The interpretation of contracts has always been a tricky subject. The Court of Appeal decision in Nesbit Law Group LLP v Acasta European Insurance Company Limited illustrates the difficulties that can arise when parties try to interpret supposedly clear wording in different ways.
The case involved a litigation funding scheme masterminded by Clydesdale Financial Services Limited and Acasta, a Gibraltar registered insurer. The scheme was for solicitors and their clients and consisted of Clydesdale providing loans and Acasta providing insurance, including Financial Guarantee Indemnity policies (FGI) for irrecoverable costs incurred by solicitors in respect of unsuccessful claims. Nesbit was one of the firms participating in this scheme. However, when Nesbit encountered financial difficulties, the litigation funding arrangement was terminated and Nesbit and Clydesdale entered into a Refinancing Agreement in order for the original loans made under the scheme to be repaid. Nesbit sought to claim against Acasta under the FGI policies but Acasta refused to pay out.
The dispute involved the interpretation of an exclusion clause in the FGI policies which stated that Acasta did not have to indemnify Nesbit for:
“Irrecoverable Costs…where the terms and conditions of the Loan have not been strictly adhered to, including but not limited to any agreement entered into by Nesbit and Clydesdale to repay a Loan” (emphasis added).
As Nesbit had allegedly failed to pay instalments of the Refinancing Agreement, Acasta argued that this brought the exclusion into effect so that it was not obliged to pay under the FGIs. Nesbit, however, argued that the underlined wording referred only to the original loans between Clydesdale and Nesbit and therefore breaches of the Refinancing Agreement did not exclude a claim under the policies.
The first instance judge favoured Nesbit’s interpretation and the Court of Appeal reached the same conclusion. Given the ambiguity of the underlined wording, the Court of Appeal considered it appropriate to have regard to the context of the litigation funding scheme as well as business common sense in construing the clause. On that basis it found that there was nothing in the FGI policies that indicated that any future global refinancing was in the contemplation of the parties and that the FGI policies only provided cover for loans made under the litigation funding scheme in place at the time. It therefore rejected Acasta’s interpretation and held that unpaid instalments of the Refinancing Agreement did not trigger the operation of the exclusion clause.
This case is a stark reminder of the need to take care when drafting insurance contracts. In particular, exclusions or limitation on cover require clear and explicit wording so that there is no room for dispute further down the line when it may be too late!