Kyle Bay Ltd (t/a Astons Nightclub) v Underwriters Subscribing Under Policy No. 019057/08/01

The issue in this case is whether the Claimants are entitled to re-open an insurance claim which they compromised with the Defendant underwriters (“Underwriters”).

The Claimants (“Kyle Bay”) operated the Astons nightclub in Bridgend for many years. It was a well run and reputable nightclub. On the night of 14/15 November 2001 there was an arson attack on neighbouring premises. The fire spread and the building in which the club operated was completely gutted. As a result the nightclub was unable to trade for over a year.

Kyle Bay’s insurances were arranged through Mr Huw Thomas ACII of Insurance Risk Consultancy Services (“IRCS”), a firm of brokers based in Swansea. In previous years, the insurances had been written by Dale, an underwriting agent based in Nottingham. The cover which had been obtained previously included 12 months business interruption cover written on a “declaration linked” basis. The more common form of business interruption cover is written on a so called “gross profits basis”, where the policy states a figure for gross profits. In the event the sum insured is less that the actual gross profit, average is applied and the sum paid will be reduced accordingly. Under a so called “declaration linked” policy the assured gives at the outset an estimate of his gross profits for the period and an interim premium is paid on account. At the end audited accounts are provided on the basis of which the final premium is adjusted. Average is not applied and in the event of a loss, the claim is paid on the basis of the actual gross profit although there is normally a maximum permitted uplift over the estimated gross profit figure provided at the outset. Typically that figure is 133⅓%.

The previous cover had lapsed in April 2001 apparently because Mr Thomas had failed to pass on the premium despite having been paid it by Kyle Bay. Dale were approached again in September 2001 to reinstate the cover but by then it had ceased to write nightclub business.

So on 10 September 2001, Mr Thomas approached SK Underwriting Limited (“SKU”) who held a binding authority from the Defendant Lloyd’s underwriters to write, inter alia, nightclub business. The experienced underwriter employed by SKU was Mr John Ing. Mr Thomas faxed quotation papers to SKU seeking various insurances for Kyle Bay including business interruption cover. The relevant page sought the following:

Mr Ing considered this proposal. It was not his general practice to write declaration linked cover which he regarded as “gimmicky”, although in some situations he might do so if his arm was really twisted. He thought such cover was inherently unsuitable for nightclub business, due to the problems he anticipated of collecting the additional premium at the end of the period. So in giving his quotation, he crossed through the words “non-average declaration linked” and also “infectious, contagious diseases”. Unfortunately however, when Ms Beth Hayes of SKU communicated the quotation to IRCS on 11 September 2001, she made it clear that the business interruption cover excluded infectious and contagious diseases but failed to state that the cover would not be on a declaration linked basis. The quote was for a material damage premium of £2,721 plus tax, subject to a number of conditions including a completed proposal form being provided within 30 days.

The quotation incorporated “conditions & terms as per our standard commercial wording”. SKU’s standard commercial wording, approved by the Underwriters, was designed to be used with a policy schedule specific to the risk. The business interruption wording contemplated three different basis of cover:

On 13 September 2001, SKU agreed at the request of IRCS to hold Kyle Bay covered for 30 days. The proposal form was not provided within 30 days and SKU carried out a threat to come off risk. In the event, a proposal form was provided on 30 October and SKU agreed to reinstate the held covered insurance. The proposal form stated:

“Sums to be insured

It is important that you ensure the Values given below are adequate as Under-Insurance may reduce the amount of recovery in the event of a claim.

Material Damage Cover

…

10 a. Loss of Gross Profit (Indemnity Period 12 months) £350,000.

The proposal form signed per pro Clayton Williams, a director of the Claimants declared that “to the best of my/our knowledge and belief:

Some further correspondence ensued and, at IRCS’s request, it was agreed that the risk would only run till 22 April 2002 to coincide with the expiry of the liability insurances, and that a premium of £1,694.96 plus tax and survey and policy fees would be paid. Mr Thomas accepted this proposal and on 7 November Mr Ing’s deputy gave instructions that policy documents should be issued.

The fire intervened on 14/15 November. The policy schedule was signed on 21 November. There is a dispute as to whether it was sent to Mr Thomas – he said in his statement that he never received a copy. Unfortunately he was too ill to give evidence. Although I am quite satisfied that this was an entirely genuine excuse, I do not regard him as a reliable witness. I think it inconceivable that he was not sent a copy of the schedule given that he had requested one on 19 November and SKU had agreed on 20 November to provide it. If he had not received a copy as requested and promised, I am sure he would have pressed for it, particularly given that he knew there was a large impending claim,. Moreover the brokers’ file has on it a copy of the schedule (albeit a poor one).

The policy schedule was in the following terms (insofar as material):

“This Schedule attaches to and forms part of the Policy specified below to which it should be permanently attached.

Material Damage Section

Section B Loss of Profit (12 months indemnity) £350,000 Declaration Linked

Additional Information:-

The Business Interruption section of this policy excludes all cover for infectious & contagious diseases & theft cover”

Within a few days of the fire, underwriters had retained Carr Greenwood Smith (“CGS”) as loss adjusters. Mr Robert Stafford ACII FCILA acted in connection with the business interruption claim. Kyle Bay had retained Mr Stewart Dymant, a senior assessor and chartered accountant, of Harris Claims Group PLC (“Harris”) as loss assessors. On 19 November Mr Dymant sent Mr Stafford a standard letter seeking certain information. Mr Stafford did not (as was his practice) respond to this letter because he did not regard it as part of his function to provide the information sought, but it is right to observe that relations between them were good and professional.

From an early stage it became apparent that the £350,000 figure in the schedule was too low. Kyle Bay had been warned by Mr Dymant that if the policy was subject to average and the sum insured was inadequate, recovery might only be partial. After considering the figures provided by Kyle Bay, Mr Dymant put in a claim assessing the loss of gross profit as £621,321 and the net profit lost as £394,661. At this stage Mr Dymant had not seen a copy of the policy wording. He appears to have proceeded on the assumption that it was a gross profits based policy and he warned Kyle Bay that, even if the underwriters agreed the claim in full, application of average would reduce payment to some £223,000.

By March 2002, underwriters had admitted liability. At a meeting between Mr Dymant and Mr Stafford in early March 2002, Mr Dymant was provided with a copy of the policy schedule as on CGS’s file, and he realised that the schedule had the words “declaration linked” by the sum insured. As a professional loss assessor he was well aware what they meant. On 12 March Mr Lawrence of Harris, who was also working on the case, wrote to Kyle Bay saying:

“I refer to our meeting on Friday 8^th March and would advise you that liability has now been accepted in respect of your claim and I have requested confirmation in writing from Rob Stafford which should follow later this week.

…

In the meantime I did request via Rob Stafford a copy of the Insurance Policy and having viewed the information which was contained within his file I did obtain a copy of a fax from SK Underwriting Ltd to your Broker Hew Thomas of IRCS. This document is very interesting in that under the Policy Schedule and Material Damage section although the copy is extremely poor in quality under Business Interruption Section B the sum insured does follow with the words “declaration linked”. If this is the case this would be extremely advantageous to your Business Interruption Claim in respect of the amount recoverable. Rob Stafford was surprised with this wording and I have asked him to raise it with Insurers. Also I was aware that your sums Insured have changed from the previous Policy by IRCS and would be grateful if you could obtain the original documentation and provide some explanation as to why the sums Insured were changed and whether it was at your request or your Brokers?”

On 20 March 2002, Mr Lawrence raised the terms of the Schedule with Mr Stafford and asked him to clarify the wording with his principals. Mr Stafford replied on 4 April:

“I would ordinarily take the words Declaration Linked to indicate that the sum insured was based on an annual declaration. However, the item insured is Loss of Profit rather than Estimated Gross Profit.”

At that stage, Mr Stafford had not approached Mr Ing and what he said reflected his own opinion of the wording. Mr Dymant responded by saying that, if a gross profit policy was declaration linked, then it would not be subject to average. He said that he did not understand what Mr Stafford was saying and asked him to explain further.

On 24 April, Mr Stafford approached Mr Ing by telephone. Mr Ing is recorded as having said:

“This is not a “declaration linked” policy – Declaration means that Insured will declare the figure each year. No escalator asked for or agreed”.

Mr Ing told me that he would not have used the word “escalator” – his point however was that no upper limit for cover had been asked for or agreed.

As a result, Mr Stafford wrote to Mr Dymant on 9 May 2002 in the following terms:

“As advised, I have asked Underwriters to release an interim payment of £100,000.00 in connection with this claim.

Further detailed analysis of the takings figures is ongoing and further advices will follow.

I have queried the sum insured with Underwriters. They confirm that this is not a declaration linked sum insured. The sum insured of £350,000.00 is subject to the average clause detailed in the policy and any payment made will be proportionately reduced.”

Mr Dymant passed this on to Kyle Bay on 16 May 2002:

“I am enclosing a copy of a letter that I have today received from the Adjusters confirming the interim payment in the sum of £100,000.

With regard to the sum insured it would appear that Insurers are saying this is £350,000 and subject to average which, of course, greatly reduces our claim.

There was some uncertainty about this as the schedules seemed to indicate that this was in fact declaration linked and if this was the case there would have been no average clause at all and any claim would have been paid up to a limit of £350,000 plus one-third. It may well be that you intended to have this form of insurance and as a consequence of which there could possibly be a claim against your Brokers. Perhaps you would be so kind as to telephone me to discuss this point”

So matters rested as regards this issue. Mr Dymant appeared to accept that the policy would be adjusted on the standard gross profit basis, with average applying. Extraordinarily, he made no real effort to obtain a full copy of the policy, or to investigate with the brokers whether they considered the Underwriters to be correct, or to examine the broker’s placing file. Mr Dymant said (as I accept) that he did attempt to make contact with Mr Thomas but he was not good about returning calls. However he never pressed Mr Thomas, as he should have very forcibly if that was necessary. It was argued that Mr Stafford in some way concealed the policy terms from Mr Dymant, knowing that he had not secured a copy of the policy. I reject that proposition unreservedly. On the contrary, I am quite sure that Mr Stafford was proceeding on the fair assumption that Mr Dymant was fully briefed and that he had a copy of the standard policy terms. If he had not, he would have expected Mr Dymant to request one. He would have been incredulous if he had been told that Mr Dymant, a professional loss assessor working for a well known firm, was proceeding without knowledge of the full policy terms.

In early 2003 there were negotiations about the exact sum payable. Mr Dymant succeeded in persuading Mr Stafford to increase his offer by some £50,000. On 24 February 2003, Mr Stafford wrote to Mr Dymant enclosing revised settlement proposals for the business interruption claim. The schedule noted that the sum insured for a 12 month period was very low at £350,000 and that based on accepted figures and a level trend, it should have been not less than £534,475.32. This significant underinsurance reduced the amount payable to £205,511.76 for a 12 month indemnity period. The schedule explained the mathematical calculation that led to this figure, involving the application of average.

Mr Dymant was pleased with this offer, which was close to what he had indicated to Kyle Bay would be recovered. He recommended acceptance. In evidence he told me that he had told Mr Williams that underwriters were adamant that the loss of profit was not insured on a declaration linked basis and “for the present” insurers would only pay out on terms that included the application of average.

On 11 March 2003 Mr Williams accepted this advice, and as requested by CGS, he signed an acceptance form on behalf of Kyle Bay in the following terms:

“Subject to the approval of Underwriters and to the terms of the policy I/we agree to accept in full and final settlement of all business interruption claims under the policy arising out of the above incident the sum of £205,511.78”

Underwriters did approve and the balance (after deduction of the interim payment) of £105,511.78 was paid.

Having reached this accord, Mr Dymant then set in hand an investigation as to whether this was a gross profits or declaration linked policy. He would have been wiser to have done this before advising Kyle Bay to enter into the settlement with Underwriters. He gained access to the brokers’ file and the full policy. He reached the conclusion that this was a declaration linked policy and that average ought not to have been applied. Edwin Coe were instructed and on 1 August 2003 they wrote to underwriters contending that the policy was declaration linked and that average ought not to have been applied.

A very odd letter was written by Harris on 14 October claiming that Edwin Coe had written without instructions and asking that the resolution of the business interruption claim be re-confirmed. No formal re-confirmation was given. I think Harris was trying to avoid rocking the boat for the related insurance claim for physical damage to the building, which was still being negotiated. The correspondence resumed in September 2004, after the buildings claim had been resolved. Importantly, given the allegations of misrepresentation as well as mistake now made by Kyle Bay, on 6 October 2004, Edwin Coe wrote to CGS:

“The business interruption claim was not settled on the basis that our client accepted insurer’s position regarding the terms and conditions of the contract for insurance because at the time the point had not been considered, certainly not by our clients and (unless you are suggesting your client misrepresented the position regarding the relevant terms and conditions) presumably not by your principal either. It was only after our clients had entered into the settlement agreement in respect of the business interruption losses that documentation was received which indicated that our clients were in fact insured on a declaration linked basis. Had our clients known at the time that insurers were not entitled to apply average then clearly they would not have accepted any settlement in which the claim as reduced because of the application of average.”

Underwriters stood their ground on the settlement agreement and this litigation ensued.

Kyle Bay contends that it is not bound by what it accepts is, prima facie, a binding settlement contract. The starting point of the argument is that the policy was, on its true construction, on a declaration linked basis and average was inapplicable. Mr Andrew Butler went on to contend that:

I heard Mr Williams, Mr Dymant, Mr Ing and Mr Stafford give oral evidence. I also read the witness statement of Mr Thomas. I am satisfied that the witnesses who gave oral evidence were all honest and doing their best to assist the Court. Not having seen him, I have difficulty assessing Mr Thomas’s evidence which I certainly found unreliable in one important respect. I have reflected my assessments of the witnesses’ evidence in my findings of fact.

I propose to deal with the issues in the following order:

There was no dispute as to the principles to be applied in construing the policy. The right approach was authoritatively summarised by Lord Hoffman in Investors Compensation Scheme v. West Bromwich Building Society (HL) [1998] 1 WLR 896:

“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] 3 All ER 237 at 240-242, [1971] 1 WLR 1381 at 1384-1386 and Reardon Smith Line Ltd v. Hansen-Tangen, Hansen-Tangen v. Sanko Steamship Co [1976] 3 All ER 570, [1976] 1 WLR 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 Investment Co Ltd v. Eagle Star Life Assurance Co Ltd [1997] 3 All ER 352, [1997] 2 WLR 945).

(5)

The 'rule' that words should be given their 'natural and ordinary meaning' reflects the commonsense 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.

There is one important additional point. Prior contracts are always admissible evidence of the factual matrix, even if superseded by the later contract, although the degree of assistance they can offer may often be slight. They are not to be treated as merely part of the negotiations leading up to the contact and thus inadmissible: HIH Casualty and General Insurance Ltd v. New Hampshire Insurance Co (CA) [2001] EWCA Civ 735, [2001] 2 Lloyd's Rep 161, [2001] Lloyd's Rep IR 596 where Rix LJ said (at paragraph 83):

That is of some relevance in this case, since there was undoubtedly an initial “held covered” contract of insurance based on the quotation by Underwriters as accepted by IRCS. Indeed, at the time of the fire this contract was still in force. However, it was always intended that it would be replaced by the policy, as actually occurred.

Here, in my judgment, the policy coupled with the schedule is quite clear on its face. The schedule expressly states that it is a declaration linked policy and the body of the policy provides for the regime that applies in the event the policy is declaration linked. Mr Reed submitted that, if the parties had intended the policy to be declaration linked, the schedule would have expressly stated the upper limit for the cover. However, there was no need for it to do so. The terms of the policy applicable to declaration linked contracts define the upper limit as 133⅓% of the estimate, and the policy when read with the schedule contains all the necessary terms. There was no need to duplicate them in the schedule. That is not at all surprising. Modern insurance policies often consist of a schedule containing the particular terms agreed between the parties, which operates as a jacket round the standard policy terms. Put together, as intended, the combination forms an entire contract.

The original contract based on the quotation is consistent with this conclusion. Looking at what crossed the line between the parties, Kyle Bay though IRCS sought cover on a non-average declaration linked basis. The quotation received back from SKU altered some of the proposed terms, but not this one. Mr Reed submitted that the quotation did not state that the premium quoted was only provisional or what the upper limit was. That is correct. But it would be implicit and obvious that the premium would only be provisional if the policy was declaration linked and it was clear on the evidence that 133⅓% was a pretty standard, although not invariable, upper limit. I cannot see that the failure at this stage to specify an upper limit meant that the contract of insurance was on a gross basis, when that was not made explicit in response to the clear terms sought by IRCS. Nor can I see that the fact that the figure of £350,000 was not a genuine pre-estimate on behalf of Kyle Bay (if that were so), something that SKU could not possibly have appreciated at the time, could affect the proper construction of the contract.

So in my judgment this was a declaration linked policy and not subject to average.

I am in no doubt that there was a mistake on the part of SKU. Mr Ing never intended the policy to be declaration linked, as he made clear in his quotation. Still less would he have been prepared to agree a declaration linked policy that had a term of less than 12 months (as was agreed after the initial quotation). Unfortunately, however, as a result of an administrative error which fed through to the production of the policy, that was never communicated to IRCS and Kyle Bay. For a case in rectification to get off the ground, Underwriters have to establish that there was a common intention that the contract of insurance was to be on a gross profits basis, together with some outward expression of accord, that this continued up to the time of the issue of the policy and that the policy does not accurately represent the true agreement of the parties: Joscelyne v. Nissen [1970] 2 QB 86; Youell v. Bland Welch & Co [1992] 2 Lloyd’s Reps 127. Here, there was no such common intention. The mistake was unilateral on the part of SKU. Kyle Bay and IRCS did not appreciate that SKU had made a mistake and there was no kind of sharp dealing on their part such as might justify rectification for unilateral mistake. The claim to rectify the policy must fail.

On my findings so far, there plainly was a mistake by both parties when the settlement agreement was concluded. Both were proceeding on the basis that this was a gross profits policy subject to the application of average, whereas in law it was a declaration linked policy not subject to the application of average. It is agreed that, on the assumption the claim should have been adjusted without average being applied (as I have found) Kyle Bay should have recovered £313,831.22, that is an extra £108,319.46. But is that sufficient to declare the settlement agreement void?

The law has developed considerably in the last few years. The leading modern case is Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd (CA) [2002] EWCA Civ 1407 [2003] QB 679 in which the Court of Appeal, following Bell v. Lever Brothers Ltd [1932] AC 161 (HL), restated the law of common mistake and rejected the existence of a separate doctrine of equitable mistake as had been championed by Lord Denning MR in Solle v. Butcher [1950] 1 KB 671 – a concept that had perplexed generations of law students and practitioners.

The Court of Appeal emphasised the relationship between the law of frustration, based on the impossibility of performance, and the law of mistake. Lord Phillips MR said (at paras 75-76):

The Court of Appeal also cited with approval from Steyn J.’s judgment in Associated Japanese Bank (International) Ltd v. Credit du Nord SA [ [1989] 1 WLR 255 where he said :

I do not consider that the Court of Appeal thought this was a significantly different formulation from their own. So in asking the critical question in that case, Lord Phillips said (at §162) :

“It was unquestionably a common assumption of both parties when the contract was concluded that the two vessels were in sufficiently close proximity to enable the Great Peace to carry out the service that she was engaged to perform. Was the distance between the two vessels so great as to confound that assumption and to render the contractual adventure impossible of performance? If so, the appellants would have an arguable case that the contract was void under the principle in Bell v Lever Bros Ltd.”

[my emphasis]

The question was answered in the negative and the appellant shipowners were held to their bargain.

Here it would be absurd to say that the settlement agreement was impossible of performance. Indeed it was in fact performed without difficulty. The case is similar to that of Brennan v. Bolt Burden (CA) [2004] EWCA Civ 1017; [2005] QB 303 where a claim was settled on a mistaken legal basis. The Claimant had compromised her claim for personal injuries on the basis that the claim form was served out of time. The terms of the settlement were that the claim was withdrawn with each side agreeing to bear its own costs. Subsequently a Court of Appeal decision showed that the parties were mistaken. The claim form had in fact been served in time. The Claimant contended that the settlement was void for mistake. By a majority, the Court of Appeal rejected her case. At §22 Maurice Kay LJ said:

Mr Butler cited Magee v. Pennine Insurance Co. Ltd. [1969] 2 QB 507 in which the Court of Appeal by a majority held that an agreement to settle an insurance claim could be set aside in equity because of a common misapprehension that the Plaintiff had a valid claim under the policy. Mr Butler was inclined to the view that this decision (helpful though it would have been to his cause) could not survive the Great Peace. I agree with him. It is Winn LJ’s dissenting judgment which is more in harmony with modern authority:

In my judgment, the mistake that the parties laboured under did not render the settlement agreement impossible to perform. Nor did the mistake render the subject matter of the contract essentially and radically different from the subject matter that the parties believed to exist. It simply made it a rather poor deal from Kyle Bay’s perspective. The settlement contract was not void for mistake.

This was the issue that took up much of the argument before me. A series of sub-issues developed. The key ones were:

At the outset Mr Reed argued that, as a matter of principle, the Court should not entertain an attempt to rescind a settlement agreement for misrepresentation. There was a powerful public policy interest in holding parties to settlements they had concluded and preventing them from re-opening them. He cited Butler Sloss LJ’s judgment in Colchester Borough Council v. Smith [1992] Ch 421 at page 435:

“Where parties to a dispute reach a compromise which brings that dispute to an end and avoids the need for litigation or further litigation, such a compromise is a valuable part of the resolution of disputes within the machinery of the administration of justice. The compromise has to be genuine, entered into freely by all parties to it without concealment of essential information or undue advantage taken by one party of another party, and preferably with the assistance of lawyers. Consequently, an agreement to compromise an action or a dispute which may lead to litigation is binding and is enforceable against the party seeking subsequently to repudiate it. As Roskill LJ said in Binder v. Alachouzos [1972] 2 QB 151, 160, Any other course would cause very great difficulty in the administration of justice.

In my view the courts have an interest in upholding agreements to compromise disputes. The terms of the agreement to compromise under review are therefore in a wholly different position from the situations caught within the scope of the Limitation Act, such as payment of rent or acknowledgment of title.”

In my judgment this argument goes too far. Of course, the Court will uphold valid compromise agreements and not allow parties to re-open them just because they later perceive that they made a bad deal. There is indeed a strong public policy reason for this. However, ultimately a compromise agreement is a species of contract subject to all the usual incidents of contract including the possibility that it might be rescinded for misrepresentation: cf. Brennan v. Bolt Burden where Maurice Kaye LJ observed (at § 17):

“as with any other contracts, compromises or consent orders may be vitiated by a common mistake of law”.

He might have added misrepresentation. To take an obvious example – a variant of this case – if Kyle Bay had lost their copy of the schedule and had been wrongly told by the Underwriters that the schedule stated that it was gross profits policy, and a settlement had been made on that basis, there would clearly have been a misrepresentation of fact which would be actionable supposing the other essential elements of such a claim were established.

However, I do consider that care is needed in examining what was said in the course of negotiations, whether it truly amounted to a representation as opposed to an argument or a contention, and if so what the representation was. In the course of settlement negotiations, parties are likely to make a number of assertions. The Court should guard against misrepresentation being used – or rather abused – as an improper means of re-opening a compromise agreement.

Mr Reed drew my attention to Norfolk Finance v. Newton and Lombard North Central Plc (unrep. CA 15 October 1998) and submitted that was a case which had striking similarities to the case before me. Lombard had leased a Porsche motor car to Hamilton Ingram Ltd. That company had purported to sell the car to Mr Newton who in turn sold it to another firm who financed the purchase by a lease purchase hire agreement with Norfolk Finance. Lombard asserted it had title to the car and demanded that Norfolk Finance pay £10,091.60 as the amount required “to settle our agreement”. Having been provided with a copy of the agreement Lombard relied upon, Norfolk Finance reluctantly agreed to do so, but without reservation. It turned out that Lombard did not have title as it had claimed. Allowing an appeal from the County Court, Peter Gibson and Mummery LJJ held that there had been a compromise agreement to avoid the car being repossessed. The Court was satisfied that Lombard made their claim to title honestly and in good faith. The agreement was a compromise made without reservation and Norfolk Finance took the risk that the factual position might turn out to be different from that believed at the time. The agreement was upheld as binding. As Mr Reed observed, it plainly did not occur to a distinguished Court of Appeal that Norfolk Finance could have succeeded on the basis that Lombard misrepresented that they had title to the car. However, I think that I should be cautious about placing much reliance on an unreported case where, rightly or wrongly, the argument was not even addressed to the Court.

Mr Butler cited Fordy v. Harwood (CA unrep. 30 March 1999) in which the Court of Appeal debated the difference between a mere puff and a statement of fact in the context of an advertisement for the sale of a Cobra motor car. I do not find that contrast very helpful in the context of this case which is not in that territory.

Mr Butler’s main submission was founded on CGS’ letter of 9 May 2002 and the statement:

The letter of 9 May 2002 must be judged objectively according to the impact that it might be expected to have on a reasonable recipient and with the known characteristics of the actual recipient (Primus Telecommunications PLC v. MCI Worldcom International Inc (CA unrep.) [2004] EWCA Civ 957 at §30). It must also be read, in my judgment, in the context of the contemporary circumstances which were known to both parties. Mr Dymant had already been shown the schedule to the Policy by CGS. He knew that it stated:

“Material Damage Section

Section B Loss of Profit (12 months indemnity) 350,000 Declaration Linked”

He had not, as I have found, seen the Policy terms but that was not known to CGS and could not reasonably have been known or suspected by them. I would add that in my judgment, any competent loss assessor would immediately see the argument based on the schedule alone that average was not to be applied – as Mr Dymant indeed did.

Against that background, I do not construe the letter as being a representation as to the contents of the policy (which Mr Dymant could be assumed to know) but rather as a statement of Underwriters’ understanding of the overall effect of policy, namely that it was not declaration linked and average applied. I interpret the letter as being more of an argument or a contention than a representation, but if a representation, at most one as to the Underwriters’ opinion. I attach some importance to Mr Dymant’s letter to Kyle Bay dated 16 May 2002, which enclosed the letter of 9 May. It seems to me to be reporting the Underwriters’ arguments rather than any sort of representation:

“With regard to the sum insured it would appear that Insurers are saying this is £350,000 and subject to average which, of course, greatly reduces our claim.

There was some uncertainty about this as the schedules seemed to indicate that this was in fact declaration linked and if this was the case there would have been no average clause at all and any claim would have been paid up to a limit of £350,000 plus one-third.”

If the letter is to be treated as merely an argument or contention, then there was no representation.

Even if, contrary to my primary view, the letter is to be read as a representation of the Underwriters’ opinion, it accurately reported Mr Ing’s opinion, which was based on his original quotation on a gross profits basis. It was not suggested that the Underwriters or CGS were acting other than in perfect good faith and, having heard Mr Ing and Mr Stafford give evidence, I am quite satisfied that they were acting in good faith. So there was no misrepresentation.

A representation as to belief or opinion can sometimes be treated as including a representation that it is based on reasonable grounds – see Brown v. Raphael [1958] Ch 636 and Chitty §§6-004 – 6-007 – but that was not pleaded or argued before me, rightly in my view. I do not think that any such implication would be justified: cf section 20(5) of the Marine Insurance Act 1906 which provides that:

“A representation as to a matter of expectation or belief is true if it be made in good faith”.

This was a commercial negotiation being conducted by experienced professionals on both sides. Both had equal access to the papers and were well able to form their own opinion. Mr Dymant in his evidence rather tried to lay emphasis on the fact that Mr Stafford was a professional loss adjuster and was subject to professional duties to remain impartial. He said that he felt he could place special reliance on what Mr Stafford said. He had never had a situation in which he had obtained information from loss adjusters which was not correct. That may be so but it rather begs the question as to what Mr Stafford is fairly to be treated as having said.

Mr Butler rightly focussed his case on the letter of 9 May 2002. It is even more difficult to spell a representation out of the schedule to the letter of 24 February 2003. I read it as simply setting out Underwriter’s settlement offer, and explaining how this has been calculated. It does not constitute a representation that the policy was on a gross profits basis.

So, in my judgment the misrepresentation case fails. There was no misrepresentation. Questions as to whether there was any inducement (as would in my judgment be necessary although presumptions could apply) are academic, but I am satisfied there was no inducement. Mr Dymant treated the Underwriters contentions as exactly that and decided for reasons that I have not managed to fathom that the claim should be settled on the basis proposed by the Underwriters, rather than investigating the point further, as he had ample opportunity to do. He appears to have decided to defer further investigation until after the compromise had been reached, but by doing that, he left it too late.

I allowed Mr Butler to amend his pleadings to contend that there was an express or implied condition precedent to the settlement agreement that the doctrine of average applied, so that if that proved to be wrong, the agreement would lapse. I did so because it was easier to deal with the point in argument at the end of the trial. The argument is, however, without merit. In substance, Mr Butler is trying to make the letters of 9 May 2002 and 24 February 2003 form the basis of a collateral contract to the settlement agreement, and to spell out of the letters an agreement that average applied and that, if it did not, the compromise agreement was of no effect. In my judgment, no such unusual agreement, express or implicit, can be derived from the letters. Nor can it possibly be said, as was argued by Mr Butler, that it was the obvious but unexpressed intention of the parties when they agreed to the compromise agreement that it should be subject to any condition precedent. On the contrary, they intended the agreement to be final. If Kyle Bay wanted to reserve its position, it should have said so expressly. As Maurice Kay LJ said in Brennan at §22:

This action fails. I realise that it might seem harsh that Kyle Bay should be held to an agreement which has resulted in it recovering substantially less than it would have been entitled to. But many compromises result in one party or the other doing less well than he would have done if the claim had been fought through, and the law favours upholding compromises. Moreover, Kyle Bay may not be without other adequate remedy elsewhere, but that will be for another day.