery and corruption laws, which was defined in the Policy as:

“ABC Liability 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” (ABC Liability Exclusion)

Insured’s submissions

The Insured submitted that:

• there is an inconsistency between the insuring clause and the Cover Spreadsheet on one hand, and the ABC Liability Exclusion on the other;
• the inconsistency arises due to an ‘obvious mistake’ in the drafting of the ABC Liability Exclusion, which should be corrected to amend “or” to “for” as follows:

“… any liability for actual or alleged non-compliance by any member of the Target Group… in respect of Anti-Bribery and Anti-Corruption Laws”

(emphasis added)

• if the Policy definition of ABC Liability (as defined in the Policy) is read literally, then no Loss arising out a breach of the ABC Warranties would ever be covered by the Policy.

The Insured’s claim was dismissed at first instance.

The judgment

The English Court of Appeal agreed with the first instance Judge, dismissing the appeal. The Court of Appeal:

1. found prima facie, there was a conflict between the breadth of the ABC Liability Exclusion and the ABC Warranties;
2. in addressing the conflict, concluded that the use of the word “notwithstanding” in the rubric at the head of the Cover Spreadsheet:

“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.”

showed (at least to some extent) that the exclusions in Clause 5 were intended to take precedence over the Cover Spreadsheet;

3. while the proposed correction to the exclusion is only one letter, noted and considered the significant impact of the change. The Court of Appeal considered the question from the perspective of underwriters, and noted that it was not difficult to see why underwriters would have wanted to exclude Loss arising from non-compliance with anti-bribery and corruption laws. The Court of Appeal therefore concluded that a rational explanation for the form of the ABC Liability Exclusion was a stronger pointer against the conclusion that there was an obvious drafting mistake;
4. while considering the textual question of ‘obvious mistake’, accepted that the ABC Liability Exclusion was not “a masterpiece of drafting”, it concluded that it was not impossible to think of circumstances that would engage the exclusion. The Court was not therefore persuaded that there had been a clear drafting error;
5. even though it had concluded there was no drafting mistake, considered the application of the principle in Arnold v Britton (see below). The Court of Appeal could not see a clear answer to whether the mistake should be corrected by amending the ABC Liability Exclusion or in amending the ABC Warranties in the Cover Spreadsheet. Therefore, there was no ‘obvious cure’ to the contradiction.

In making these findings the Court of Appeal reiterated the following principles in relation to interpretation of insurance contracts:

• an exclusion clause must be read in the context of the contract of insurance as a whole and in a manner that is consistent with and not repugnant to the purpose of the insurance contract (Impact Funding Solutions Ltd v Barrington Support Services Ltd [2016] UKSC 57)
• in relation to an alleged error in a contract, the general principle is “the literal meaning of a provision can be corrected if it is clear both (i) that a mistake has been made, and (ii) what the provision is intended to say” (Chartbrook Ltd v Persimmon Homes [2009] AC 1101; Arnold v Britton [2015] UKSC 36).

Comments

Project Angel Bidco v AXIS is a reminder to insurers (and insureds) of the importance of ensuring consistency between the insuring clause and scheduled of warranties ‘covered’ and the exclusions in the policy. The Court of Appeal noted that errors may arise during the drafting and negotiation policies. This is of particular concern in the context of W&I policies which are often negotiated under time pressure along with the SPA. In order to demonstrate the true intentions of the parties, it is important that Underwriters keep records of the discussions behind the wording agreed as underwriting evidence will be key to any policy construction dispute.

The decision, along with other recent UK decisions on W&I insurance, also serves as a reminder to insureds that they cannot simply rely on the warranty and indemnity insurance to, for example, ‘make good’ failures in the due diligence process or a ‘bad business decision’.

Whilst this case does not introduce any new legal principles, this decision reiterates the strict test (also applied in Australia) which one must overcome in order to correct a perceived drafting error in insurance policies. It is a reminder that the Courts will take a textual approach thereby generally favouring the text of a policy. The Courts will only intervene in limited circumstances where the drafting error and the cure is obvious.

You can read our commentary on the first instance decision as part of our March 2024 Professions and Financial Lines Brief here.

Read other items in Professions and Financial Lines Brief - July 2024