Project Angel: Court of Appeal (by majority) confirms High Court’s construction of W&I insurance exclusions

In late 2023, the High Court dismissed a W&I claim at preliminary issue stage in reliance on an exclusion. At the time, our article Project Angel: High Court affirms ‘proper’ construction of W&I insurance exclusions considered the High Court’s analysis as a helpful reminder of the key principles of construction when considering insurance exclusions.

By a judgment given on 2 May 2024, the Court of Appeal has upheld the High Court’s view and once again dismissed the W&I claim. We note with interest that the Court of Appeal’s decision to dismiss the appeal was on the basis of a 2:1 majority, with Lord Justice Phillips providing a dissenting view. We concluded our last article remarking that whether an exclusion will ultimately be said to apply would invite a question as to what a reasonable person, with all the relevant background information, would conclude about how the parties had chosen to manage the risk that has now arisen - the case of Project Angel continues to emphasise this point.

 

THE FIRST INSTANCE JUDGMENT

We refer to our earlier article for a short summary of the key facts of the claim, to the extent relevant to the discussion.

In brief, the High Court considered an assertion from the Underwriters that, if there were any Breach proven and any Loss established (which was denied), they had no liability for the claim by operation of an exclusion in the Policy. The relevant exclusion in the Policy read:

“The Underwriters shall not be liable to pay any Loss to the extent that it arises out of…any ABC Liability”.

Of relevance, “ABC Liability” was defined to mean:

“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 argued that the Loss did not arise out of ABC Liability because the definition of ABC Liability contained an “obvious minor error” in drafting, such that it should have read “any liability [f]or actual or alleged non-compliance…in respect of Anti-Bribery and Anti-Corruption Laws” – thereby removing a formulation of the exclusion relating to “any liability…in respect of Anti-Bribery and Anti-Corruption Laws”.

At first instance, the Insured’s case was dismissed with a finding of no inherent absurdity in the drafting that required correction.

 

THE APPEAL

The point “at the heart of the appeal” was the Insured’s continued contention that there is a contradiction in the Policy between the extent of cover provided by the insuring clauses and the exclusions from cover and, in particular, the exclusion of liability for any Loss arising out of an “ABC Liability”. The Insured argued that this contradiction gives rise to an obvious mistake which the court could and should correct.

The Court of Appeal described the Insured’s argument as entirely dependent on persuading the court that (i) there is an inconsistency between the insuring clause and the Cover Spreadsheet on the one hand, and the exclusion of Loss arising out of any ABC Liability on the other, (ii) the inconsistency arises because of an error in the drafting of the definition of ABC Liability, and (iii) the error should be corrected such that the ABC Liability definition reads “any liability [f]or actual or alleged non-compliance…in respect of Anti-Bribery and Anti-Corruption Laws”.

The Court of Appeal drew attention to the fact that the claim under the Policy related to alleged Breach of four warranties given by the Sellers, only one of which (Warranty 13.5), centrally dealt with matters of Bribery and Corruption.

 

APPARENT INCONSISTENCY

The Court of Appeal concluded that Warranty 13.5, relating to Bribery and Corruption, being listed as a “Covered” warranty in the Cover Spreadsheet and within scope of the insuring clause, when considered with the breadth of the exclusion of Loss arising out of ABC Liability, did appear to create a conflict. Lord Justice Lewison commented “the Policy appears to give with one hand and take away with the other”. It was noted, however, that it was “easy to envisage” breaches of the other warranties alleged that would not be excluded by the ABC Liability exclusion.

To the extent there was a conflict between Warranty 13.5 being a “Covered” warranty in the Cover Spreadsheet and the breadth of the impact of the ABC Liability exclusion, the Court of Appeal affirmed HHJ Pelling’s first instance views on the introductory wording of the Cover Spreadsheet which read:

“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.”

The use of the word “Notwithstanding” was found to show clearly that the ABC Liability exclusion in clause 5 took precedence over the Cover Spreadsheet.

 

OBVIOUS DRAFTING MISTAKE

Noting that the ABC Liability exclusion would take precedence over Warranty 13.5 being marked as “Covered” in the Cover Spreadsheet, the Court of Appeal went on to consider whether there was an obvious mistake in the drafting of the ABC Liability exclusion and whether the exclusion ought to have referred to “any liability [f]or actual or alleged non-compliance”, as contended for by the Insured.

Lord Justice Lewison found that, the mistake (if there were one) was common to both parties, such that it is necessary to consider the question from the perspective of the Underwriters. Although the proposed correction was only one letter, the Court considered it would have a very significant effect. 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, was found to be “a strong pointer against the conclusion that there is an obvious drafting mistake”, noting in particular that it was common ground that the ABC Liability exclusion was a specifically negotiated clause.

While accepting that the definition of ABC Liability was “not a masterpiece of drafting”, the Court of Appeal considered that the concept of liability for alleged non-compliance is a difficult one to understand if it is contrasted with liability for actual non-compliance. Accordingly, despite the apparent inconsistency, the Court was not persuaded that there had been a clear drafting error.

Notwithstanding the conclusion that there was no drafting error, the Court of Appeal briefly contemplated also whether (if there were such an error) the ‘cure’ was clear. Assuming there is a contradiction arising between the ABC Liability exclusion and the designation of Warranty 13.5 as “Covered” in the Cover Spreadsheet, the Court found no clear answer to the question as to which of these was the mistake – the drafting of the ABC Liability exclusion, or the designation of Warranty 13.5 in the Cover Spreadsheet. There was therefore no clear ‘cure’.

 

CONSTRUCTION OF THE POLICY

The Insured continued its argument that Underwriters’ application of the exclusion caused an “obvious conflict” with the Cover Spreadsheet, where the relevant warranties were marked as “Covered”. It was argued that, in order to understand the insuring clause, the reasonable reader would go through the definitions of Loss, Breach, Insured Obligations and then look to the Cover Spreadsheet to see which warranties were covered. The Court of Appeal affirmed the view of HHJ Pelling at first instance, noting that the insuring clause specifically provides that the obligation to insure is “subject to the terms and conditions of this Policy” and, in order to understand what that means, the reasonable reader would “surely read the policy as a whole”.

 

DISSENTING JUDGMENT

It is of interest that Lord Justice Phillips, while acknowledging that the arguments in this case are finely balanced, preferred the analysis advanced by the Insured.

In his dissenting judgment, Phillips LJ considered the legal and commercial context of the Policy holistically, focusing on the commercial purpose of the SPA and Policy collectively. Phillips LJ observed that the Sellers were “major beneficiaries” of the Policy, such that part of the commercial purpose of the Policy, and in particular the Cover Spreadsheet, was to enable the Sellers to ascertain the extent to which they were being released from liability. Phillips LJ considered that, had the parties intended to exclude Warranty 13.5 from the scope of the insurance, there was a simple mechanism to do so: by making it an Excluded Obligation (and not an Insured Obligation).

In this context, Phillips LJ concluded that the Policy, if the ABC Liability exclusion is read literally, contains a fundamental inconsistency. This inconsistency is described as being “particularly stark and unfortunate” given the commercial context and specifically that, where Warranty 13.5 was designated as “Covered”, there was a significant risk that the Sellers would not have appreciated that the effect of the ABC Liability exclusion was to effectively reverse them from otherwise being released from ABC type liability.

In Phillips LJ’s view there was, in fact, both an obvious error and a clear solution. In this dissenting judgment, the simple cure proposed by the Insured, to change “or” to “for” in the ABC Liability exclusion, was found to fix all of the problems faced and bring a result consistent with commercial sense.

 

FINAL REMARKS

In deliberating the apparent inconsistency arising in the Policy, the Court of Appeal decision in Project Angel serves as a further helpful reminder of key principles of construction, beyond those helpfully outlined by the Hight Court.

A dissenting decision in the Court of Appeal highlights quite how finely balanced the interpretation and application of exclusions can be. The review of Project Angel continues to underline the importance of careful, considered, holistic drafting, working closely with brokers and insureds to work towards a shared understanding of the scope of cover being obtained.

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