Commercial Court provides rare guidance on construction of exclusion clauses in W&I policies

The Commercial Court has provided helpful guidance on the proper construction of exclusion clauses in warranty and indemnity (W&I) policies in Project Angel Bidco Limited (in administration) v Axis Managing Agency Limited and Ors [2023] EWHC 2649 (Comm). The Court decided preliminary issues in favour of the Insurers making it clear that the cover spreadsheet containing the warranty schedule is subject to the general exclusions in a W&I Policy. 

The acquisition

Project Angel Bidco Limited (Buyer) acquired the entire share capital of Knowsley Contractors Limited (Target), a company providing civil engineering and general construction services to local councils, for £16.65m. The Buyer purchased a W&I policy to cover warranties in the sale and purchase agreement. 

The claim

The Buyer notified the Insurers of alleged warranty breaches, including the warranty that the Target had not committed any bribery or corruption offences. The conduct at the heart of these allegations is subject to an ongoing police enquiry and is confidential. The Buyer considered that this alleged conduct led to the Liverpool City Council severely reducing its business with the Target. The Buyer claimed the full limit of the Policy, £5m.

Insurers declined the claim, denying there had been any warranty breaches and relying on the following bribery and corruption exclusion in clause 5:

The Underwriter shall not be liable to pay any Loss to the extent it arises out of:

 

… 
any liability or actual or alleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws

The parties agreed that if the exclusion applied, the clause would provide the Insurers with a complete defence to the claim, so the Court was asked to consider the construction of the exclusion clause as a preliminary issue.

Construction of the exclusion

The Buyer alleged the exclusion contained an obvious error and should be amended so that the “or” after “any liability” read as “for”:

any Loss to the extent that it arises out of any liability [f]or actual or alleged non-compliance by any member of the Target Group

The Buyer’s proposed wording narrowed the scope of the exclusion so that “any liability … in respect of Anti-Bribery and Anti-Corruption Laws”, is not covered and the exclusion only applies when Loss arises out of liability for actual or alleged non-compliance with Anti-Bribery and Anti-Corruption Laws. The implication of the Buyer’s interpretation is that the exclusion would not apply to a reduction in share value caused by the allegations alone. For example, how the anticipation of a fine may have been factored into the valuation of the Target, had the allegations been known.

The Court applied the established principles of contract construction in rejecting the Buyer’s argument.  The Court found that:

• The clause is not inherently absurd or obvious nonsense in the absence of such a solution being adopted.
• The clause makes sense when read with the insuring clause, which contemplates loss suffered directly by the Buyer or as a result of any liability of the Target to a third party.
• An ordinary policyholder with all the background knowledge reasonably available to both parties when the Policy was entered into, would have understood the “or” in the exclusion to read disjunctively.

The exclusion’s application to the cover spreadsheet

The Buyer submitted that the Insurers’ interpretation of the exclusion as drafted means the Policy is contradictory, contrary to commercial common sense, and absurd because the bribery and corruption warranty was marked as “Covered” in the cover spreadsheet.

The Court rejected this argument because an ordinary insured having read the Policy conscientiously in order to understand the cover, would have understood from reading the insuring clause and the definitions within it, that the warranties marked as covered were subject to the exclusions in clause 5.  The Court said:

• The words in the cover spreadsheet “put beyond doubt” that a covered Insured Obligation may be excluded pursuant to the exclusions in clause 5.
• An excluded warranty falls outside the scope of the insuring clause, and a warranty marked as covered can be the subject of the exclusions in clause 5.

Key points for policyholders

• Have a clear understanding of the scope of the specific exclusion clauses as these will cut across all insured warranties.
• Ensure the policy captures exactly what was intended because:
  • Evidence of what was said or done before the policy incepts is not admissible to interpret the meaning of the policy.
  • The Court will construe the policy from the understanding of the reasonable person with all the relevant background information reasonably available to both parties. It is not that of the pedantic lawyer.
  • Errors will only be corrected if it is clear that a mistake has been made and it is clear what it should say. A party will not be saved from the unfortunate commercial consequences of an error unless there is an inherent absurdity or obvious nonsense.