Warranty & Indemnity insurance - mistake not established again (but only just)

In Project Angel Bidco Ltd (in Administration) v Axis Managing Agency Ltd [2024] EWCA Civ 446, the English Court of Appeal has handed down what we believe is its first judgment considering the operation of Warranty & Indemnity (W&I) insurance.

This was an appeal from the decision of his Honour Judge Pelling KC in the Commercial Court - our earlier article on this decision can be found here.

In a majority decision which the court clearly found difficult (2:1 with a dissenting judgment from Lord Justice Phillips), the Court of Appeal affirmed the Commercial Court decision that the wording of a policy exclusion clause should stand.

The Court of Appeal decision is a further illustration of the highly nuanced wording of W&I insurance policies which were acknowledged by the judges to be a specialised form of insurance product with a number of unique features not seen in other types of insurance policies or commercial contracts generally.

BACKGROUND

To recap, the dispute concerned a claim under a W&I insurance policy issued to the purchaser of a civil engineering and construction company which mainly provided services to local authorities. The claim was for loss in value of the shares in the target company on the basis that certain warranties given by the seller of the shares in the context of the transaction were alleged to be untrue. These warranties were to the effect that the company was not involved in legal proceedings or under investigation and had not committed any breach of contract or acts of bribery or corruption.

Each of these warranties had been marked by the insurance underwriter as “Covered” on a spreadsheet appended to the policy.  The key issue before the Court of Appeal was whether liability of the insurers under the policy for breach of those warranties was nevertheless excluded by an ‘ABC’ (Anti-Bribery & Corruption) exclusion found within the general terms and conditions of the policy which was stated to take out of cover:

“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”.

The insured buyer argued that there was an obvious mistake in the drafting of the policy as the ABC exclusion should have only excluded any liability for actual or alleged non-compliance with ABC laws (and not loss attributable to alleged non-compliance with ABC laws where liability for ABC breaches was not actually established). The buyer argued that the error/mistake was obvious as a liability has to be for something i.e. proof of actual liability for breach of ABC laws had to be established for the exclusion to apply. The Court was accordingly requested by the buyer to change the word "or" for "for".

The buyer also relied on the apparent direct contradiction between the ABC exclusion as drafted and the fact that the individual warranties including those related to ABC risk had been expressly marked as “Covered” in the spreadsheet for the policy. The buyer argued its approach would provide some element of coverage for ABC risk in the policy which the buyer argued was clearly intended as the relevant warranties had been marked as “Covered”.

COURT OF APPEAL DECISION

The leading judgment in the Court of Appeal from Lord Justice Lewison repeated the test applied by the Commercial Court as the basis of a claim for mistake (rectification not being argued).  The test was in summary that:

1. it was clear a mistake had been made;
2. it was clear what the provision should have said (i.e. the cure to the wording defect was obvious); and
3. there was a high hurdle to overcome before the Court would intervene and would typically only do so where the clause in question as originally drafted was an ‘obvious nonsense’.

All three Court of Appeal judges accepted that there was an obvious contradiction as the policy appeared to give coverage with one hand (ABC warranties marked as “Covered” in the spreadsheet) and take away cover with the other hand (by virtue of the application of the ABC exclusion as originally drafted). The Insurers (more or less) accepted that no loss covered by the warranty fell outside the exclusion.

However, the majority decision was that the buyer’s correction/amendment to the ABC exclusion clause should not be permitted.  The principal reason was that as the base measure of loss covered by a W&I policy is diminution in the value of the shares acquired attributable to the breach(es) of warranty, a mere allegation of anti-bribery or corruption conduct could well lead to recoverable loss under the policy. In the majority view therefore, there was a clear commercial rationale, at least so far as insurers were concerned, for the broad effect of the ABC exclusion. The majority did not think therefore there was an obvious error, and struggled with what was the obvious "correction".

The dissenting judgment of Lord Justice Phillips, however, focused on the perspective of the buyer and also the sellers of the shares.  The sellers had approved the terms of the W&I policy and remained liable to the extent that losses were not recovered under the W&I policy. From the perspective of these beneficiaries of the W&I policy, Lord Justice Phillips noted that the relevant warranties had clearly been marked as covered and therefore in his judgment something had obviously gone wrong in the drafting if such coverage was completely removed elsewhere in the policy. The obvious cure was to correct the wording of the ABC exclusion clause as proposed by the buyer which would have the effect of providing some coverage under the policy for ABC risk for allegations of ABC conduct which contravened the warranties but for which no liability under applicable laws was actually established.

COMMENT

Our comments following the Commercial Court decision remain largely applicable –  please see our original article here.

The Court of Appeal decision again illustrates the high test for mistake, noting that this matter did not concern rectification or interpretation falling short of mistake.

The judgments show, however, that there was significant room for debate as to the approach in these very bespoke W&I policies when positive cover and exclusions appear to directly conflict. It was accepted that this was a difficult case and clearly there was a fine margin between the competing arguments as was acknowledged by the Court.

Given the nature of these bespoke W&I policies, with very specific and extensive covers mapped to warranties and more general exclusions, we can expect other cases on different facts to give rise to further construction issues.  Where for example there is less of a complete contradiction in the language of an insurance policy, there is likely to be greater scope for insureds to demonstrate that reliance on an exclusion is not justified on a proper construction.