Bidco appeal: no clear drafting error in W&I policy exclusion

Summary

In 2023 we saw a number of decisions focussing on SPA warranty and indemnity claims and insurance, which we summarised in our November 2023 round up.

The scope of cover offered by the W&I insurance policy in Project Angel Bidco Ltd (In Administration) v Axis Managing Agency Ltd & Ors has again been before the courts. Upholding the first instance decision, the Court of Appeal construed the policy in question as excluding ABC Liability, and dismissed the insured’s arguments on appeal that there had been a clear drafting error which needed to be corrected.

Background

Following the acquisition of shares in a construction company, a police investigation began into conduct at the target company, and the company’s main client withdrew most or all of its business. The buyer duly made a claim under its W&I insurance policy, which underwriters argued was excluded from cover.

The warranties and indemnities in the relevant SPA included (in summary) warranties that there were no pending or threatened legal proceedings, no investigations or enquiries underway (or circumstances which may give rise to investigation or enquiry), and that no offences had been committed under the Bribery Act 2010 involving the company’s directors, officers or employees.

The policy excluded liability for any loss arising out of an "ABC Liability", defined in the Policy as being “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 Policy contained a Cover Spreadsheet which identified which warranties in the SPA were insured, including as “covered” the ABC Liability warranties in the SPA. However, this coverage summary was prefaced with a clause that stated “Notwithstanding that a particular Insured Obligation is marked as “Covered” or “Partially Covered”, certain Loss arising from a Breach of such Insured Obligation may be excluded from cover pursuant to Clause 5 of the Policy”.

At first instance, the court held that the meaning of the various policy terms was entirely “unequivocal and coherent”, and that the loss was excluded by virtue of the ABC Liability exclusion.

The Bidco appeal decision – obvious mistake

The insured argued, on appeal as at first instance, for a corrective interpretation of the policy. To succeed in getting the Court of Appeal to correct the policy, the insured would need to persuade the court both that there was a clear drafting error, but also that there was a clear cure for that error.

At first instance the court had held that the clause was clear: it excluded the liability or the fact of actual or alleged non-compliance with anti-bribery or corruption laws. Referring to the principles espoused in key authorities, the judge made it clear that there is a high hurdle to be overcome before a court will conclude that it is clear a mistake has been made. Whilst accepting that the definition of ABC Liability “is not a masterpiece of drafting”, the Court of Appeal (Lewison LJ giving the leading judgment, with Phillips LJ dissenting) was not persuaded that there had been a clear drafting error.

The Court of Appeal acknowledged the apparent conflict (at least in part) between on the one hand the inclusion of the ABC Liability in the Cover Spreadsheet, and the ABC Liability exclusion on the other. The Court did not accept that the Cover Spreadsheet was, by definition, subordinate to the ABC Liability exclusion in the policy. It did, however, conclude that the rubric at the beginning of the Cover Spreadsheet provided the answer, at least to some extent. Specifically, that rubric anticipated that there might be an inconsistency between the Cover Spreadsheet and the policy exclusions, and that in that event, the policy exclusions would take priority.

That did not resolve the question: was there an “obvious mistake” in the drafting of the policy?

Before turning to a textual analysis, the Court of Appeal looked at whether there had been a mistake common to both parties The insured argued that there was a typo in the definition of ABC Liability in the policy, where the first word “or” should in fact read “for”, so that the corrected definition reads: "Any liability for 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 authorities are clear that “the exclusion clause must be read in the context of the contract of insurance as a whole and in a manner that is consistent with and not repugnant to the purpose of the insurance contract – see Impact Funding Solutions Ltd v Barrington Support Services Ltd [2016] UKSC 57”. The Loss to which the Policy responds is a loss in share value. It is not a liability policy intended to cover the insured against the risk of third party liabilities. Lewison LJ observed that the existence of a “coherent and rational explanation for why the ABC Liability exclusion took the form that it did is a strong pointer against the conclusion that there is an obvious drafting mistake”; it isn’t difficult to see why underwriters would want to exclude any diminution in share value attributable to an allegation of non-compliance with anti-bribery laws even if the allegation was never proven nor even investigated.

Lewison LJ did not feel that there was a sufficiently obvious drafting error, nor, if there had been such an error, that the insured’s suggested correction (turning the “or” into “for” within the definition of ABC Liability) would be the clear solution, rather than correcting the Cover Spreadsheet.

Phillips LJ, in his dissenting judgment, felt in contrast that something had obviously “gone wrong” with the language of the ABC Liability exclusion, and that the simple solution contended for by the insured would cure that ill.

Commentary

The courts continue to emphasise, whilst acknowledging the broader context (including looking at underwriters’ perspective and the wider circumstances), that they will primarily take a textual approach to construing the terms of contracts. This includes insurance policies. It is not the courts’ role to make good bad bargains, or to re-write contracts to be “fairer” to both parties.

It’s clear from Bidco, however, that a “corrective interpretation” of a contract is not simply a question of choosing between rival interpretations. Whilst the general principles of contractual interpretation obviously apply, where a party is asking the court to intervene and correct drafting errors that party must show both an obvious mistake, and an obvious cure.

In this case, there was neither a clear drafting error, nor an obvious cure even if there was an error.

It is perhaps surprising that there was such a dispute on policy construction when the policy itself anticipated that the terms might conflict, and provided an order of priority between the exclusions and the Cover Spreadsheet.

That said, insurers and insureds do need to exercise caution in extrapolating this decision across other wordings. It is not difficult to predict an alternative outcome in the event that the policy had contained the same overall structure and just slightly different terms.