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England and Wales High Court (Technology and Construction Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Technology and Construction Court) Decisions >> Genesis Housing Association Ltd v Liberty Syndicate Management Ltd  EWHC 3105 (TCC) (08 November 2012)
Cite as:  BLR 28,  EWHC 3105 (TCC),  2 CLC 837
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QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
Strand, London, WC2A 2LL
B e f o r e :
| GENESIS HOUSING ASSOCIATION LIMITED
|- and -
|LIBERTY SYNDICATE MANAGEMENT LIMITED for and on behalf of SYNDICATE 4472 at Lloyd's
Richard Sage (instructed by CMS Cameron McKenna LLP) for the Defendant
Hearing date: 29 October 2012
Crown Copyright ©
Mr Justice Akenhead:
The Facts and the Documents
(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.
"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."
"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.
"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)?
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?"
"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.
"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…"
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:
- The Builder has to comply with Building Regulations…
- Site Audit Surveyors will have completed inspections before the Final Certificate was issued. Such inspections are carried out to satisfy the Underwriter that the Housing Unit represents a normal risk for insurance under Premier Guarantee for Social Housing. It should not be inferred that the inspections are for any other purpose…
(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"
The person or company with whom the Policyholder has contracted to erect or refurbish the New Development(s).
B. BUILDING CONTRACT
The contract between the Builder and the Policyholder in respect of and the construction or refurbishment of the New Development…
D. CERTIFICATE OF APPROVAL
The Certificate issued by the Site Audit Surveyor to the underwriter on or following satisfactory completion of each New Development…
G. FINAL CERTIFICATE
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…
I. INITIAL CERTIFICATE
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…
M. 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)…
Q. SITE AUDIT SURVEYOR
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…"
"2. BUILDER'S RESPONSIBILITIES
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…"
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."
"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."
"…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  1 W.L.R. 1381, 1384-1386 and Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen  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. http://www.bailii.org/uk/cases/UKHL/1997/19.html 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.""
"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"
"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…"
"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."
"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."
"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.
"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)
"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  QB 587, 598, 599, where the duty of the applicant was held to be one of honesty."
(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.
(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.
(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.