A recent decision of the Technology and Construction Court reaffirms enforceability of “basis of contract” clauses and highlights the potentially harsh impact of a breach of warranty resulting from such provisions.
The insured was a charitable provider of social housing and tenant of 51 flats to be refurbished by a newly formed company, Time & Tide (Bedford) (“TTB”). TTB was a special purpose vehicle set up for purposes of the development. The proposal form signed on behalf of the insured wrongly stated that the builder would be Time & Tide Construction (“TTC”), an established company. The proposal form contained the following clause:
“I/We declare that to the best of my/our knowledge and belief, the information that I/we have given is correct and complete…this proposal and the statements made therein shall form the basis of the contract between me/us and the insurer.”
A quotation was issued on behalf of the insurer naming TTC as the builder, and the same inaccuracy persisted into the policy itself, which included cover in the event of the builder’s insolvency. The policy defined “Builder” as: “the person or company with whom the Policyholder has contracted to erect or refurbish the New Development(s)”, and also contained a condition stating that it would be voidable in the event of misrepresentation with intent to defraud.
TTB became insolvent in March 2009, triggering a claim under the policy. It was claimed in defence that the insured was in breach of warranty and Akenhead J. agreed that insurers were discharged from liability, for the following reasons:
1. The declaration was in two parts and the second part was not limited by the “best knowledge and belief” in the first part, so it was an unrestricted basis clause.
2. It has long been recognised in English law that a basis of contract clause in the proposal form will usually amount to a warranty as to the truth of statements made therein. Such clauses are enforceable in law and not contrary to public policy.
3. The statement made by the insured in the proposal form to the effect that the builder was TTC was incorrect and this would have been known to the individual signing the proposal form on behalf of the insured had they thought about it.
4. The warranty was not displaced or modified by any other terms of the insurance contract, including the definition of “Builder” or the condition relating to misrepresentation with intent to defraud.
5. Where a statement is said to be true to the best of the representor’s knowledge or belief, reference can be made to the honesty of the representor in the case of an individual (Economides v Commercial Assurance ). With a corporate organisation, the Court must consider what it corporately is likely to have known when it made the declaration. Although there is no requirement for dishonesty as such on the part of the organisation, if it actually knows that something said to be true on the declaration is in fact wrong, then it is making a statement which is not true to the best of its knowledge or belief.
Basis of contract clauses have been the subject of academic criticism as being unduly onerous and such provisions will be abolished for individual insureds when the Consumer Insurance (Disclosure and Representations) Act 2012 becomes law next year. Similar proposals have been made by the Law Commission in its recent consultation report on reform of business insurance contract law. If implemented, this would mean that a warranty would have to be included specifically in the policy and any general statement purporting to convert answers on the proposal form into warranties would have no effect. The decision is of interest in suggesting for the first time a different test for corporate insureds in relation to representations of belief.
For further information , please contact Georgina Squire or the Partner with whom you usually deal.