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You are here: BAILII >> Databases >> England and Wales High Court (Technology and Construction Court) Decisions >> Genesis Housing Association Ltd v Liberty Syndicate Management Ltd [2012] EWHC 3105 (TCC) (08 November 2012)
Cite as: [2013] BLR 28, [2012] EWHC 3105 (TCC), [2012] 2 CLC 837

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Neutral Citation Number: [2012] EWHC 3105 (TCC)
Case No: HT-11-527


Royal Courts of Justice
Strand, London, WC2A 2LL
8th November 2012

B e f o r e :

Mr Justice Akenhead

- and -



James Leabeater (instructed by Winckworth Sherwood LLP) for the Claimant
Richard Sage (instructed by CMS Cameron McKenna LLP) for the Defendant
Hearing date: 29 October 2012



Crown Copyright ©


    Mr Justice Akenhead:

  1. These proceedings raise interesting insurance issues, particularly in relation to "basis" clauses and warranties. There was little in issue between the parties on the evidence, and indeed neither of the single witnesses called by each party could add much at first hand to the contemporaneous documents.
  2. The Facts and the Documents

  3. Paddington Churches Housing Association ("Paddington") was a charitable Industrial and Provident Society and part of what was called the Genesis Housing Group which provided affordable or social housing. In April 2011 Paddington was by special resolution amalgamated together with Genesis Housing Association Ltd, the Claimant. The Defendant, Liberty Syndicate Management Ltd, is a corporate Lloyd's syndicate which until 2011 underwrote policies known as "Premier Guarantee for Social Housing" administered exclusively by a Reading based company, MD Insurance Services Ltd ("MD"). This guarantee provided decennial cover, amongst other things, against certain types of defects within the social housing to which it applied.
  4. In March 2007, Bedford Properties Ltd secured planning permission for the renovation and redevelopment of an office block formerly known as BT Towers, 25-27, St John's Street, Bedford for residential use including affordable housing. The freehold was transferred to a company called Time and Tide (Bedford) Ltd ("TT Bedford") in May 2007 who, by prior arrangement, granted leases to Paddington for Floors 1 to 3 to be rented on a social rent basis and Floors 4 to 6 on a shared ownership basis; 51 flats were demised to Paddington. TT Bedford was a special purpose vehicle for this particular development and was part of a group of companies owned or at least run by two brothers, Graham and Perry Gamby.
  5. By a written contract in standard JCT form dated 9 April 2007, Paddington as Employer engaged TT Bedford (wrongly named as Time and Tide Ltd) as the main contractor to design and carry out extensive alterations, refurbishments and fitting out for this development. The Contract Sum was £4.6m and the Employer's Agent was named as Woodeson Drury Ltd. The works were to start on 3 May 2007 and be completed by 1 December 2008. There was a Contract Sum Analysis which identified against 27 Heads various individual sums totalling £4.6m including an "Initial Payment" of £1.3m. £38,250 was identified as being for a "Building Warranty". Paragraph 730 of the contractual Employer's Requirements required TT Bedford to secure insurance cover with the NHBC which was to include cover for TT Bedford's insolvency and 12 years cover.
  6. These arrangements had been the subject matter of discussion and negotiation for some months prior to the building contract being entered into. On 28 March 2007, Mr Galliers on behalf of Paddington wrote to TT Bedford saying that it would pay £4.6 million and would enter into a JCT contract with TT Bedford.
  7. There clearly was some discussion between Mr Galliers and either or both of the Gamby brothers about the building warranty and it seems to have been understood between them that cover using the Premier Guarantee arrangements (including insurance against TT Bedford's insolvency) would suffice instead of the NHBC arrangement. There was clearly some understanding that TT Bedford would arrange for such cover to be provided. This is evidenced amongst other things by an e-mail dated 28 March 2007 from Mr Galliers.
  8. To that end, one or other or both of the Gamby brothers approached MD to seek such cover. A Proposal form to that end was filled out largely by Mr Johnson of MD; there is no evidence as to whether this was largely done on the telephone or face to face although it is not an issue that Mr Graham Gamby signed the Proposal form, probably on 2 April 2007. Mr Johnson wrote in handwriting on the front page: Time and Tide Bedford Ltd" and "Genesis HSG Assoc". The form goes on to provide:
  9. (a) "Genesis Housing Association" is named as the Housing Association.
    (b) The Quotation is to go to Graham Gamby.
    (c) The "Reconstruction Cost" is identified as £4.6m; the "Contract Cost" was filled out (correctly) as £4.6m in handwriting but that was scored out and £3.7m substituted. It is unclear when the scoring out took place and it is wholly unclear where the figure of £3.7 million came from. It has no obvious resonance for instance in the Contract Sum Analysis.
    (d) The name of the "Builder" was identified as "Time and Tide Construction Ltd" ("TT Construction") and a contact name was "Perry Gamby".
    (e) Under the heading "Additional Cover", the box against "Insolvency of Builder during construction" has been ticked.
    (f) The following words appear, typed as part of the form, under the heading "Declaration by the Insured":
    "I/we declare that to the best of my/our knowledge and belief, the information I/we have given is correct and complete in every detail and I/we have not withheld any material fact.
    I/we understanding [sic] that the signing of this form does not bind us to effecting insurance under the Premier Guarantee for Social Housing Scheme but agree that should a contract be completed for a New Development or Housing Unit that [sic] this proposal and the statements made therein shall form the basis of the contract between me/us and the Insurer."
    (g) The form was signed by Mr Graham Gamby apparently on 2 April 2007 for and on behalf of "Time and Tide (Bedford) Ltd and Genesis Housing Association."

    Apart from Mr Gamby's signature, the whole of the form had been filled in by Mr Johnson. It is unlikely that this document was ever shown to Paddington or to Mr Galliers at the time; indeed, it only emerged so far as the Claimant was concerned after a claim was notified some 2 to 3 years later.

  10. At the same time, Mr Gamby and Mr Johnson were discussing Premier Guarantee cover for the remainder of the development above the seventh floor and forms were filled again by Mr Johnson; these described the Developer as TT Bedford and the Builder as TT Construction. Again these other forms were signed by Mr Graham Gamby for and on behalf of TT Bedford. There appears possibly to have been some confusion or doubt at about this time as to whether TT Bedford was going to be the developer, engaged by Paddington, with TT Construction being engaged in effect by TT Bedford as the builder; this is borne out by internal documents dated 11 April 2007 and entitled "PG [Premier Guarantee] New Homes" disclosed by the Defendant. It is likely that the premiums for the Housing Association units were worked out by reference to the overall sum of £4.6 million. MD obtained a Dunn and Bradstreet report on TT Construction on 13 April 2007 which suggested that this company had an established track record and a tangible net worth of some £366,000.
  11. On 16 April 2007, MD submitted a quotation for "Genesis Housing Association" for Premier Guarantee cover for the proposed development. This clearly identified the Builder (in bold) as TT Construction and the Sum Insured as £4.6 million. It was prefaced with the following words:
  12. "Please find below details of our quotation for your New Development. All terms highlighted in bold are policy definitions and you should refer to the policy wording for interpretation of their meaning."

    The quotation identified that there would be an endorsement for "insolvency of the Builder during the Building Period" subject to payment of an additional premium of £2,415. Against the heading in bold "Conditions", the following was stated:

    "This quotation is subject to:
    1. A Certificate of Approval being issued by the Site Audit Surveyor:
    2. Full rights of recourse being retained against all parties other than the Policyholder;
    3. All other terms and conditions as per the policy wording."
    Under the heading "Your responsibilities" the following was stated:
    "You are responsible for providing the complete and accurate information, which the Underwriter requires in connection with any proposal for insurance cover. This is particularly important before taking out a policy but it also applies throughout the life of a policy. If you fail to disclose any material fact or other information material to the insurance this could invalidate the policy and mean that claims may not be paid. You should check all details on any proposal form or statement of facts and pay particular attention to any declaration you may be asked to sign."

    In a box headed "Important Notice" the following was set out:

    "This quotation sets out the basis on which an offer of insurance is made. It does not purport to give a comprehensive summary of the cover provided by the Premier Guarantee for Social Housing. Please refer to the policy wording for full information for the cover provided."
  13. Over April 2007, there was negotiation between Paddington's solicitors and TT Bedford's solicitors about the granting of leases to Paddington and, as appears in a letter dated 30 April 2007 from the latter to the former, TT Bedford was undertaking to pay the premium for the Premier Guarantee upon completion of the lease transfer. By 1 May 2007, it was confirmed between them that the cover would include "contractor's insolvency cover". By 1 May 2007, Mr Galliers had a copy of the insurance quotation referred to above.
  14. The construction works started in May 2007 and by mid-June 2007 the Employer's Agent had certified a gross value of work done of £1,672,787. TT Bedford sub-contracted all or at least virtually all the actual building works to a company called 3Sixty Construction Ltd ("3Sixty"). TT Bedford paid the premium for the Premier Guarantee cover, probably in May 2007 and an Initial Certificate was issued in effect by the Defendant on 8 May 2007. This identified the Policyholder as Genesis Housing Association, the Builder as TT Construction and the Sum Insured as £4.6m. It was expressly endorsed with cover for "Insolvency of Builder during Construction Period".
  15. Although there appear to have been few problems up to the end of 2008, by February 2009, there were real and growing concerns. Although the show flat was almost completed and the standard of finish was good, only seven people were still working on the site and no ground work was going on in the car park area; temporary water supplies had been removed from the building and, although Paddington had paid for electricity connection charges, 3Sixty had not paid the electricity company which unsurprisingly had not provided a permanent electrical supply. Concerns began to be raised by late February 2009 as to whether 3Sixty had a financial problem. By 11 March 2009, just over £4 million had been certified, gross, in respect of the work completed.
  16. By the end of March 2009, 3Sixty had ceased work due to financial problems. 3Sixty had not been paying its own subcontractors who were owed a substantial six-figure sum. By 7 April 2009 TT Bedford had terminated 3Sixty's employment under the sub contract between them. It is likely that by this time 3Sixty was insolvent.
  17. On 23 April 2009, administrators of TT Bedford were appointed, administrators having been appointed for TT Construction in July 2008. The administrators were appointed at the instigation of Anglo Irish Assets Finance which held a floating charge over the assets of TT Bedford. The administrators published proposals on 16 June 2009 which set out the background to their appointment:
  18. "3.2 The main contractor for the conversion of the BT Tower was 3Sixty…who were struggling financially and, as a result, had failed to pay sub-contractors. Understandably, many sub-contractors withdrew from site which precipitated a cessation of the conversion works. Consequently, 3Sixty ceased to trade (and subsequently was placed into liquidation on 2 June 2009).
    3.3 Due to the cessation of work by 3Sixty, Grant Thornton…was first consulted by the Bank on 17 April 2009 with a view to protecting the Bank's interests. Legal advisers to the Bank had confirmed that the Bank hold a valid debenture dated 3 May 2007 conferring a fixed and floating charge over the assets of the Company."

    They went on to identify that there was a term loan of £10.52 million and it was not anticipated that the value of the development, which was the main asset, would exceed that figure. The Administrators confirmed that they would pursue "the objective of a rescue of TT Bedford or of achieving a better result for" its creditors. Pending this, TT Bedford was being supported by the Bank.

  19. Meanwhile tenders were being secured with a view to the project being completed, possibly by or with the assistance of the Administrators. There were discussions between the Claimant and MD in the summer of 2009. Loss Adjusters instructed by the Defendant either directly or indirectly through MD reported on 28 September 2009; none of the issues which are now taken by the Defendant were identified in this report; the loss adjusters reported that there was no suggestion that TT Bedford had been declared insolvent and they anticipated that TT Bedford would remain solvent "whilst it retains the support of its bank but that, in the event that the support is withdrawn" TT Bedford would become insolvent. The point they were making was that liability under the policy had not been triggered because TT Bedford was not insolvent. On 14 November 2009 the Bank appointed an administrative receiver. By February 2010, the administrators applied to the Chancery Court to move from administration to dissolution of TT Bedford.
  20. A company called Birmingham Properties Group Ltd had become involved with a view to taking on the project of completing the overall project including the flats for Genesis. By January 2010 a company called Midgard had been identified as appropriate to complete all works. On 9 March 2010, Paddington served a notice determining TT Bedford's employment under the building contract. On 15 May 2010, TT Bedford was dissolved.
  21. Throughout 2010 the Claimant's solicitors wrote on numerous occasions to MD seeking its proposals. Letter after letter was not replied to and it is clear that MD seriously fell down on the claims handling. Following a Pre-Action Protocol process in 2011, the Claimant issued proceedings in this court on 23 December 2011.
  22. The Issues

  23. These have been usefully set out in the opening submissions of the Claimant's Counsel:
  24. "Identity of policyholder
    1. Was PCHA a policyholder?
    2. Is the Claimant (subject to other matters raised by the Defendant) entitled to claim on the Policy?
    Breach of warranty
    3. Were the facts disclosed in the Proposal Form absolutely warranted as to their truth, or did they merely have to be true to the best of the proposer's knowledge and belief?
    4. On the correct answer to issue number 3, did the proposal form contain a breach of warranty as to:
    (1) The identity of the building contractor; and/or
    (2) The building contract cost?
    5. Is the Defendant entitled only to decline a claim on the basis of breach of warranty only where it has proved an intention on the part of the claimant to defraud?
    6. Is the Defendant entitled to defend these claims by reason of breach of warranty?
    Insolvency Endorsement Claim
    7. Was TTB insolvent? Did that cause it to be unable to complete the Development?
    8. Does the Claimant have to show that the proximate cause of TTB's failure to complete the works was its own insolvency as opposed to the insolvency of 3Sixty Construction Limited? If so:
    (1) Was 3Sixty Construction Limited insolvent?
    (2) Was that insolvency the proximate cause of TTB's failure to complete the works?
    (3) Does that give rise to a defence to the claim?
    9. Is the Claimant entitled to claim the extra costs of completing the works under the Insolvency Endorsement? If so, is its claim £460,000 (as contended by the Claimant) or £370,000 (as contended by the Defendant)?
    Final Certificate
    10. Does the fact that the Development was completed by another contractor mean that the Defendant does not need to issue a Final Certificate?
    11. Has the Development been completed?
    12. Should a Certificate of Approval have been or be issued?
    13. Should the Defendant issue a Final Certificate to the Claimant?"
  25. It is unnecessary to analyse the pleadings although it should be emphasised that the Defendant has abandoned any misrepresentation defence and has expressly disavowed any reliance on dishonesty or intention to defraud on the part of the Claimant.
  26. Most of the issues between the parties arise out of the tension which exists between the Proposal Form, the Quotation and the Initial Certificate on the one hand and the Policy on the other. Essentially, the Defendant argues that the Proposal Form is effectively part of the insurance contract between the parties and contains warranties, breach of which renders void that contract; it says therefore that because the Builder was not TT Construction (but was TT Bedford), because the Contract Cost was £4.6 million and not £3.7 million and because the Housing Association was not "Genesis Housing Association" but Paddington, the Claimant was in breach of warranty and therefore the contract is void. The Claimant argues that the Proposal was not incorporated in the insurance contract and, even if it was, the terms of the Policy in effect prevail.
  27. The Policy

  28. There is no dispute, unsurprisingly, that the Policy formed part of the insurance contract between the parties. In considering the wording used, one needs to bear in mind that it is also addressed to the future owners or occupiers of the individual housing units. It is prefaced in Clause 1 with these words:
  29. "The Policyholder is requested to read the Policy and Certificates. These are important documents."

    It is clear from the Definitions section (Clause 2) that one of these Certificates is the Initial Certificate, referred to above.

  30. Clause 1 goes on to identify that the "Policy consists of" a number of Clauses, (Clauses 1 to 8) and there is no express suggestion that the Proposal was incorporated in the Policy but there is equally nothing which obviously suggests that it is excluded. Clause 1 goes on to say:
  31. "This Policy sets out the insurance cover provided by the Premier Guarantee for Social Housing.
    This insurance cover is subject to a number of definitions conditions, exclusions and financial limits as detailed in the Policy…
    Unless otherwise stated on the Initial and Final Certificates the Premier Guarantee for Social Housing provides Policyholders with protection in the following ways:
    Each Housing Unit is insured for a period of 10 years from the date of issue of the Certificate of Approval against the risk of Major Damage, ingress of water through the Waterproof Envelope, a defect in the drains or a danger to health and safety caused by a defect in chimneys or flues.. See Section 3.1 for details…"
  32. There are three further parts of Clause 1:
  33. "Interpretation
    Where any word or expression is given a specific meaning then such a word or expression shall, unless the context otherwise requires, have the same meaning wherever it appears.
    The Quality of Your Housing Unit
    All New Development(s) issued by Premier Guarantee for Social Housing are the subject of a thorough system of checks and inspections prior to and during construction:
    (1) After a satisfactory final inspection has been carried out by the Site Audit Surveyor a Final Certificate will be issued for the New Development concerning cover under Sections 3.1, 3.2 and any optional extensions (as applicable) is in effect.
    (2) The Policyholder should look carefully at the details to ensure that they have been correctly entered… The Final Certificate should be filed with the current policy"
  34. Clause 2 contains the Definitions:
  35. "A. BUILDER
    The person or company with whom the Policyholder has contracted to erect or refurbish the New Development(s).
    The contract between the Builder and the Policyholder in respect of and the construction or refurbishment of the New Development…
    The Certificate issued by the Site Audit Surveyor to the underwriter on or following satisfactory completion of each New Development…
    The Certificate issued by the Underwriter to signify acceptance of each New Development or if required each Housing Unit for insurance hereunder following issue of the Certificate of Approval by the Site Audit Surveyor…
    The Certificate issued by the Underwriter signifying their agreement to the provision of the insurance cover set out in this Policy subject to receipt of a Certificate of Approval for each New Development…
    A Housing Unit or group of Housing Units located at the site noted on the Initial/Final Certificate and used wholly or mainly by or for the benefit of the Policyholder and constructed by the Builder…
    The Housing Association and/or part or future owners of the property which is the subject of this insurance acquiring a freehold or leasehold interest in each Housing Unit within the New Development or their successors in title, or any mortgagee or lessor (other than the Builder)…
    The surveyor appointed by the Underwriter and who carries out checks and inspections on behalf of the Underwriter and prior to the issue of the Final Certificate for the New Development issues a Certificate of Approval…"
  36. Clause 5 identified exclusions which the Policy did not cover:
    Loss or damage which appears within a defects liability or maintenance period and which is the responsibility of the Builder under the terms of any agreement or Building Contract to erect the Housing Unit, unless such loss or damage is covered by this Policy…"
  38. Clause 6 contained the Conditions on which two are relevant:
  39. "4. FRAUD
    If any claim under this Policy shall be in any respect fraudulent, or if any fraudulent means or devices are used by the Policyholder, or anyone acting on its behalf, to obtain benefit under this insurance, all benefit hereunder shall be forfeited…
    This Policy will be voidable in the event of misrepresentation, misdescription, error, omission or non-disclosure by the Policyholder with intention to defraud."
  40. Clause 8 contains the endorsement as to cover for the "Insolvency of Builder during Building Period":
  41. "In consideration of the payment of the additional premium the Underwriter will indemnify the Policyholder during the currency of the Building Period against:
    a) the additional cost required to complete the New Development;
    b) the cost of reasonable precautions to secure the New Development.
    Provided that the total loss or cost under this Endorsement does not exceed 10% of the agreed contract price for the New Development… and arises out of the failure of the Builder to complete the construction of the New Development due to insolvency or fraud
    Note For the purposes of this Endorsement Builder shall not be deemed to include any sub-contractor or sub-consultant.
    Subject otherwise to the Terms Definitions, Exclusions and Conditions of this Policy."

    The Law

  42. Although most of the issues on analysis are a matter of construction of the insurance contract, a substantial amount of authority was deployed by both Counsel and certainly some of those authorities help inform the debate as to what the contract actually means. Lord Hoffman said in Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28:
  43. "…But I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v. Simmonds [1971] 1 W.L.R. 1381, 1384-1386 and Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen [1976] 1 W.L.R. 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of "legal" interpretation has been discarded. The principles may be summarised as follows:
    (1)      Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
    (2)      The background was famously referred to by Lord Wilberforce as the "matrix of fact," but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
    (3)      The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.
    (4)      The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax. (see Mannai Investments Co. Ltd. v. Eagle Star Life Assurance Co. Ltd.[1997] 2 WLR 945
    (5)      The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in The Antaios Compania Neviera S.A. v. Salen Rederierna A.B. 19851 A.C. 191, 201:
     "…if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.""
  44. There is long standing authority, much of it fairly old, which addresses the impact of "basis" clauses and the warranties to which they give rise. Sometimes, the "basis" is in a proposal form or in the insurance contract. The House of Lords in Dawsons Ltd v Bonnin [1922] 2 AC 413, in a Scottish appeal, considered a case involving an inadvertently inaccurate statement by the insured in the proposal form which was expressly incorporated in the policy, as was a clause which expressly rendered the policy void for material misstatement. The inaccuracy was found to be immaterial but a majority of the House decided that there could be no claim under the insurance. Lord Haldane said at pages 424 and 425:
  45. "It is clear that the answer was textually inaccurate. I think that the words employed in the body of the policy can only be properly construed as having made its accuracy a condition. The result may be technical and harsh, but if the parties have so stipulated, we have no alternative, sitting as a Court of justice, but to give effect to the words agreed on. Hard cases must not be allowed to make bad law…It was a specific insurance, based on a statement which is made of foundational if the parties have chosen, however carelessly, to stipulate that it should be so. Both on principle and in the light of authorities such as those I have already cited, it appears to me that when the answers, including that in question, are declared to be the basis of the contract this can only mean that their truth is made a condition exact fulfilment of which is rendered by stipulation foundational to its enforceability."

    Lord Cave also in the majority said this at page 433:

    "But it is contended…that the "basis" clause is limited or qualified by the fourth condition on the back of the policy [relating to material misstatement"].
    And it is argued that, having regard to this condition, a misstatement in the proposal does not avoid the policy unless it is a material misstatement. I do not take that view. The "basis" clause and the fourth condition do not cover the same ground. The former includes promissory statements which are apparently not within the condition; and the condition covers misstatements and concealments outside the proposal with which the "basis" clause is not concerned. I think the two clauses are independent and cumulative provisions, each of which must take effect…"

    The third member of the majority, Lord Dunedin said at page 435:

    "I think that "basis" cannot be taken as merely pleonastic and exegitical of the following words, "and incorporated therewith". It must mean that the parties held that these statements are fundamental-i.e. go to the root of the contract-and that consequently if the statements are untrue the contract is not binding"
  46. In Condogianis v Guardian Assurance Company Ltd [1921] 2 AC 125 the Privy Council addressed an Australian case in which the insured had filled out a proposal form for fire insurance incorrectly in that he failed to mention in answer to a relevant question about a second of two fires for which he had previously claimed. The proposal form contained a declaration stating that the proposal was the "basis of the contract [and] is to be taken as part of the policy and…the particulars to be deemed express and continuing warranties furnished by" the insured; there was also an express clause about material misdescription and misrepresentation. Lord Shaw said at page 129:
  47. "The case accordingly is one of express warranty. If in point of fact the answer is untrue, the warranty still holds, notwithstanding that the untruths might have arisen inadvertently and without any kind of fraud. Secondly, the materiality of the untruth is not an issue; the parties having settled themselves-by making the fact the basis of the contract, and giving a warranty-that as between them their agreement on that subject precluded all enquiry into the issue of materiality. In the language of Lord Eldon in Newcastle Fire Insurance Co v Macmorran (1815) 3 Dow 255,262: "It is a first principle in the law of insurance, on all occasions, that where a representation is material it must be complied with-if immaterial, that immateriality may be inquired into and shown; but that if there is a warranty it is part of the contract that the matter is such as it is represented to be. Therefore the materiality or immateriality signifies nothing."
    This rule has been repeated over and over again and is too well-settled to be questioned…"
  48. A first instance case a few years later, Holmes v Scottish Legal Life Assurance Society (1932) TLR 306, was concerned with an honest misstatement made by a son about his father's health in a proposal form for a life insurance. The proposal form was made "the basis of the contract" and there was a further provision in the policy that it could be avoided if the insured had made any "fraudulent or untrue" statement. In the summarised judgement, Mr Justice Swift said:
  49. "The claimant had stated in the proposal form that his father's health was good, and had agreed that the truth of this statement should be the basis of the contract. The misstatement, therefore, though innocent, was a warranty. And in the body of the policy the claimant further agreed that the policy should be avoided if he had made any untrue statement on matters material to the insurance, and this clearly included innocent misstatements as well as fraudulent statements. The rules [of the defendant society] did not affect the matter and were not inconsistent with the other provisions of the contract. It was unfortunate for the claimant, but, if a person warranted that the statement was true when he had in fact no means of knowing whether it was true of all is, and if ultimately he had to admit that it was false, his insurance was gone."
  50. The Court of Appeal in Rozanes v Bowen (1928) 32 Ll.L.Rep.98 considered a proposal form for a jewellers block policy as filled in by the insured or his agent which incorrectly identified only one previous loss although there were several previous losses. The form stated that "It is understood that this proposal will serve as the basis of the contract if a policy is issued". Lord Justice Scrutton said at page 103:
  51. "The second point [taken by the insured's Counsel]…was that the answers were not in any way incorporated with the policy so that the correct answering was a condition precedent. The answer to that appears to be at the bottom of the form: "This proposal is to serve as the basis of the contract"; and, if so, the truth of the statements in it is equally the basis of the contract."

    Lord Sankey said at page 104:

    "The same law was laid down by the Court of Appeal by Lord Esher…in Hambrough v Mutual Life Insurance Company of New York 72 L.T. 140, which was decided as far back as 1895. There the words in the proposal were not quite the same as the words in the proposal in the present case, but the Lord Chief Justice in the Court below said in his judgment that in his view the proposal was made the basis of the contract, and that the legal effect of the express warranty of the truth of the statements in the proposal is that if any of the statements is untrue the policies cannot be enforced by anyone. He was therefore following almost exactly the law laid down in the House of Lords by Lord Eldon in 1815 in the Newcastle Fire Insurance Company v Macmorran & Co., 3 Dow (H.L.) 255. I only refer to those cases to show that the law in this country at any rate has been settled in that respect for, it appears to me, over a century."
  52. There has not been much by way of reported authority (at least put before the Court in this case) over the last 50 years. In a decision of the Inner House in Scotland, Unipac (Scotland) Ltd v Aegon Insurance Co (UK) Ltd 1996 SLT 1197, similar principles were applied in circumstances where information set out in a proposal form was incorrect and the declaration made by the insured was not dissimilar to the one in the current case.
  53. In Kumar v AGF Insurance Ltd [1999] 1 WLR 1747, Mr Justice Thomas (as he then was) was concerned with solicitors' professional liability top up insurance. Clause 5 of the policy contained an undertaking by the insurer "not to avoid repudiate or rescind this insurance upon any ground whatsoever including in particular non-disclosure or misrepresentation" and a statement that "where before the inception or renewal of this insurance a principal has fraudulently failed to disclose and/or fraudulently misrepresented circumstances which might give rise to a claim or claims, the insurer shall be entitled to seek reimbursement from that principal". There were errors or omissions in the information provided in the insurance proposal form and the insured certified on the form that they were satisfied that the details were correct "to the best of our knowledge and belief". The judge was prepared to assume that this conduct was fraudulent. He considered the construction exercise against the regulatory background of the Solicitors Indemnity Fund, in particular rules 29 and 30 and the fact that the insurance scheme was intended to provide an indemnity to clients when they had been caused loss by a solicitor (page 1754D-G). This is clear when one comes to seeing the construction which the learned judge found at pages 1755G- 1756D. He referred then to the insurers' argument that the warranty on the proposal form was extremely important. He then went on to say that "it is not uncommon to find surplusage in a policy of insurance [and that] in no way detracts from the meaning which I have found the parties intended and in which in my judgement is plainly expressed in the language used in the policy as a whole".
  54. The reliance by insurers on "basis" clauses has attracted academic criticism. In McGillivray on Insurance Law (12th Edition 2012), the editors at Paragraph10-023 say that the "juristic basis for this practice is unclear", referring in effect to how the declaration can become an effective term of the "contract of insurance even if not expressly mentioned in the policy"; they suggest that one explanation "is that the policy evidences the main contract between the parties but the promises in the proposal form are collateral warranties given prior to the conclusion of the contract". Another approach is that adopted by Lord Goff in the Good Luck [1992] 1 AC 233 at 262-3 that "fulfilment of the warranty is a condition precedent to the liability of the insurer". They go on to say:
  55. "Whatever is the reasoning behind this practice, it is in our submission an objectionable one in so far as it makes the extent of the assured's obligations extremely unclear to him, particularly where continuing warranties have been made."

    They go on to refer to the recent Consumer Insurance (Disclosure and Representations) Act 2012 (not yet in force) which outlaws such "basis" clauses in consumer contracts. They refer in Paragraph 10-043 to the Statement of General Insurance Practice 1986 which "provided that insurers will not repudiate liability towards an assured on the grounds of a breach of warranty or condition where the circumstances of the loss are unconnected with the breach unless fraud is involved". This Statement amongst others was replaced from 2005 by regulation by the Financial Services Authority.

  56. Reliance was placed by Mr Leabeater on authorities which deal with what declarations as to the best of knowledge and belief mean. In Economides v Commercial Assurance Co Plc [1998] QB 587, the Court of Appeal addressed a case in which a son declared on a proposal form that to the "best of his knowledge and belief" the value of various valuable items such as jewellery was £16,000 (mostly belonging to the parents), when the value was in fact some £31,000. This had been based on what he had been told by his father. Simon Brown LJ said:
  57. "Mr Bartlett relies in particular upon sub-section (5) notwithstanding what Steyn J said about it in the passage cited above from Highlands. He accepts, as inevitably he must, that the appellant had to have some basis for his statement of belief in this valuation; he could not simply make a blind guess: one cannot believe to be true that which one has not the least idea about. But, he submits, and this is the heart of the argument, the basis of belief does not have to be an objectively reasonable one. What the appellant's father told him here was a sufficient basis for his representation: he was under a duty of honesty, not a duty of care.
    In my judgment these submissions are well-founded. This case seems to me very different from those relied upon by the respondents. (Page 598 C-E)
    I would hold, therefore, that the sole obligation upon the appellant when he represented to the respondents on renewal that he believed the full contents value to be £16,000 was that of honesty. That obligation the judge apparently found him to have satisfied. Certainly, given that the appellant was at the time aged 21, given that the figure for the increase in cover was put forward by his father, and given that father was a retired senior police officer, inevitably better able than the appellant himself to put a valuation on the additional contents, there would seem to me every reason to accept the appellant's honesty". (Page 600A-B)

  58. In Zeller v British Cayman Insurance Co Ltd [2008] Lloyd's Rep IR 545, a Privy Council decision on a health insurance policy, Lord Bingham considered a statement which was said to be "complete and correct to the best of my knowledge and belief". At Paragraph 18, Lord Bingham stated:
  59. "It is unnecessary to rehearse these authorities in detail, since it is clear in the Board's opinion that the basis of this contract, as it affected Mr Zeller, was that the statements made by Mr Zeller in the application form were true to the best of his knowledge and belief. This was expressly stated three times in the form, and the incompleteness of the statement at the very end of the form seems likely, having regard also to the absence of punctuation, to be attributable to a typographical error. It was not stated in the form, as is often done, that the applicant's warranty that his answers were true to the best of his knowledge and belief was to be the basis of the contract, but that was plainly to be understood. Ms Corbett drew attention to the parenthesis in condition (b) at the end of the form (see para 7 above: "if such statements are fraudulent or material to the acceptance of this application"), but this immediately follows a warranty of correctness to the best of the applicant's knowledge and belief. It cannot, consistently with the rest of the form, be read as entitling the insurer to cancel the policy if a material fact is not disclosed despite the applicant answering the insurer's questions fully to the best of his knowledge and belief. Thus the judge was right to regard the real question as being whether Mr Zeller, if he honestly believed he was answering the questions truthfully, was guilty of non-disclosure, and Ms Corbett was correct to tie her submissions, as she expressly did, to the questions Mr Zeller answered. This approach is entirely consistent with that of the Court of Appeal of England and Wales in Economides v Commercial Assurance Co Plc [1998] QB 587, 598, 599, where the duty of the applicant was held to be one of honesty."
  60. I draw from the above authorities following propositions:
  61. (a) It is well established that in principle "basis of contract" clauses and warranties in relation to insurance are enforceable in law and not contrary to law or public policy at least yet. This will change in the case of consumer contracts of insurance when the new Act comes into force.
    (b) The enforceability will generally come about either by such clauses or warranties being incorporated within the contract of insurance or as a stand-alone warranty by the insured given to the insurer through the proposal form or other document in which the "basis of contract" expression or declaration is given.
    (c) If the insured has innocently or otherwise signed a document, usually the proposal, as the basis of the insurance contract entered or to be entered into, which confirms (either to the best of the insured's knowledge or belief or absolutely) as true the contents of that document, the insurance contract will be void or unenforceable if the contents are untrue.
    (d) The contract of insurance, whether contained in the policy itself or any other documents such as the quotation or a certificate of insurance, may as a matter of construction modify, amend or even render of no or limited effect the "basis of contract" declaration or warranty. The ordinary principles of contractual interpretation apply to this exercise.
    (e) Declarations said to be true or correct to the best knowledge or belief of the declarer will often be in the case of an individual person reviewable by reference to the honesty of that person in making the declaration. Thus Mr Zeller and Mr Economides in their respective cases honestly believed that what they were declaring was true in the sense it was to their best knowledge and belief. However, in determining particularly whether a corporate organisation making a declaration as to various statements being true to the best of its knowledge and belief is wrongful, the Court must determine what it corporately is likely to have known when it made the declaration. There does not have to be dishonesty as such on the part of the organisation but, if that organisation 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.


  62. It is rightly common ground that in effect TT Bedford acted as an express or implied agent for Paddington in securing the Premier Guarantee cover. It matters not therefore (although it is certainly unfortunate) that Paddington or the Claimant did not see, correct and sign the Proposal form itself at the time. There are clearly errors on the face of the Proposal form, namely that the Builder was to be TT Construction, that the "Contract Cost" for the conversion and refurbishment works was £3.7m. In the latter context, I simply do not understand as a matter of fact how anyone for Paddington or the TT companies could have thought that the contract cost would be £3.7m. There is nothing in the Contract Sum Analysis from which one could infer or guess how a figure of £3.7m could be extracted. It was and must have been painfully obvious at the time of the Proposal to both of those parties that the contract sum would be £4.6m for the building contract; this was expressly referred to in the letter dated 28 March 2007 (see above) and in an e-mail from Mr Galliers of 28 March 2007. The insurance quotation and the Initial Certificate to the insurance identified the sum insured as £4.6m as did the building contract of 7 April 2007. I therefore infer that the Proposal form as signed by Mr Gamby referred to £4.6m as the "Contract Cost" and that it was someone within MD who later (for one misguided reason or another) scrubbed out the original entry of £4.6m and inserted in hand writing £3.7m. No-one within MD or the Defendant believed that the Contract cost was anything other than £4.6m.
  63. However, there is no getting away from the clear error in the identification of the Builder as TT Construction. Although Mr Gamby signed the form on behalf of TT Bedford and Genesis, both he and Paddington (principally through Mr Galliers) would, if they had thought about it at the time, have realised that TT Bedford, and not TT Construction, was to be the Builder. There is absolutely no reliable evidence to suggest that as at 2 April 2007 when the Proposal was signed TT Construction was to be the Builder. The letter and e-mail of 28 March 2007 referred to above, only five days before, make it clear that Paddington was to engage TT Bedford as the Contractor under the proposed JCT contract, which when signed a few days later confirmed that. I can only conclude that Mr Gamby was at worst confused or more likely simply did not properly read the form (which had clearly been filled out by Mr Johnson of MD). I can and do accept that it was an entirely innocent error in that context and there is no hint or suggestion that there was some deliberate or conscious misrepresentation that the Builder was to be TT Construction. The error was openly and obviously repeated in the Quotation with TT Construction identified as the Builder and it is clear that both Mr Gamby and Mr Galliers received and saw the Quotation and did not either pick up the error or at least appreciate that there was an error.
  64. In so far as it is necessary to determine the materiality of this error, this was material because TT Construction had a reasonable credit rating and had been in business for a number of year whilst TT Bedford was a new single vehicle company with no or no established credit rating. There was therefore at least potentially a lesser risk that TT Construction would become insolvent than TT Bedford, who should have been named as the Builder. This difference could well have impacted on the level of premium.
  65. Mr Leabeater for the Claimant argues that the declaration on the Proposal is essentially only an honesty declaration and that the reference in the second part of the declaration to the "proposal and the statements made" is simply a reference to the first half of the declaration. I do not accept this argument. The first part of the declaration simply means what it says, namely that the insured is saying in context: "so far as I know, the name of the Builder set out in the Proposal is correct". Whilst I do not consider that there was any dishonesty here (in the sense that when Mr Gamby signed the Proposal he was deliberately and consciously lying), certainly on the part of the Insured and most probably on the part of Mr Gamby, it is not as such a declaration of honesty; it does not say: "I declare that in filling out and signing this form I have [only] acted honestly" but it is saying: "so far as I know and believe, the Builder is or is to be TT Construction". If Mr Gamby or Mr Galliers had actually seen and thought about this reference, TT Bedford would have been named as the Builder. Put another way, they both knew at the date of the signing of the Proposal that the Builder was not to be TT Construction and therefore Mr Gamby for himself and the Claimant through Mr Gamby were saying something which was not true to the best of their knowledge and belief. The second part and sentence of the Declaration is essentially and simply saying that the statement (amongst others set out in the Proposal) that the Builder is or is to be TT Construction is to be treated as forming the basis of the insurance contract. This case is factually different from the Economides and Zeller cases which were concerned with honest individuals' assessments of the value of property and health; that is an essentially different scenario from the statement that TT Construction was to be the Builder when the agent signing the Proposal and the principal knew and must have known that the Builder was to be TT Bedford.
  66. It is argued by Mr Sage for the Defendant that there was another error on the Proposal which was the name of the Housing Association, "Genesis Housing Association". I do not consider that this was as such an error. This appellation was simply and in effect a shorthand reference to the group which included Paddington. There was no legal entity, as such, called Genesis Housing Association. The reference to it was not wrong and did not amount to some sort of warranty that there was some entity called Genesis Housing Association. Paddington was effectively within the appellation.
  67. There is nothing of particular or additional relevance in the Quotation to the interpretation of the contract of insurance albeit that, because the quotation was accepted for and on behalf of Paddington, it was or became part of the contract. It repeated the name of the Builder as TT Construction and the Policyholder was named as the "Housing Association and/or part or future owners of each Housing Unit to be insured acquiring a freehold or leasehold interest or their successors in title, or any mortgagee or lessor for (other than the Builder)". This emphasised the mutually accepted basis of who the contract was to be with but also that the Defendant, so to speak, did not mind whether the contract was to be with "Genesis Housing Association" or whoever the "Housing Association" which required the freehold or the leasehold interest turned out to be. In any event, Paddington was the Housing Association which acquired the leasehold interest in the relevant property.
  68. Turning to the Policy itself, the Claimant amongst others (the future owners of the flats) is specifically told to read the Policy and the Certificates as being "important documents". The Certificates include the Initial Certificate issued by the Defendant and that contained in substance the same information as that referred to in the Quotation. The Policy itself spelt out that it consisted of the eight clauses set out in the following pages of the Policy. There is no hint or suggestion as such that the Proposal was to be considered as incorporated in or within the Policy but that does not particularly matter because the insurance contract as between the Claimant and the Defendant was evidenced additionally by the Quotation and the Certificate, together with the Proposal itself (unless the Proposal was to be treated as a separate stand-alone warranty by the Claimant).
  69. It is true to say that Clause 1 states that the insurance cover "is subject to a number of definitions, conditions exclusions and financial limits as detailed in the Policy". In the context of the dispute between the parties, the only relevant definition is that of "Builder" which is defined in the policy as the "person or company with whom the Policyholder has contracted to erect or refurbish the New Development". This definition does not have such say that one should disregard the other contractual documentation. Mr Leabeater argues that this definition, so to speak, "trumps" or overrides the identification of TT Construction in the Quotation, the Certificate and the Proposal form. I disagree because looking at the overall documentation there can be no doubt that, as between the Claimant and the Defendant, the Builder was to be treated, and was being warranted by the Claimant, as being TT Construction. Indeed that is by far the most sensible, commercial construction to be put on the documentation overall because, if the Claimant was right, it could retain any builder, no matter how small, incompetent or impecunious that builder was, in circumstances in which the insurer was giving cover against not only insolvency (in Clause 8) but also major damage caused by a defect in the design, workmanship, materials or components provided by that very builder. One also has to bear in mind that the Policy was to bind not only the Claimant and the Defendant but also the part and future owners of the flats, who were also to be considered within the definition of Policyholder; the definition of "Builder" within the Policy can be explained as a simple explanation to such future owners of who the Builder is to be considered to be.
  70. The next series of arguments relate to the contractual impact of Condition 7 within Clause 6 of the Policy. Mr Leabeater argues that Condition 7 should be construed as in effect modifying or nullifying the "basis of contract" warranty so that only warranted errors which were made with "intention to defraud" can be deployed to render the insurance contract unenforceable. As Mr Justice Thomas suggested in the Kumar case, surplusage or repetition of clauses does not necessarily detract or mean that one clause is intended to replace or supersede the other. I disagree with the argument deployed on behalf of the Claimant for the following reasons:
  71. (a) Even if Condition 7 covers the same ground as the Proposal declaration, neither it nor any other part of the policy is framed, certainly expressly, to exclude, modify or redefine the Proposal declaration.
    (b) On its face Condition 7 is giving to the insurer the right to avoid for any misrepresentation, misdescription, error, omission or non-disclosure, occurring at any time made by the Claimant with intent to defraud. Such fraudulent behaviour does not even have to have induced the contract of insurance. The Proposal declaration, whilst it could be made fraudulently, also covers the wholly innocent and non-dishonest provision of information in the Proposal form. In one sense, Condition 7 is itself largely surplusage because any or most fraud will by one means or another unravel a contract. Although Condition 7 and the Proposal declaration can actually overlap in fact, they do not necessarily cover the same ground.
    (c) The remedies or consequences flowing from Condition 7 and the Proposal declaration are in law different. A breach of the warranty given in the Proposal renders the contract of insurance void as such, in effect as if it never was, whilst the contractual option in Condition 7 available to the insurer is to avoid the contract of insurance, in effect when it discovers fraud and that avoidance will take place, not relating back to when the contract was entered into, but at the time when the insurer elects to treat the contract as avoided.
    (d) One usually needs clear words even in a contract of insurance to remove or cancel the basis of contract warranty that was made by the insured. Such clear wording is not present. The two provisions can in logic and commercially exist side-by-side even if, on occasions, the insurer could equally rely on one remedy or the other.
  72. On the assumption that the above is all correct, it is clear that the insolvency endorsement, which expressly relates to the Builder, relates in this case to the entity which the parties must be taken as having mutually intended it to be, namely TT Construction. Therefore, either (and primarily) the insurance contract was void from the start because the information in the Proposal form about who the Builder was or was to be was simply wrong (as Paddington and its agent for these purposes Mr Gamby would have known if they had thought about it) and the Claimant was in breach of the warranty which it gave about that in the first place or, even if the insurance in some way subsists, it only relates to TT Construction and not to TT Bedford. The whole case has been predicated and pleaded upon the basis of the Builder being TT Bedford; there is no alternative case relying upon the insolvency of TT Construction. On either basis the claim must fail. An alternative argument was put, namely that the definition of Builder could relate to any subsequent builder appointed by the Claimant even after the named and defined Builder had become insolvent or otherwise ceased to perform. Again, I do not consider that this argument holds water because the definition of Builder in the Policy and indeed in the other contractual documentation is to a specific named builder and it is predicated upon the basis that effectively only one company has entered into a building contract for the requisite work. There is nothing in the policy which suggests that the Policyholder can repeatedly appoint builders who each consecutively becomes insolvent and for whose insolvencies the insurer must indemnify for up to 10% of the £4.6m; such an interpretation would be simply un-commercial.
  73. It follows from the above that the Claimant had no right of claim under the insurance because it was, albeit innocently, in breach of warranty in that the statement made by it in the Proposal form to the effect that the Builder was or was to be TT Construction was within its knowledge and belief incorrect and because such warranty was not displaced or modified materially or at all by any other terms of the insurance contract.
  74. .. There are some residual issues which it is strictly speaking not necessary to decide. However, I will briefly indicate my findings on these other matters:
  75. (a) TT Bedford was insolvent as from about late 2009, and no earlier than about November of that year, when a receiver was appointed. Up to that stage, although no further work had been done at the building site since late March 2009, TT Bedford had been supported by its Bank, as the loss adjusters found. TT Bedford's eventual insolvency did cause it to be unable to complete the project. The insolvency indemnity was or otherwise would have been engaged under Clause 8 of the Policy, but for the fact that TT Bedford was not the Builder referred to in Clause 8 and the breach of warranty in the Proposal form.
    (b) This insolvency was not as such caused by the insolvency of 3Sixty but, if anything, by the ultimate unwillingness of its Bank or other funding agencies or people to continue to support it. In that regard, Clause 8 would not be construed, as suggested by Mr Sage, so that, even if the insolvency of 3Sixty was the cause of the insolvency of TT Bedford, the Claimant would otherwise have been prevented from claiming under Clause 8.
    (c) The Claimant would, if entitled to claim under Clause 8, have been entitled to £460,000, both as the matter of the latterly accepted quantum and because that amount was the sum insured.
    (d) Issues were raised by the Claimant as to whether it was entitled in effect to a Final Certificate and a Certificate of Approval. In my judgement, the effect of Clause 8 is that, once the named Builder has become insolvent and has failed to complete the construction as a result, the insured would have had a good claim (absent the matters set out in this judgment) under Clause 8 but would not then have been entitled to any of the other relief or benefits under the policy because there never could be completion of the work by the named Builder, even if the Builder had been contractually defined as TT Bedford. This is notwithstanding that in all probability the Development has actually been completed by other contractors.


  76. It follows from the above that there will be judgment for the Defendant. So far as is material, the answers to the issues posed earlier in this judgment are: (1) Yes, (2) Yes, (3) The facts disclosed on the Proposal form were warranted as to their truth to the best of the Claimant's knowledge and belief, (4) Yes, (5) No, (6) Yes, (7) Yes to both questions, (8) No, (9) Yes, subject to the other answers the amount otherwise claimable would have been £460,000, (10) Yes, (11) Yes, (12) No, (13) No.

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