The recent case of Genesis Housing Association Ltd v Liberty Syndicate Management Ltd (for and on behalf of Syndicate 4472 at Lloyd’s) [2012] EWHC 3105 (TCC) demonstrates the devastating effect a basis of contract clause can have in the construction context. 

Here Bedford Housing Ltd (a property developer) obtained planning permission to redevelop an office block into social housing. The freehold was transferred to TT Bedford, a special purpose vehicle that was part of a group of companies run by Graham and Perry Gamby. Genesis Housing Association (‘Genesis’) then entered into a JCT standard form contract with TT Bedford as main contractor. The Contract Sum was £4.6M.

TT Bedford sought insurance cover through MD Insurance Services Ltd, a company that administered a group of policies underwritten by Liberty known as “Premier Guarantee for Social Housing”. The guarantee provided decennial cover for certain types of latent defects and an extension was also sought, and agreed, for TT Bedford’s own insolvency. The Proposal Form was signed by Graham Gamby for and on behalf of both TT Bedford and Genesis.  TT Bedford then subcontracted the work to another company who became insolvent. The contract was terminated and TT Bedford went into administration.

When the Proposal Form was completed the contract sum of £4.6M was, for reasons unknown, scrubbed out and the sum of £3.7M inserted instead. The main contractor was wrongly identified as Time and Tide Construction Ltd rather than TT Bedford. The proposal form, like most commercial proposal forms, contained a Declaration by the Insured that the information provided was, to the best of the Proposer’s knowledge and belief, ‘correct and complete in every detail and I/we have not withheld any material fact.’ The Proposer further acknowledged that he agreed that in the event an insurance contract was completed the proposal form and all of the statements contained within it ‘shall form the basis of the contract between me/us and the Insurer.’ This is known as a basis of contract clause. By doing so the Proposer effectively warranted that all of the answers in the proposal form were true to the best of his knowledge and belief. It has long been established law that breach of such warranty automatically discharges Insurers from liability under the policy irrespective of whether the incorrect answer given was material to the risk.

The court held that such basis of contract clauses are enforceable so that an insurance contract will be rendered void or unenforceable if the proposal form contains a basis of contract clause and the contents of the proposal form are untrue in some respect. Where, as here, the answers were warranted by a corporate entity, it would be enough if the company knew that an answer on the declaration was wrong. In such circumstances the company was clearly making a statement which was not true to the best of its knowledge or belief. 

It was impossible to escape the fact that the builder had wrongly been identified on the proposal form and that error was material because whereas Time and Tide Construction Ltd was an experienced builder with a reasonable credit rating, TT Bedford was a special purpose vehicle company with no established credit rating. Such an error could well have impacted on the level of premium charged. As a result, Genesis had no right to claim under the insurance. Even though it had not actually been involved directly in completion of the proposal form, it was bound by the acts of its agent (TT Bedford). Therein lies the sting.

The Consumer Insurance (Disclosure and Representations) Act 2012 abolishes basis of contract clauses in consumer contracts.  The Law Commissions have recommended extending this stance to business contracts but whether these proposals will be carried forward remains unknown until the Commissions’ final report is published. Publication is expected towards the end of 2013.