Court of Appeal confirms that basis of the contract clauses work in a non-consumer context

http://www.bailii.org/ew/cases/EWCA/Civ/2013/1173.html

The first instance decision in this case was reported in Weekly Update 41/12. The proposal form contained a “basis of the contract” clause and the insured had incorrectly identified “TT Construction” (rather than the name of another company in its group - TT Bedford) as the name of the builder engaged by it. At first instance, the judge held that the insured was in breach of warranty. The insured appealed and the Court of Appeal has now held as follows:  

  1. “Basis of the contract” clauses do have the effect of making all statements in a proposal form warranties (and recent reform of consumer insurance law has not affected this principle).
  2. The proposal form has contractual effect even if the policy does not refer to it. Although the editors of MacGillivray have commented that the juristic basis of this principle is unclear, it was “not open to challenge in this court”. Although that position can be ousted by express wording, a mere failure to refer to the proposal form in the list of contractual documents set out in the policy was not enough. Clear and unequivocal language would be needed.
  3. The proposal form here was signed by an agent of the insured. Both the agent and the contact at the insured dealing with the insurance arrangements knew the correct identity of the builder. Accordingly, they knew that the answer given had been wrong (even if the agent might have been confused). Thus the case could be distinguished from Economides [1998] and Zeller (see Weekly Update 05/08), where the errors in information were unknown to the insureds.
  4. Condition 7 of the policy provided that “This Policy will be voidable in the event of ...non-disclosure by the Policyholder with intention to defraud.” The Court of Appeal held that this did not mean that the policy could be avoided only if there was fraud. If the parties had intended such a “remarkable” result, they should and would have said so expressly. It was also noted that “it is not uncommon to find surplusage in a contract of insurance”.
  5. The identify of the builder had been important to the insurers because they were providing cover against the risks of insolvency or defective work for that particular builder and not any other builder whom the insured may choose to substitute.

Accordingly, the appeal failed.

COMMENT: It is interesting to note that although the Law Commissions have mooted abolition of basis of the contract clauses in business insurance (although insurers would still be able to contract out of a ban), there is still strong support for the clause amongst the judiciary. It is also noteworthy that the Court of Appeal did not debate the apparently novel suggestion made by Akenhead J at first instance that the test of whether a representation as to a matter of “expectation or belief” is true differs depending on whether the insured is a corporate body or an individual. This is probably because the identity of the builder was, in reality, a purely factual matter, rather than one which required the insured to express a belief or opinion.