Bache & Ors v Zurich Insurance Plc

Between 2005 and 2007, Mr and Mrs Bache and 21 other purchasers (“the purchasers”) entered into Agreements for Lease with JR Developments Ltd (“JRD”) or Gold Homes (The Wave) Ltd (“Gold” or, collectively, the “vendors”) in relation to flats in Block A yet to be built at the “Wave” development in Middlesbrough, Cleveland. Several of the purchasers bought two flats. The purchasers each paid a 10% deposit to the vendors. The vendors were required to construct and complete the flats and common parts. There was another block (B) being developed on the site. Although, I am told, Block B was constructed, no work was done by the vendors on Block A. By letter dated 16 February 2010, the purchasers’ solicitors wrote to the vendors, it being believed that JRD had assigned to Gold, purporting to accept the vendors’ failure to complete the construction as repudiation of the Agreements for Lease, and seeking the return of the deposits, totalling £357,800, and costs. In April 2011, Gold was placed in administration on 8 April 2011, being dissolved in early January 2013, albeit notice thereof was given on 24 September 2012; it seems likely that Gold and its associated companies were collectively in debt to a relatively massive scale. None of the deposits were ever repaid to the purchasers.

Zurich Insurance PLC (“Zurich”) provide a competitive insurance product comparable to the NHBC cover which provided at least at one stage the only well known 10 year cover for new built dwellings. Zurich provided the cover at the behest of Gold. It was for the benefit of the purchasers. The Zurich cover related to two periods, first up to the time when the building in question had been acceptably completed and the second thereafter. For the first period, Zurich said in the Introduction to the policy that “the policy protects you if your developer goes into liquidation…against the loss of contract exchange deposit…”

Zurich has not paid out as against the claims made by the purchasers for sums represented by their lost deposits. Thus, the matter came to this Court via the General List of the Queen’s Bench Division. There are a number of matters in dispute on the pleadings but some fundamental issues were identified by the parties to be dealt with as preliminary issues.

The Introduction to the Policy, of which it forms part, states:

“By way of summary, and subject to the conditions and any endorsements printed on the certificates the policy protects you if your developer goes into liquidation or is made bankrupt against the loss of contract exchange deposit and the repair of certain types of damage caused by building defect in the first 2 years or one year if your new home include a conversion …

If the developer is not in liquidation, or has not been made bankrupt, but nonetheless unreasonably refuses to meet its repair obligations within a reasonable period, we will help to resolve a dispute between you and the developer by giving advice about the extent o cover available under the policy…”

The reference to certificates is firstly to the “building period certificate” defined (at Page 4) as:

“The certificate issued by us when the new home has been registered with us prior to completion. By issuing this certificate we are confirming that cover under Section 1 of the policy is in place…”

The “Insurance certificate” was to be issued by Zurich “to signify acceptance of the new home for insurance under this policy”.

Section 1 of the Policy stated:

“What we will pay before the new home is completed:

1.

We will pay where, due to the developer’s bankruptcy, liquidation or fraud, the developer fails to complete the construction of the new home in accordance with the requirements and the buyer loses a deposit paid to the developer under the terms of the purchase contract for the new home, we will at our option

(a)

Pay the reasonable cost of completing the home to the original specification; or

(b)

Pay to the buyer the amount of any such lost deposit.”

“Requirements” were defined as those “contained within the technical manual issued by us” (Page 6). The “new home” was the “new property or conversion described in the building period certificate and/or the insurance certificate” and included the common parts, amongst other things (Page 5).

There was a box opposite the Section 1 wording headed “What we will not pay” which included:

“Any sum exceeding 10% of the purchase price declared by us to the developer…

Any claim made after the legal completion of the purchase by the first buyer of the new home…”

Section 2 covered the two years from the effective date (the later of exchange of contracts with the first buyer or the effective date of cover on the insurance certificate) against broadly certain types of damage, poor sound insulation or danger to health and safety. Section 3 covered the period thereafter up to 10 years against “major physical damage” and danger to health and safety (in specified respects).

The insurance Conditions (Page 13) have relatively common clauses including subrogation rights. Clause 10 provided for termination of the policy when Zurich accepted a claim under Section 1 of the policy.

Gold did not accept that it was in breach of contract, for instance in its solicitor’s letter of 25 August 2010 to the Claimants’ solicitors. The latter first contacted Zurich in July 2011 following the appointment of Gold’s administrators telling them that the agreements for lease “had been rescinded” and seeking payment of the lost deposits. Zurich’s response on 5 July 2011 stated that it would only “consider loss of deposit claims due to the developer’s bankruptcy, liquidation or fraud” and that “as the developer is currently only in administration, we are unable to consider your loss of deposit claim at this stage”. Zurich instructed solicitors to address further letters from the claimants’ solicitors who in their letter dated 15 July 2011 deployed the defences which broadly are mounted in these proceedings, saying that the policy would not engage until liquidation and that the loss of deposits were “triggered” by the “rescission of the contracts”. Following some correspondence between the Claimants’ solicitors and the administrators about whether Gold should be put into liquidation, Zurich confirmed by e-mail dated 20 February 2012 to the administrators’ solicitors that “should the company enter dissolution, the policy will engage”.

The Claim was issued by the Claimants on 22 March 2013 and the Particulars of Claim sought the recovery of the lost deposits. Paragraph 12 stated;

“The Defendant…argued that the Seller’s administration (not being ‘bankruptcy, liquidation or fraud’) would not trigger payment under the wording of the Policy. However, without prejudice to the other defences the Defendant claims to have, the Defendant subsequently accepted that the Seller’s dissolution would do so”.

The Defence pleads a number of defences, with which this judgment is not concerned, but it does plead (at Paragraph 18) that “the construction of the development and/or the Claimants’ loss of deposit was or were not due to [Gold’s] liquidation” and that for the policy to respond the developer had to “be under a subsisting obligation to the purchaser to complete the new home, and it must be the developer’s liquidation which prevents it from discharging such obligation”; even if administration was covered by the word “liquidation”, Gold had no obligation at the time of the administration to complete the development. The failure by Gold to complete was due to the “purported acceptance of [Gold’s] alleged repudiatory breach rather than as a result of [Gold’s liquidation]”. At Paragraph 12, Zurich denied that the e-mail dated 20 February 2012 amounted to an admission of the Claimants’ claims, going on:

“The statement goes no further than stating that dissolution would fall within the meaning of “bankruptcy, liquidation or fraud”. Further or alternatively and to the extent necessary, any admission in that email is hereby withdrawn…”

Issue was taken by the Claimants in their Reply with all the defences adumbrated in the Defence and an estoppel was raised in relation to the contents of the e-mail of 20 February 2012.

Thus, it was that at the first CMC in the TCC the Court was presented with agreement that there should be two preliminary issues:

However, on 4 July 2014, notwithstanding the wording of Paragraph 12 of the Defence and the wording of the first preliminary issue, Zurich’s solicitor indicated that on further reflection dissolution would in principle suffice to trigger cover under the policy and that the issue of whether insolvent administration was covered did not arise. Following some further correspondence, there has been an unequivocal acceptance by Zurich through Counsel that dissolution would as a matter of definition come within the word “liquidation” in Section1 of the Policy.

Thus it was that, following discussion in Court at the start of the preliminary issues hearing, Issue 1 has been shelved, albeit that the Claimants through Counsel still reserve their position lest it becomes relevant; this is because it might wish to argue that insolvent administration should be considered as falling within liquidation. Issue 2 has been reformulated as follows:

“1.

Are the Claimants entitled to claim under the policy if:

a)

They accept the repudiatory breach on the part of the developer (in that the developer had failed to start or complete the development within a reasonable time); and

b)

Following such acceptance the developer enters liquidation or dissolution; and

c)

At the date of the acceptance [of the repudiation], the developer was as a matter of fact insolvent and such insolvency is the reason why it had not started or completed the development?

2.

Is the answer different if at the time of the acceptance the developer is not insolvent?”

Argument by Counsel followed broadly the positions taken in the pleadings with Mr Rigney QC and Ms Taylor arguing that the developer’s failure to complete must causatively be attributable to the liquidation or dissolution and that the words “fails to complete the construction” necessarily import a subsisting obligation on the part of the developer to complete; if there has been an accepted repudiation, that relieved the developer of any further obligation to complete the work. Mr Mowschenson QC and Mr Yell argued that the words “fails to complete the construction” simply mean that the developer does not complete the construction and it does not matter that there was no current and subsisting obligation on the part of the developer as at the date of the dissolution to complete the development. Both Counsel asserted with vigour that the other party’s interpretation was commercially absurd.

It is probably an abuse of Sherlock Holmes’ statement (“when you have eliminated the impossible, whatever remains, however improbable, must be the truth”) to say that, if both sides’ Counsel here are right as to the commercial absurdity of the other’s contractual interpretation, one must eliminate the most absurd and what is left even if absurd (albeit less so) must be the truth. It is not necessary to apply the great fictional detective’s words of wisdom to this case because the state of competing absurdities has not been reached.

The parties are not in dispute as to the law which broadly relates to in general to contractual interpretation and of insurance policies in particular. Lord Hoffmann set out the general approach in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, 912-913:

“(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] A.C. 749.

(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 Antaios Compania Naviera S.A. v. Salen Rederierna A.B. [1985] 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 common sense, it must be made to yield to business common sense."

Lord Steyn’s dictum in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 771 is informative:

“In determining the meaning of language of a commercial contact, and unilateral contract notices, the law generally favours a commercially sensible construction. The reason for this approach is that a commercial construction is more likely to give effect to the intention of the parties. Words are therefore interpreted in the way in which a reasonable commercial person would construe them. And the standard of the reasonable person is hostile to technical interpretations and undue emphasis on niceties of language” [p.771].

Insurance policies should be interpreted in the light of the commercial object of the insurance; in Cornish v Accident Insurance Co (1899) 23 QBD 452, at p.456, Lindley LJ said of a policy against accidental death or injury except for accidents happening “by exposure of the insured to obvious risk of injury”:

“”The object of the contract is to insure against accidental death and injuries, and the contract must not be construed so as to defeat that object, nor as to render it practically illusory…The real difficulty is to express the necessary qualification with which the words must be taken. In a case on the line, in a case of real doubt, the policy ought to be construed most strongly against the insurers; they frame the policy and insert the exceptions. But this principle ought only to be applied for the purpose of removing a doubt, not for the purpose of creating a doubt, or magnifying and ambiguity, when the circumstances of the case raised no real difficulty…"

This is picked up in Youell v Bland [1992] 2 Lloyd Rep 27 by Staughton LJ at page 134:

“There are two well established rules of construction, although one is perhaps more often relied on with success than the other. The first is that in case of doubt, wording to a contract is to be construed against a party who seeks to rely on it in order to diminish or exclude his basic obligation…The second is that, again in case of doubt, wording is to be construed against the party who proposed it for inclusion in the contract: it was up to him to make it clear.”.

An insurance policy “must be construed in the sense in which it would have been reasonably understood by [the insured] as the consumer”; see Cook v Financial Ins Co [1998] 1 WLR 1765 at p.1768 per Lord Lloyd, Lords Steyn and Hope agreeing with him.

Some reliance has been placed by Mr Mowschenson QC on the Consumer Protection legislation to reinforce his argument. The Unfair Terms in Consumer Contract Regulations 1999 provide the platform for this argument:

It is probably going to be an unusual case where a "consumer" type contract will be construed differently from an ordinary contract but one presumes that the legislature had in mind the real possibility that consumer contracts might be construed more adversely against the non-consumer party than might otherwise be the case. There is in any event by Paragraphs 6 and 7 a requirement that consumer contracts are written in "plain intelligible language". In my judgment, I am satisfied that, broadly at least in the context of what is in issue on this preliminary issue hearing, the language is plain and intelligible and it does not become less so simply because there is a dispute between insurer and insured as to what the meaning of Section 1 is.

One needs to consider the Introduction and Section 1 in this policy in the context of the fact that it relates to a series of agreements for lease between the insurer and various insured parties. Typically, those agreements recited that the vendors proposed to erect two blocks of flats at the relevant address and contained clauses that they would cause the individual flat and the building overall to be constructed and completed in accordance with planning permissions and building regulation consents and that a deposit of 10% of the purchase price would be payable. In some of the agreements for lease, those deposits were to be held by the vendor’s solicitors pending confirmation of the Zurich insurance. There was a requirement or the vendors to procure from Zurich the insurance policy in question.

One also needs to consider the commercial reality which must have been envisaged as the date of the insurance policies in question. That reality can be considered by answering the practical question as to when would circumstances arise which would give rise to the right to secure the return to the purchasers by the vendors of the deposits. In practice, the two most obvious and possibly only circumstances are either a repudiatory failure on the part of the vendors to start or complete the development or a refusal or inability on the part of the vendors to complete the long leases. The latter circumstance in practice (as indicated in the sample agreements for lease provided in the Court Bundle) could only arise where the flat construction had in physical terms been substantially completed. The parties to the policy must be taken therefore to have foreseen the real possibility of the deposits being recoverable in principle by the purchasers from the vendors if and when the latter had repudiated the agreements for lease by being unable or unwilling to proceed with construction of the flats.

One then turns to review the meaning of the words in Section 1 of the policy. It is however a legitimate exercise to consider the Introduction to the policy which is clearly incorporated within the policy (at Page 3). If Section 1 had not been incorporated, one could have little doubt that what was intended was that purchasers would recover their deposits if the vendors went into liquidation (or, as is now accepted, properly, by the insurer, if the vendors were dissolved). That is, after all, what the words say:

“…the policy protects you if your developer goes into liquidation against the loss of contract exchange deposit”

In a legitimate sense, one can, in construing Section 1, consider it in the light of the Introduction, albeit that the introductory words are said to be "subject to the conditions". It sets out in plain and intelligible language to purchasers of flats that that represents the protection that they will have if they sign up to an agreement for lease which contains a requirement that this insurance policy is provided for their benefit and protection.

One then turns to Section 1 and I make the following observations:

Mr Rigney QC with skill sought to argue that Section 1 recognised a temporal difference between those purchasers, such as the Claimants in this case who treated the non-commencement and non-completion of Block A as repudiatory, and those purchasers who did not do so but simply waited until the dissolution. In the latter case, on instructions, he informed the court that Zurich had paid and would pay out on the policy. This implied that the timing is important. However, in my judgment, this is a distinction without at least a commercial difference. The reality is (albeit that I make no factual finding) that, for one reason or another, this construction project looks as if it was never going to be completed by the vendors; particularly during times of recession as this country went through in the 2008 to 2012 period, this was a foreseeable type of problem. There is no obvious or logical reason why there should be a distinction between the two types of purchaser; one has the purchaser who is prepared to wait or who can not be bothered to do anything about the failure to complete the work and the purchaser who feels that he or she can not wait possibly for a very long time. In practice, the only way in which a purchaser in the latter category can try to secure the recovery of his or her deposits is to accept any repudiation on the part of the vendors. Somewhat illogically for Mr Rigney QC’s argument, if the Claimants in this case were as a matter of fact and law wrong to treat the non-commencement and non-completion of Block A as repudiatory and the vendors did not treat the Claimants’ conduct as repudiation, the Claimants would be entitled to recover because the agreements for lease would still subsist and they would then fall into the category of purchasers who had not effectively treated the vendors’ behaviour as repudiatory.

One of the consequences of the liquidation or dissolution in this case is that the vendors no longer exist and therefore they will not complete the development and the purchasers from that time also actually lose any prospect of recovering the deposit. The two options which the insurer has under Section 1 if the policy is engaged will in practice more often than not be the payment of the lost deposit; the other option might conceivably arise if the new home is nearly completed but the vendors go into liquidation and the insurer or pays for the cost of completing the home. There is no issue in this case that the fact that the cost of completing the home option is in practice not available makes any difference.

Insolvency of the vendors is not in itself an event which engages the policy. That is not only because there are different tests for insolvency and there may be technically momentary and fleeting insolvency but also because it is not identified as such as an event. The foreseeability of insolvency of developers is clear. Its relevance is simply as a matter of background in the interpretation of Section 1 because the primary reason why a developer "fails to complete the" given construction will be its insolvency or financial inability to fund the development. It is mainly because that factor will commonly and foreseeably be the true underlying cause of the failure to complete the construction that the words "the developer fails to complete" mean simply that the developer does not complete.

I can and do accept that Section 1 of the policy is not engaged unless and until it can be said that there is bankruptcy, liquidation (including dissolution) or fraud. Otherwise, there would have been no need to mention these contingencies.

The answer to the re-formulated issue is as follows:

The legal teams for the parties should seek to agree the terms of the declarations on the preliminary issue as reformulated. Broadly, at least, there is to be judgment for the Claimants on the preliminary issue.