Learning from “mistakes”: Court of Appeal finds no obvious mistake requiring correction in W&I policy

By a majority, the Court of Appeal in Project Angel Bidco Ltd (In Administration) v Axis Managing Agency Ltd & Ors [2024] EWCA Civ 446[1] has dismissed the appeal by the Insured of a Buyer Side Warranty & Indemnity Insurance Policy, finding that there was no obvious mistake or obvious cure to the contradiction between the extent of cover and the ABC Liability exclusion and, therefore, the wording in the exclusion stood.

The effect of this is that the Insured’s claim appears to have come to an end, as it was accepted that the claim would be excluded if the clause remained as drafted.

Background

The Insured purchased a target company but, thereafter, alleged that the sellers were in breach of certain warranties under the SPA and that it had suffered a loss on the basis that the true value of the target’s shares was substantially lower than the warranted value reflected in the purchase price. The Insured made a claim under the Policy for £5million (this being the limit of liability under the Policy) in respect of the alleged loss. The Insured’s claim failed at first instance.

The appeal centred on the Insured’s contention that there is a contradiction between, on the one hand, the extent of cover provided by the insuring clauses and the ‘Cover Spreadsheet’ (which listed the warranties in 13.5 of the SPA as ‘Covered’) and, on the other hand, the exclusion of liability for any loss arising out of ABC Liability in clause 5 of the Policy, 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.”

The insured asserted that the definition of ‘ABC Liability’ contained an obvious minor error in that the word “or” that appears between “any liability” and “actual” should have been “for”, such that the exclusion should be construed as only excluding “liability for…” actual or alleged non-compliance with the ABC laws, as defined.

At first instance, the Judge had found no contradiction and, thus, no need to correct, as the exclusion clause made sense when read together with the insuring clause and other provisions, including the caveat contained at the beginning of the Cover Spreadsheet.

Appeal Decision

Lewison LJ (who gave the leading judgment, with which Arnold LJ agreed) considered the following principles (which the Judge at first instance had also noted):

• exclusion clauses 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, Lord Hodge), noting also the comments in Lord Toulson’s concurring judgment that words of exception may simply be a way of delineating the scope of the primary obligation;
• the general principle is that the literal meaning of a provision in a contract can be corrected if it is clear both: (i) that a mistake has been made, and (ii) what the provision is intended to say (i.e. the cure for the mistake) (Chartbrook Ltd v Persimmon Homes [2009] AC 1101), the high hurdle being in place because it should not easily be accepted that parties have made linguistic mistakes in formal documents;
• the Court must be satisfied as to both the mistake and the nature of the correction (Arnold v Britton [2015] UKSC 36);
• if there are multiple potential ways to cure a drafting mistake then this would be a bar to correction, as it cannot then be said that the cure is clear. Further, inconsistency or impracticability is not enough to conclude that the contract should be rewritten (Britvic plc v Britvic Pensions Ltd [2011] EWCA Civ 867).

With these principles in mind, Lewison LJ approached the case as follows:

1. Is there an apparent inconsistency, as alleged?

The general proposition, derived from case law, is that it is not enough if one term qualifies or modifies the effect of another; to be inconsistent a term must contradict another term or be in conflict with it, such that effect cannot fairly be given to both clauses. This proposition is, however, subject to important qualifications:

• one cannot assume that the draftsperson has both clauses simultaneously in mind when drafting;
• the policy itself might state which sections prevail over other sections;
• the location of clauses within a policy may indicate that one clause is intended to have higher contractual status than another (this approach, in Lewison LJ’s opinion, was adopted by the Supreme Court in FCA v Arch [2021] UKSC 1).

Lewison LJ accepted that “on the face of it, the inclusion of warranties 13.5 (and its sub-paragraphs) among the Insured Obligations, and the breadth of the exclusion of Loss arising out of ABC Liability do appear to conflict. Put shortly, in relation to warranty 13.5 the Policy appears to give with one hand and take away with the other.” Lewison LJ acknowledged, however, that it had been argued that some breaches of the warranties (13.5(e) and/or (h)) could be capable of falling outside the ABC Liability exclusion and thus give rise to Losses to which the Policy would respond, so there was only a partial contradiction/inconsistency.

2. If there is an apparent inconsistency, does the contract itself answer the question which of the inconsistent clauses is to prevail?

The rubric at the head of the Cover Spreadsheet stated: "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."

Lewison LJ stated: “What is possible to take from the rubric is that the exclusions were intended to take precedence over the Cover Spreadsheet at least to some extent. To what extent depends on the scope of the exclusion. But that does not at this stage answer the question: is there an obvious mistake in the drafting of the ABC Liability exclusion?”

3. Is there an obvious mistake in the drafting of the ABC Liability exclusion?

Lewison LJ stated that the mistake, if there was one, must be a mistake that was common to both parties so it was necessary to consider whether it could be considered a mistake from the perspective of the Insurers.

Looking at a W&I policy, as it is not a third party liability policy - but rather one intended to respond (subject to its terms) to a loss suffered from a breach of insured warranties provided by a seller/warrantor in the context of an acquisition of a target company or business - the Insured’s proposed correction of “liability for” would potentially bring within the cover loss attributable to an allegation of non-compliance with anti-bribery laws, even if the allegation was never proven or investigated. As such, Lewison LJ could see that this might be something Insurers would wish to exclude from cover.

As a result: “the existence (from the point of view of the underwriters) of a coherent and rational explanation for why the ABC Liability exclusion took the form that it did is a strong pointer against the conclusion that there is an obvious drafting mistake.”

In addition, it was common ground that the ABC Liability exclusion had been subject to heavy negotiation and, as noted in another leading contractual interpretation case, Wood v Capita Insurance Services Ltd [2017] UKSC 24, “the court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms."

Whilst acknowledging that the exclusion was “not a masterpiece of drafting”, Lewison LJ concluded that “despite the apparent contradiction, I have not been persuaded that there has been a clear drafting error.”

4. If there was a mistake, what is the cure?

For correction to take place, the mistake and the cure to the mistake must be clear and obvious. Even assuming there was a contradiction which arose because of a drafting mistake, it was not obvious to Lewison LJ whether the fix should be to correct the Cover Spreadsheet - to remove the warranties from the “Covered” section - or to correct the wording of the exclusion (substituting “or” with “for”). As previously noted, the Insurers could have had a rational reason for wanting the exclusion to say “or” and, in addition, the fact that the Insured’s proposed correction to the exclusion was merely to add a single letter (i.e. “less red ink”) did not sway the point in its favour.

As a result, Lewison LJ dismissed the appeal. Arnold LJ agreed, though he questioned whether there could have simply been a typo when the contract was printed but “if one cannot conclude that there is an obvious typographical error in the definition of ABC Liability, then I find it difficult to conclude that there is an obvious mistake in the Policy with an obvious correction.”

Phillips LJ dissented with the majority, considering that the Insured’s correction was, in his opinion, the clear cure for what he thought was likely a typographic error.

Comment

As well as an interesting exposition of the jurisprudence on contractual interpretation and the law of mistake, this decision is a welcome examination of the construction of W&I policies, albeit on a preliminary issue basis. Importantly, the Court of Appeal confirmed that the coverage afforded to insured warranties is subject to the terms and, in particular, the exclusions that are set out in the Policy. The mere fact that a warranty is confirmed as “covered” in a Policy’s warranty spreadsheet (so is capable of falling within the “in principle” scope of the Policy) does not mean that the Policy will necessarily respond to any breach of such warranty, which should come as no surprise.

In relation to the ABC exclusion itself, we agree with the majority’s decision that underwriters would likely have had in mind to exclude even alleged non-compliance. Given the significance of such allegations, this is perhaps unsurprising and the correction that was proposed by the Insured in this case would have extended the scope of cover in a way that presumably was not within the contemplation of underwriters. In our view, the proposed correction might itself have contradicted the reference to “alleged” non-compliance.

Finally, it is of note that the majority were prepared to acknowledge the fact that the process of drafting and negotiating a policy wording might lead to an imprecise result; this is arguably even more so in the time-constrained circumstances in which W&I policies are often negotiated and reminds us of the importance of keeping records of the drafting process where possible.

[1] Project Angel Bidco Ltd (In Administration) v Axis Managing Agency Ltd & Ors [2024] EWCA Civ 446