Whether insurer liable to repay purchasers’ deposits following dissolution of developer/policy interpretation

http://www.bailii.org/ew/cases/EWHC/TCC/2014/2430.html

The claimants purchased flats being built by a developer and paid a 10% deposit. The developer took out a policy with the defendant for the benefit of the  claimants. The introduction to the policy explained that “the policy protects you if your developer  goes into liquidation… against the loss of contract exchange deposit”. Section 1  of the policy  provided that “we will pay where, due to the developer’s bankruptcy, liquidation or fraud, the  developer fails to complete the construction of the new home…” (emphasis added).

When construction work stopped, the claimants wrote to the developer in 2010 purporting to accept  the developer’s failure to complete the construction as a repudiation of their agreement and  seeking the return of their deposits. The developer was placed in administration in 2011 and  dissolved in 2013 (with any deposits being returned). The insurers initially denied liability on  the ground that the developer was not in liquidation, but that defence was subsequently dropped  because the insurer accepted that dissolution would fall within the scope of “liquidation”. However, the insurers also sought to argue that there was no cover because the loss of the deposits  had been triggered by the rescission of the contract between the claimants and the developer, and  not the “liquidation”. As a result, at the time of its “liquidation”, the developer had no longer  been under any obligation to complete the development.

Akenhead J rejected the insurer’s interpretation of the policy. The words “fails to complete” did  not necessarily imply a subsisting obligation on the part of the developer to complete. The judge  held that “A failure to do something can and often simply means an omission to do something or  simply not doing that thing. It does not necessarily imply some legal, statutory or contractual  duty”. Taking into account the commercial purpose of the policy, it made no sense to treat these claimants differently from other purchasers who had not treated the  non-completion as repudiatory and had instead simply waited until the developer’s dissolution: “in my judgment, this is a distinction without at least a commercial  difference… there is no obvious or logical reason why there should be a distinction between the two  types of purchaser”.

The judge concluded that section 1 is only engaged on bankruptcy, liquidation (including  dissolution) or fraud but insolvency “is not in itself an event which engages  the policy”. There  was cover here because the developer’s insolvency was the reason it had failed to complete the development.

COMMENT: The judge here was clearly swayed by the commercial purpose behind the policy when reaching his decision and the reason why the development  was not completed. There would have appeared to have been some force in the argument that the term  “fails to complete” pre-supposes some subsisting duty to complete the works, but the argument might have been seen as a  technical  one on the facts of the case where, the judge found, insolvency was at the root of the  non-completion of the works. However if, for example, the developer had failed to complete the development for a reason unconnected  to its impending insolvency (e.g. delay by  sub-contractors) and was then subsequently placed in insolvency, it would seem that there would be no cover under the policy in such circumstances.