Last month, the England and Wales Court of Appeal released its judgment in Project Angel Bidco Ltd (In Administration) v Axis Managing Agency Ltd & Ors – a case concerning the extent of coverage under a buyer-side warranty and indemnity (W&I) insurance policy.
The decision provides a sobering reminder of the importance of careful drafting (and proofing) and of ensuring internal consistency between provisions of a contract. From a legal standpoint, the case also underscores the difficulties associated with corrective interpretation arguments.
Background
Project Angel Bidco Limited (Buyer) acquired the whole share capital in Knowsley Contractors Limited (KCL) from five sellers (Sellers) by way of a share purchase agreement (SPA). KCL was a provider of civil engineering and general construction services.
The SPA included various warranties given by the Sellers, including warranties concerning KCL's compliance with anti-bribery and anti-corruption laws (Relevant Warranties). A requirement of the transaction was that the Buyer obtain W&I insurance cover in respect of the Sellers' warranties in the SPA.
Adopting the typical structure of W&I policies, the W&I cover purchased by the Buyer included a "Cover Spreadsheet" specifying which warranties were "Covered", "Not Covered" or "Partially Covered". The Cover Spreadsheet listed the Relevant Warranties (amongst others) as Covered, but also stated that even where a particular insured obligation was marked as Covered or Partially Covered, "certain Loss arising from a Breach of such Insured Obligation may be excluded from cover pursuant to Clause 5 of the Policy".
Clause 5 of the policy specified the exclusions applicable to the W&I cover. Amongst other things, clause 5 excluded cover under the policy for any loss arising out of any "ABC Liability", being "any liability or actual or alleged non-compliance by any member of the Target Group or any agent, affiliate or other third party in respect of Anti-Bribery and Anti-Corruption Laws".
On their face, these provisions created an internal inconsistency within the contract for W&I insurance cover: in short, listing the Relevant Warranties in the Cover Spreadsheet as "Covered" was seemingly inconsistent with the wholesale exclusion of cover for "ABC Liability".
The dispute
Following completion of the transaction KCL lost its major client, the Liverpool City Council, and was subsequently placed into liquidation. The Buyer brought claims under the W&I policy alleging breaches of the Relevant Warranties by the Sellers, which breaches the Buyer claimed had caused the Liverpool City Council to cease to do business with KCL.
In the High Court the insurers claimed they were not liable under the W&I policy for the claim because of the application of the ABC Liability exclusion. The Buyer accepted that, unless the ABC Liability exclusion was corrected as a matter of interpretation, it would have no cover under the W&I policy for these alleged breaches. It argued, however, that the definition of ABC Liability contained an obvious error in that the words "liability or actual or alleged non-compliance" should have read "liability for actual or alleged non-compliance", which if corrected would preserve the Buyer's claims for first-party loss suffered by way of diminution of the share value.
The High Court held that there was no contradiction that required corrective interpretation. The Buyer appealed.
The Court of Appeal judgment
The only issue before the Court on appeal was whether there was an inconsistency between the Cover Spreadsheet and the ABC Liability exclusion that necessitated correction as a matter of interpretation. The Court observed that corrective interpretation is a different exercise to that of choosing between rival interpretations. It also differs from rectification (where there has been a mistake in the recording of the parties' common intention). The general principle is that the literal meaning of a provision in a contract can be corrected if it is clear that (i) a mistake has been made and (ii) what the provision is intended to say.
The majority of the Court of Appeal accepted there was an inconsistency between the Cover Spreadsheet and the literal meaning of the ABC Liability exclusion. The majority, however, rejected the Buyer's various textual arguments suggesting a mistake had been made and concluded that there was no obvious typographical error in the ABC Liability definition. Further, even if there had been a mistake in the language of the W&I policy, the "cure" sought by the Buyer was not sufficiently obvious because it was not clear whether the Cover Spreadsheet needed correcting (changing "Covered" to "Not Covered" for the Relevant Warranties) or the definition of ABC Liability needed correcting (changing "liability or" to "liability for"). The majority therefore dismissed the appeal.
Phillips LJ dissented, holding that he would have allowed the appeal. His Honour found that reading the ABC Liability exclusion as "liability for..." rather than "liability or…" removed the awkwardness of the clause's language, rendered the text of the definition consistent with the label, avoided rendering the concept of liability in that definition redundant, and removed the inconsistency between the Cover Spreadsheet and the exclusions in clause 5. His Honour added that such a reading would be consistent with the commercial sense of enabling the Sellers to identify from the Cover Spreadsheet which SPA warranties were and were not covered (and from which they were consequently released under the "no recourse" terms of the SPA).
Conclusion
While the Court of Appeal's findings are specific to the particular drafting issues in this case, the majority and minority decisions both highlight the problems that can arise if insufficient attention is given to the drafting of complex transaction documentation.
While Courts are prepared to apply interpretive principles to address obvious mistakes in drafting, the "obviousness" of the parties' intent is often in the eye of the beholder and inevitably the topic of substantial disagreement once a dispute has emerged. There is a real possibility of reasonable judges coming to differing views, as highlighted by the dissent in this case.
Parties accordingly need to take care to ensure that their contractual provisions both have internal consistency as well as consistency with the overall scheme of the transaction.