Whilst the Court of Appeal’s decision in Project Angel Bidco Ltd v Axis Managing Agency Ltd related to a dispute under a warranty & indemnity insurance policy, it has broader application where there is a coverage dispute about ambiguous words or apparent errors in the drafting of insurance policy wordings.
Contractual and policy construction arguments are having a moment. In recent memory, there have been appellate decisions in relation to the meaning of a non-assignment clause (Dassault Aviation SA v Mitsui Sumitomo Insurance Co Ltd [2024] EWCA Civ 5) and the meaning of a notice clause in a breach of warranty claim (Drax Smart Generation Holdco Limited v Scottish Power Retail Holdings Limited [2024] EWCA Civ 477). So far as policyholders are concerned, the recent decision in Project Angel Bidco Ltd v Axis Managing Agency Ltd [2024] EWCA Civ 446 will be of more interest, not least since the Court of Appeal concluded that – notwithstanding ambiguity and conflict in a policy wording – there was nothing to be done to resolve it, meaning that a substantial warranty & indemnity insurance claim failed. Whilst this decision related to a coverage dispute under a W&I insurance policy, it has broader application where there is a coverage dispute about ambiguous words or apparent errors in policy wording.
A copy of the Court of Appeal’s decision can be found here.
As you were: the current law as to contractual/policy interpretation
The Court of Appeal applied a number of key well-established principles in relation to the interpretation of commercial contracts, including insurance policies. These have not changed in light of this judgment.
The court’s starting point is to identify the objective meaning of the words chosen by the parties in the contract (Wood v Capita Insurance Services Ltd [2017] UKSC 24). The subjective intention of the parties (for example, as demonstrated by negotiations) is disregarded.
In doing so, the court will consider aspects such as:
- The natural, ordinary meaning of the words used. Where the parties have used unambiguous language, the court must apply it (Rainy Sky SA v Kookmin Bank [2011] UKSC 50).
- The other relevant provisions of the contract.
- The overall purpose of the clause and the contract.
- The surrounding facts and circumstances known to the parties at execution.
- Commercial/business common sense.
It requires a strong case to convince the court that something must have gone wrong with the language the parties have chosen to use in the contract (Chartbrook Ltd v Persimmon Homes [2009] AC 1101). Two conditions must be satisfied:
- There must be a clear mistake on the face of the contract. Here, the court need not be confined to reading the document alone, but may take into account the context in interpreting the contract.
- It must be clear what correction is necessary to fix the mistake.
Background
In November 2019, the policyholder (referred to as “BidCo” below) exchanged with various sellers (the “Sellers”) a Share Purchase Agreement (“SPA”) in respect of an acquisition of issued shares of the target company (the “Target”). The SPA contained a number of warranties. These included warranties on bribery and corruption to the general effect that there was no known non-compliance with relevant anti-bribery and anti-corruption (“ABC”) legislation.
BidCo took out a bespoke buyer-side warranty & indemnity insurance policy (the “Policy”) in connection with this acquisition. To the extent that there was a breach of warranty, BidCo’s claim would accordingly be against insurers in the first instance, and not the Sellers.
In November 2022, BidCo issued proceedings against insurers alleging that the Sellers were in breach of the warranties including the bribery and corruption warranties and claimed the full £5 million Policy limit, alleging that the shares in the Target had a lower value than they would have had if the relevant warranties had been true.
The Policy
The Policy covered any breach by the Sellers of certain “Insured Obligations”. These were defined in the Policy and set out in a “Cover Spreadsheet”. The Insured Obligations included the warranties relating to anti-bribery and corruption (the “ABC Warranties”). The ABC Warranties were marked as “Covered” in the Cover Spreadsheet. However, one of the exclusions in the Policy excluded cover for loss arising out of anti-bribery and corruption (the “ABC Exclusion”).
Accordingly, there was an apparent mis-match between these provisions as to whether ABC liability was covered.
The Claim
The dispute between BidCo and insurers therefore centred on what was, in BidCo’s submission, a contradiction between:
- The Cover Spreadsheet which indicated that the ABC Warranties were covered; and
- The ABC Exclusion which removed that cover.
BidCo’s submission was that the contradiction stemmed from a mistake in the drafting of a definition relating to the ABC Exclusion which should be corrected. The effect of the proposed correction would be to confine the ABC Exclusion to cases of “liability FOR non-compliance” with anti-bribery laws rather than “liability OR non-compliance” with anti-bribery laws.
Insurers disagreed and argued that there was no contradiction.
The answer to this question was important: the Loss would be excluded from cover unless the definition and thus the ABC Exclusion were corrected as BidCo proposed.
At first instance, the High Court found in favour of the insurers on the construction issues. It held that there was no obvious drafting error in the Policy wording that should be corrected as a matter of construction. BidCo appealed.
Decision
The Court of Appeal reached its decision by a majority. Lewison LJ gave the leading judgment. The Court approached the issue in the following manner:
- Was there an inconsistency between the insuring clause and the Cover Spreadsheet on the one hand, and the definition relevant to the ABC Exclusion on the other?
The Court found that there was an apparent conflict (at least in part) between the inclusion of the whole of the ABC Warranties in the Cover Spreadsheet on the one hand and the breadth of the ABC Exclusion on the other.
- If there was inconsistency, could it be resolved within the Policy wording itself?
The Court concluded that the wording of the Cover Spreadsheet permitted the exclusions in the Policy to take precedence over the Cover Spreadsheet at least to some extent. The question remained whether there was an obvious mistake in the drafting of the ABC Exclusion.
- Was there an error in the drafting of the definition relevant to the ABC Exclusion?
By a majority, the Court considered that there had not been a clear drafting error.
Setting the Policy in context, the Court noted that, as with other W&I policies, it was intended to protect BidCo against the risk that the Target was not in the state warranted by the Sellers on the day of sale and therefore worth less than the purchase price agreed. The Policy, again as usual in W&I policies, included clauses which limited the insurers’ subrogation rights (where a claim has been paid) to situations where loss arose from the Sellers’ fraud. It was therefore understandable that in negotiations an insurer would wish to limit its exposure and include a broader bribery and corruption exclusion in the Policy; it was also common ground that the ABC Exclusion was a specifically negotiated clause such that the lack of precision and conflict between the provisions could simply have been the outcome of the negotiations.
- Should the error be corrected in the manner BidCo suggested?
In light of the conclusion above, it was not strictly necessary to consider the remedy for the alleged error, albeit the Court concluded that, since there was no clear way to establish whether the Cover Spreadsheet or the ABC Exclusion was in error, there could be no clear answer to what the cure might be, which in other cases (as in this one) prevented a finding in favour of correcting any apparent error.
Whilst it will be of little comfort to the policyholder, in the dissenting judgment Phillips LJ concluded that the conflict between the Cover Spreadsheet and the ABC Exclusion meant that – given the Sellers’ interest in the Policy being entered into as it operated to release them from personal liability – something must indeed have gone wrong with the language of the Policy, as it meant that the release for the Sellers was narrower than they had expected. Phillips LJ therefore agreed that there had been a mistake and also that the cure proposed by BidCo would fix all of the problems identified.
Comments
This case is a helpful illustration of how the courts apply those well-established legal principles on interpretation and construe a W&I policy. The dissenting judgment given by Phillips LJ shows that in a finely balanced case like the present one, the Court – and experienced practitioners – may reach different conclusions. It remains to be seen whether there will be a further appeal and on which issues.
It also serves to emphasise how important it is, at the underwriting stage, to ensure that there are no obvious areas for a later dispute. The provisions of the W&I policy may be considered at a later stage of any deal, and indeed here it was concluded in the weeks after the exchange of the SPA. In that context, the detail of the W&I policy may be overlooked as one issue amongst many as exchange and completion approach. There are a number of key takeaways for policyholders (and their advisors) at the time of policy negotiation and prior to policy inception:
- Ensure the policy wording is consistent and consider the interaction between insuring clauses and exclusions. If necessary, seek specialist advice.
- Make clear the priority of clauses to the extent possible, e.g. if a special insuring clause should be stated to take precedence over certain boilerplate exclusions, or alternatively, if an exclusion should be stated not to affect the coverage provided by an insuring clause.
- Keep a record of the negotiating and drafting process of the policy. Despite not normally being admissible in a contractual interpretation case, such record can be helpful during pre-action engagement with insurers once a claim arises and for any rectification or estoppel arguments.
Authors:
Tom Pangbourne
Esther Zhu
Indemnity Law
