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basis of contract clauses: back to basis?

14 October 2013

On 4 October the Court of Appeal handed down its judgment in the case of Genesis Housing Association Limited v Liberty Syndicate Management Limited [2013] EWHC Civ 1173.

The decision is a helpful reminder of the current state of the law in relation to basis of contract clauses and its apparent harshness and perhaps explains why the Law Commission has proved so critical of them.

1. The underlying facts of the claimThe claimant was a social housing group which sought to arrange insurance for latent defects in construction works and against the risk of a contractor becoming insolvent during the construction process. This cover was arranged by the contractor (acting as agent for Genesis) and an insurance broker, who together incorrectly filled out the proposal. In fact, the proposal named TT Construction Limited as the company which would be carrying out the works, rather than the Special Purpose Vehicle SPV which it had formed for that purpose, TT (Bedford) Limited.

The proposal carried the usual basis of contract clause. In due course, when the contractor became insolvent during the construction period and Genesis came to make a claim on the policy, the defendant insurers relied on the clause and refused to indemnify Genesis from the losses incurred. Genesis issued proceedings against the insurers in the Technology and Construction Court.

2. The decision of the Technology and Construction CourtAt first instance (Genesis Housing Association Limited v Liberty Syndicate Management Limited [2012] EWHC 3105 (TCC)) the court held that, in line with a long list of authorities (which stretched back to the 19th century), the basis of contract clause had the effect of giving contractual effect to the statements in the proposal. By signing the incorrect proposal (through its agent) Genesis had breached a warranty which discharged the insurers from liability under the policy.

In his judgment Akenhead J made the point that the warranty that had been breached was a material one because the incorrectly named entity was an established contractor with a proven track record and good credit rating, while the SPV was a recently created vehicle with no credit rating. The individuals who had prepared and signed the proposal had known full well the correct identity of the contractor and, while the mistake was innocent, had not completed the proposal in line with the wording of the declaration which stated that the contents of the proposal were correct "to the best of the knowledge and belief of the insured".

3. The appeal before the Court of AppealThe central issue in Genesis appeal was whether the statements in the proposal were contractual warranties. This point was dealt with swiftly by the Court of Appeal which agreed with the judgment of the TCC and, citing a long list of authorities in support, dismissed the appeal.

4. Impact of decisionWhilst the Consumer Insurance (Disclosure and Representations) Act 2012 protects the position of insureds who deal as consumers, this decision of the Court of Appeal shows that basis clauses will still be effective against commercial insureds. This is a stark illustration that:

  • brokers and commercial insureds will still need to take the utmost care in the preparation of proposal forms; and
  • underwriters will still be able to rely upon any errors in proposals as breaches of warranty and thereby avoid liability under a policy of insurance.

The above points reflect the current law, which has been criticised by academics and legal pressure groups alike for being draconian in nature. Indeed, the Law Commissions recent consultation addresses these criticisms and even proposes that basis clauses be abolished so that insurers could only rely upon clauses contained in an insurance policy itself. Decisions such as this are likely to highlight the apparent unfairness of the law and may encourage legislators to take action.

Also of note is that the Financial Ombudsman has stated that it may be prepared to treat "unsophisticated" commercial insureds (ie, small businesses employing one or two employees) as if they were consumers. Therefore, smaller commercial insureds are more likely to get a favourable result from the Ombudsman than from the courts. However, this will only apply to claims that fall within the ambit of the Ombudsman, which are those worth £150,000 and under.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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