Corrective Interpretation of Warranty & Indemnity Insurance Policies: Resolving ABC Liability Exclusions

Introduction

The appeal in Project Angel Bidco Ltd (In Administration) v Axis Managing Agency Ltd & Ors ([2024] EWCA Civ 446) addresses a critical issue in the interpretation of Warranty & Indemnity Insurance Policies (W&IP). The case centers on whether the exclusion of liability for any Anti-Bribery and Anti-Corruption (ABC) Liability within the Policy creates a contradiction with the coverage of specific warranties outlined in the Share and Purchase Agreement (SPA). The parties involved include Project Angel Bidco Ltd ("PABL"), the underwriters of the Policy, and the sellers of Knowsley Contractors Limited ("King Construction").

Summary of the Judgment

PABL acquired King Construction by entering into a SPA dated 19 November 2019, subsequently taking out a W&IP on 3 December 2019. After financial complications led PABL into administration and King into liquidation, PABL sought to claim £5 million under the Policy, alleging breaches of warranties related to litigation and bribery. The core issue revolved around whether the exclusion for ABC Liability negates the coverage of warranties 13.5(a)-(h) as outlined in the SPA.

The High Court, presided over by HHJ Pelling KC, found no contradiction between the Policy's cover and its exclusions, dismissing PABL's claim for corrective interpretation. On appeal, Lewison LJ upheld the High Court's decision, emphasizing the absence of an obvious drafting mistake. However, Phillips LJ dissented, advocating for corrective interpretation due to the apparent inconsistency between the Policy's coverage and exclusions.

Analysis

Precedents Cited

The judgment extensively references key cases that outline principles of contractual interpretation and corrective measures for drafting mistakes. Notable among these are:

Chartbrook Ltd v Persimmon Homes [2009] AC 1101 – Emphasizes that defined terms often distill the intended meaning and can resolve ambiguities in agreements.
Impact Funding Solutions Ltd v Barrington Support Services Ltd [2016] UKSC 57 – Highlights that exclusions must be read in the context of the entire insurance contract, excluding the contra proferentem principle if expressly done so.
Arnold v Britton [2015] UKSC 36 – Reinforces that corrective interpretation requires not just a clear mistake but also a clear remedy for that mistake.
MonSolar IQ Ltd v Woden Park Ltd [2021] EWCA Civ 961 – Stresses the high threshold for recognizing and correcting drafting errors.
FCA v Arch Insurance (UK) Ltd [2021] UKSC 1 – Demonstrates the Supreme Court’s approach to resolving policy interpretation issues in the absence of clear drafting errors.

Legal Reasoning

The crux of Lewison LJ's reasoning lies in the interpretation of the Policy's language and structure. He examines whether the exclusion of ABC Liability inherently contradicts the coverage of warranties 13.5(a)-(h). Lewison LJ determines that there is no apparent drafting mistake, as the exclusion was a specifically negotiated bespoke term intended to limit the underwriters' liability, especially given the absence of recourse against the Sellers.

In contrast, Phillips LJ contends that the Policy exhibits an obvious inconsistency where the coverage of specific warranties is nullified by the broad exclusion of ABC Liability. He argues that the definition of ABC Liability either excludes or subsumes the warranties, rendering the coverage misleading and effectively voiding the intended protection. Phillips LJ supports PABL's stance that a typographical error ("or" instead of "for") may have led to this inconsistency, advocating for corrective interpretation to align the Policy with its commercial intent.

Impact

The judgment has significant implications for the interpretation of W&IP Policies, particularly in contexts where exclusions may appear to negate specific coverages. It underscores the judiciary's stringent standards for recognizing and rectifying drafting errors, emphasizing that mere inconsistencies do not suffice for corrective interpretation unless accompanied by clear evidence of an obvious mistake and a definitive remedy.

This case serves as a precedent for future disputes involving the interplay between policy cover and exclusions, guiding insurers and insured parties in drafting and negotiating W&IP terms to ensure clarity and coherence. It also highlights the delicate balance between the intents of underwriters to limit liability and the buyers’ need for comprehensive coverage.

Complex Concepts Simplified

Buyer Side Warranty & Indemnity Insurance Policy (W&IP)

A W&IP is a specialized insurance policy that protects the buyer in a business acquisition against risks that the seller's warranties are untrue or incomplete. If a warranty is breached, leading to financial loss, the policy can cover the difference between the agreed purchase price and the actual value.

ABC Liability

ABC Liability refers to any legal responsibility arising from breaches related to Anti-Bribery and Anti-Corruption laws. In this Policy, ABC Liability was broadly defined to exclude certain losses, creating tension between coverage and exclusions.

Corrective Interpretation

This legal principle allows courts to rectify obvious drafting errors in contracts to reflect the true intent of the parties. However, it requires unmistakable evidence of a mistake and a clear way to amend it without introducing further ambiguities.

Conclusion

The Project Angel Bidco Ltd (In Administration) v Axis Managing Agency Ltd & Ors case highlights the complexities inherent in interpreting Warranty & Indemnity Insurance Policies. While the High Court and Lewison LJ upheld the Policy's language as consistent and free from obvious errors, Phillips LJ's dissent emphasizes the necessity for clarity and coherence in insurance contracts. This judgment reinforces the high threshold courts maintain for corrective interpretations, ensuring that only clear and unambiguous mistakes are rectified. Consequently, parties drafting W&IP should meticulously align coverage clauses with exclusions to prevent potential conflicts and ensure the Policy fulfills its intended protective function.