Bluebon Ltd v Ageas (UK) Ltd & Ors [2017] EWHC 3301 (Comm)

[2017] EWHC 3301 (Comm)

Case No CL-2016-000119

IN THE HIGH COURT OF JUSTICE

BUSINESS AND PROPERTY COURTS

OF ENGLAND AND WALES

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

Venue Rolls Building, Fetter Lane

Date 15/12/2017

London EC4A 1NL

Before

THE HONOURABLE MR JUSTICE BRYAN

Between

BLUEBON LIMITED (IN LIQUIDATION)Claimant

(1) AGEAS (UK) LIMITEDDefendant

Formerly known as FORTIS INSURANCE LIMITEDDefendant

(2) AVIVA INSURANCE LIMITEDDefendant

(3) TOWERGATE UNDERWRITING GROUP LIMITEDDefendant

Alex Hall Taylor (instructed by Stewarts Law LLP) for Claimant

Graham Eklund QC and Nicholas Broomfield

(instructed by Plexus Law) for First and Second Defendants

Bob Moxon Browne QC and Lucas Fear-Segal

(instructed by Kennedys) for Third Defendant

Hearing Hearing dates: 9 and 10 October 2017

Judgment Approved

Introduction

[1]The parties appear before the Court on the hearing of a preliminary issue as to the proper construction of a policy of insurance (the “Policy”) taken out by the Claimant Bluebon Limited (the “Insured”), which is now in liquidation, pursuant to which the First and Second Defendants (“Insurers”) provided insurance to the Insured in respect of the Star and Garter Hotel in Linlithgow West Lothian (“the Hotel”) against various risks including Buildings (Section A), Contents (Section B), Business Interruption (Section C), Liability (Section D), Money (Section E), Frozen Food (Section F), Loss of Licence (Section G), Book Debts (Section H), as well as Commercial Legal Protection, Equipment Breakdown and Key Person Cover.

[2]The insurance was arranged by the Third Defendant, the insurance brokers Towergate Underwriting Group Limited (“Towergate”). The period of insurance was from 3 December 2009 until 2 December 2010, “[a]nd any subsequent period for which the insurers shall accept a premium at renewal date” and so was a 12 month policy, albeit it contemplated the possibility that the Insurers, at Insurers’ option (given the words “for which Insurers shall accept a premium”) might agree to the Policy’s renewal (assuming the Insured sought the same).

[3]The Insured had purchased the Hotel in December 2007. Towergate had arranged the Insured’s cover for the prior year. That cover was provided by Towergate Commercial Underwriting and underwritten by a consortium of leading insurers. The renewal premium had increased to £4,181.42, including IPT. Mr Phillips (of Towergate) had obtained an alternative quotation from Primary General of £3,600.53 including IPT and insurer fee, which he provided to Mr Bartlett of the Insured at a meeting on 20 November 2009. It was Primary General which provided the insurance from 3 December 2009, underwritten by the Insurers. The eventual premium was £3,239.80, a saving of £941.62.

[4]There had been an inspection of the electrical installation at the Hotel in September 2003 and a Certificate entitled “Periodic Inspection Report for an Electrical Installation…requirements for electrical installations BS7671 IEE Wiring Regulations” was issued on or about 16 September 2003 by an electrician (the “Certificate”). The Certificate identified that the estimated age of the electrical installation was not known, but that there had been “alterations or additions” estimated at 6 years previously. The Certificate provided that the inspection had been carried out in accordance with BS7671 IEE Wiring Regulations as amended, and that, “Cables concealed within trunking and conduits or cables and conduits concealed under floors, in roof spaces and generally within the fabric of the building or underground [had] not been inspected.” The Certificate recommended that the installation be further inspected and tested not more than 10 years hence (i.e. by September 2013).

[5]In the Policy Schedule (at page 4 thereof) underneath the heading “Special Conditions and Endorsements” (which then stated as already quoted above), there were then stated five provisions, namely “DFF1- Deep Fat Frying Warranty”, “MCR – Money Carrying Warranty”, “PGO001 – Electrical Installation Inspection Warranty”, “PGO002 – Daily Waste Warranty”, “PGO003 – Portable Heating Warranty” and “PGO004 – Index Linking”, below which it was stated, “Survey required within 30 days”.

[6]“PGO001 – Electrical Installation Inspection Warranty”, which will be referred to, for ease of reference only, as the “Electrical Inspection Warranty”, and which is at the heart of preliminary issue, provided as follows:

“PGO001 – Electrical Installation Inspection Warranty It is warranted that the electrical installation be inspected and tested every five years by a contractor approved by the National Inspection Council for Electrical Installation Contracting (NICEIC) and that any defects be remedied forthwith in accordance with the Regulations of the Institute of Electrical Engineers.”

[7]The Hotel was destroyed by fire on 15 October 2010 (i.e. during the currency of the Policy). The losses claimed total just under £1,750,000 made up of the full Policy indemnity for buildings cover of £1.3 million, business interruption losses, the full Policy indemnity for contents of £118,750 and expenses associated with the liquidation, together with a claim for interest of over £750,000.

[8]There is no evidence that the electrical installation of the Hotel had been inspected and tested within the 5 years preceding the commencement of the Policy (on 3 December 2009). Nor was it inspected at the time of inception of the Policy or at any time prior to the fire.

[9]In a letter on 21 December 2010 (the “Letter”) written by UK General on behalf of Insurers to the Insured, and after quoting the words of the Electrical Inspection Warranty, and referring to the fact that it appeared that during the 5 year period prior to the date of inception of 3 December 2009 no inspection of the electrical installation of the premises had been carried out, it was stated:- “This means:- 1. You are therefore in breach of the Electrical Installation Inspection Warranty PG001. For that reason we hereby void the above policy from inception on 3 December 2009; and 2. Alternatively, cover under the policy was suspended from the date of inception of 3 December 2009 and accordingly the policy would not respond to this claim.”

[10]Consistent with their contention that the Policy was void, the Insurers stated that they were obliged to refund the premium of £3,239.80 and the Insured was obliged to refund a sum of £7,948.56 (which Insurers’ had paid in respect of a burst pipe claim in January 2010). Although the Letter referred to Insurers “void[ing] the policy from inception”, it is clear enough that what Insurers were asserting (as their primary position) was that the Policy was void ab initio from inception and that they had never come on risk on the basis of an allegation that the Electrical Inspection Warranty, on its proper construction, was a true warranty within the meaning of section 33 of the Marine Insurance Act 1906 and the Insured had allegedly breached that warranty. In the alternative Insurers were asserting that the Electrical Inspection Warranty was a suspensive warranty whereby all cover was suspended from date of breach (in the present case from inception) until the suspensive warranty was complied with (and regardless of whether the non-compliance with the suspensive warranty was causally linked to the loss) (which I shall refer to as a “Suspensive Warranty”).

[11]It is common ground between the parties that following breach of a true warranty (hereinafter a “Warranty”) discharge of the insurer from any liability at all on the policy is automatic, and is not dependent upon a decision by the insurer to treat the contract as at an end – see section 33 of the Marine Insurance Act 1906 and The Good Luck

[1992] 1 AC 233

[12]Towergate, and the Insured, also accept that it is possible that a provision in an insurance policy that is properly characterizable as a Suspensive Warranty will have the effect that all cover is suspended from date of breach until the Suspensive Warranty was complied with (and regardless of whether the non-compliance with the Suspensive Warranty was causally linked to the loss) but submit that the Electrical Inspection Warranty is neither a Warranty nor a Suspensive Warranty but was merely a term of the Policy requiring compliance as a condition precedent to Insurers’ liability to provide cover in respect of risks to which the stipulation related with the effect of suspending such cover in the event of non-compliance for so long as such non-compliance subsisted. I shall refer to such construction as the “Risk Specific Condition Precedent”. They say that there is no evidence that the fire was caused by the electrical installation (which they say was the risk to which the stipulation related) and so the Risk Specific Condition Precedent, even if it was breached/not complied with, is irrelevant and Insurers are liable to indemnify the Insured.

[13]On 24 January 2011 the Insurers wrote to Towergate in response to a letter they had received from Towergate dated 11 January 2011, in which Towergate had asserted that the five year period referred to in the Electrical Inspection Warranty was five years from the inception of the Policy. In their letter in response the Insurers stated that “The interpretation which is placed on the Warranty [by the Insured] would in our view render the Warranty meaningless in annual policies.”

[14]No claim was initially pursued against Insurers. Following the liquidation of the Insured, Stewarts Law were instructed to act on behalf of the Joint Liquidators. On 24 July 2013 Stewarts Law wrote to Towergate asserting a claim on behalf of the Liquidators for breach of contract and negligence (in relation to the broking of the risk). Correspondence ensued between Stewarts Law and Kennedys (for Towergate) and on 10 November 2014 Stewarts Law wrote to Insurers advising them that they would be named as co-defendant along with Towergate in proceedings that were in due course commenced.

[15]In the Amended Particulars of Claim served on 22 June 2016, the Insured claims against the Insurers on the basis that, on the true construction of the Policy and the Electrical Inspection Warranty, Insurers should have indemnified the Insured under the Policy and the Insurers are liable in damages in the amounts the Insured should have received if indemnified under the Policy, it being asserted that the avoidance of the claim and/or rejection of the claim was wrongful, was based upon an incorrect construction of the Policy wording, and constituted a repudiatory breach of the Policy which the Insured had accepted. In its claim against Towergate the Insured asserts that Towergate was in breach of its duties owed to the Insured in failing to bring the Electrical Inspection Warranty to the express notice of the Insured, or explain its nature and effect, or arrange alternative insurance without the Electrical Inspection Warranty, or advise as to the best ways of acting so that its business procedures conformed to the requirements of the Policy (including advising that an electrical installation inspection/test be carried out prior to inception), in the light of which the Insured would either have sought and obtained alternative cover or carried out an electrical installation inspection/test before inception or before the fire.

[16]In their Defence, the Insurers maintained that the Electrical Inspection Warranty, on its proper construction, required that the electrical installation be “inspected and tested every five years” from the date of the last inspection (and before Insurers came on risk in the event that the electrical installation insured had not been inspected and tested in the last five years), that this had not taken place, and as the Electrical Inspection Warranty was a true Warranty, or a Suspensive Warranty, Insurers were under no liability to the Insured. In its Defence Towergate denied any breach of duty on its part, and broadly aligned itself with the Insured in relation to the issues that arise as to the proper construction of the Electrical Inspection Warranty. For this reason it was agreed that I hear the submissions from the Insurers first, followed by Towergate, followed by the Insured, and then Insurers in reply, and matters so proceeded.

[17]If Insurers are right in their pleaded case that the Electrical Inspection Warranty is a true Warranty or Suspensive Warranty and that the same was not complied with, it matters not what the cause of the fire was – it is common ground that on either construction the Insurers would be under no liability to the Insured. Set against that backdrop the approach of the Insurers (at least to date) has not been to advance any positive case as to the cause of the fire, and the same has not been established (as recorded in the third sentence of the “factual background and the claim” in paragraph 1 of the Preliminary Issue Wording).

[18]In the Insured’s Skeleton Argument on this hearing, it was stated at paragraph 2 that, “there is no suggestion from any of the parties that it was caused by the electrical installation at the Hotel or any defect in it.” At paragraph 3 of the Insurers’ Skeleton Argument on this hearing reference was made to a Mr Barr of Burgoynes having been instructed to investigate the cause of the fire and that he had reported on 11 November 2010, it being stated that he had concluded:

“Based on the evidence that is currently available, the only likely cause of a fire that originated in one of the aforementioned voids is an incendive electrical fault.”

And that he had added:

“I note that there does not appear to have been any recent periodic inspection or test of the fixed electrical installation in the premises. In this regard, the Institute of Electrical Engineers Wiring Regulations (17th Edition): Requirements for Electrical Installations, Guidance Note 3: Inspection and Testing recommends that in hotels, the maximum period between periodic inspection and testing by an appropriately qualified electrician should be five years.”

[19]The cause of the fire (if relevant and it would only be relevant if the Electrical Inspection Warranty was a Risk Specific Condition Precedent related to the electrical installation) is not the subject matter of the preliminary issue (and by its nature would probably not have been suitable for determination as a preliminary issue). At the hearing before me, and in the light of the arguments advanced in the Skeleton Arguments of the Insured and Towergate, Graham Eklund QC on behalf of Insurers indicated that if the Electrical Inspection Warranty was, contrary to Insurers’ case, found not to be a Warranty or a Suspensive Condition but a Risk Specific Condition Precedent then Insurers would wish to consider advancing, hereafter, a positive case as to the cause of the fire in an amended Defence. For their part, Bob Moxon Browne QC on behalf of Towergate and Alex Hall Taylor on behalf of the Insured, put a marker down that any future amendment application on the part of Insurers to amend their Defence to advance a positive case as to the cause of the fire would be opposed.

[20]On 23 March 2017 Knowles J ordered that there be a trial of certain preliminary issues which are the preliminary issues that arise before me, save that, in the light of the arguments that emerged from the Skeleton Arguments before me as to whether the Electrical Inspection Warranty was to be construed as a Risk Specific Condition Precedent the parties submitted amended Preliminary Issues with a view to addressing this issue (albeit they submitted three different formulations of that additional issue).

[21]It would be fair to say that little time was spent before me addressing the specific preliminary issues as drafted, and instead the parties focussed on the key issues between them, as developed before me which were, in summary:-(1) Whether the Electrical Inspection Warranty required the electrical installation be “inspected and tested every five years” a) from the date of the last inspection (and if not previously inspected and tested that it required the electrical installation to be inspected and tested at or prior to inception of the Policy), as submitted by the Insurers, or b) from the date of Policy inception, as submitted by the Insured and Towergate.

(2) Whether the Electrical Inspection Warranty was a) A true warranty (Warranty), as submitted by Insurers, or b) A Suspensive Warranty suspending either all cover under the Policy alternatively all cover under the Policy for losses arising out of fire, as submitted by the Insurers (in the alternative), or c) A term of the Policy requiring compliance as a condition precedent to Insurers’ liability to provide cover in respect of risks to which the stipulation related (Risk Specific Condition Precedent).

(3) Whether the Insurers’ action in purporting to avoid the Policy completely, or alternatively treating the whole Policy as suspended from inception of the Policy was a wrongful repudiation of the Policy which had been accepted by the Insured and which entitled the Insured to such damages as it may prove.

[22]For completeness, however, I set out below the Preliminary Issues as ordered by Knowles J (including his amendment to paragraph 13(c)(iv) underlined). I identify in bold below (at paragraph 13(d)(i)) the essence of the additional issue that was developed before me:- “Proposed preliminary issues Whether or not, on its proper construction (or due to any ambiguity or any aid to its construction), the Warranty:a. should be construed with regard to the rules of construction and/or any applicable aids to its construction and/or applicable industry guidelines, and if so what rules and/or aids to construction and/or guidelines; and

b. Was a suspensive condition, not a true warranty, that:

(i) should be read as a current or future obligation by reason of the use of the words “be inspected” and “be remedied” and/or whether it should be read as if the word “will” was included prior to each, such that the electrical installation “will be inspected” and “will be remedied” in the event of defects being found;

(ii) constituted a stipulation that the electrical installation should be inspected and tested every five years during the currency of the period prospectively from the date of the Policy’s inception

(iii) taken together with the term pleaded in paragraph 10 above, in the event of subsequent renewals of the Policy had the effect of ensuring that the 5-year requirement for inspection and testing was calculated from the date of the first Schedule containing the relevant stipulation and endured to the benefit of the First and Second Defendants, at least to the extent that the Claimant’s past obligations were relevant for continuing cover;

(iv) was a composite obligation which included an obligation to remedy defects found on the stipulated inspections and tests; and to carry out such remedial work in accordance with current IEE (now IET) Regulations.

(v) represented (taken with the Claimant’s declaration) only a statement of current intention of the Claimant at the time of the Policy’s inception that going forward the electrical installation would be inspected and tested every five years and that it would remedy any defects found in accordance with current IET Regulations or

c. Was a warranty (whether a true warranty or a suspensive warranty), that: (i) provided that every five years the electrical installation required inspection and testing within the five year period running from the date of the last inspection and the remedying of defects found as a result of such inspection; (ii) meant that if there had been no inspection and remedying of defects with the period of five years prior to inception, that the Claimant was in breach of warranty from inception unless and until an inspection had taken place after inception and such defects as were found were remedied; (iii) warranted that at some time in the five years prior to the Fire, the electrical installation at the Hotel had been inspected and remediated; (iv) had if not complied with by the Claimant and therefore entitled the First and Second Defendants to avoid the Policy and/or to refuse to indemnify the Claimant for losses arising from the Fire.

d. If the warranty was a suspensive warranty, and not a true warranty: (i) did it operate to suspend cover from the time that the Claimant was in breach of warranty, namely (for the reasons set out in paragraphs 13(c)(i) - (iv) above) from the date of inception in respect of: (a) all cover under the Policy; or (b) all cover under the Policy for losses arising out of fire; or (c) all cover under the Policy for losses arising out of fire caused by the electrical installation. (ii) were the First and Second Defendants entitled (by 21 December 2010) to avoid the Policy or was the purported avoidance of the Policy by the letter of 21 December 2010 in repudiatory breach of the Policy; (iii) if the letter and purported avoidance of the Policy was in repudiatory breach of the Policy, has the Claimant accepted that repudiatory breach; and if so, is it now open to the First and Second Defendants to rely on the Warranty as a suspensive condition. (i) should be read as a current or future obligation by reason of the use of the words “be inspected” and “be remedied” and/or whether it should be read as if the word “will” was included prior to each, such that the electrical installation “will be inspected” and “will be remedied” in the event of defects being found; (ii) constituted a stipulation that the electrical installation should be inspected and tested every five years during the currency of the period prospectively from the date of the Policy’s inception (iii) taken together with the term pleaded in paragraph 10 above, in the event of subsequent renewals of the Policy had the effect of ensuring that the 5-year requirement for inspection and testing was calculated from the date of the first Schedule containing the relevant stipulation and endured to the benefit of the First and Second Defendants, at least to the extent that the Claimant’s past obligations were relevant for continuing cover; (iv) was a composite obligation which included an obligation to remedy defects found on the stipulated inspections and tests; and to carry out such remedial work in accordance with current IEE (now IET) Regulations. (v) represented (taken with the Claimant’s declaration) only a statement of current intention of the Claimant at the time of the Policy’s inception that going forward the electrical installation would be inspected and tested every five years and that it would remedy any defects found in accordance with current IET Regulations (i) provided that every five years the electrical installation required inspection and testing within the five year period running from the date of the last inspection and the remedying of defects found as a result of such inspection; (ii) meant that if there had been no inspection and remedying of defects with the period of five years prior to inception, that the Claimant was in breach of warranty from inception unless and until an inspection had taken place after inception and such defects as were found were remedied; (iii) warranted that at some time in the five years prior to the Fire, the electrical installation at the Hotel had been inspected and remediated; (iv) had if not complied with by the Claimant and therefore entitled the First and Second Defendants to avoid the Policy and/or to refuse to indemnify the Claimant for losses arising from the Fire. (i) did it operate to suspend cover from the time that the Claimant was in breach of warranty, namely (for the reasons set out in paragraphs 13(c)(i) - (iv) above) from the date of inception in respect of: (a) all cover under the Policy; or (b) all cover under the Policy for losses arising out of fire; or (c) all cover under the Policy for losses arising out of fire caused by the electrical installation. (ii) were the First and Second Defendants entitled (by 21 December 2010) to avoid the Policy or was the purported avoidance of the Policy by the letter of 21 December 2010 in repudiatory breach of the Policy; (iii) if the letter and purported avoidance of the Policy was in repudiatory breach of the Policy, has the Claimant accepted that repudiatory breach; and

[23]Thus the formulation in paragraph 13(d)(i) above encompasses the possibility that any Suspensive Warranty suspended all cover under the Policy (as advocated by Insurers) or all cover under the Policy for losses arising out of fire (as advocated by the Insurers in the alternative) or all cover under the Policy for losses arising out of fire caused by the electrical installation (as advocated by the Insured and Towergate in terms of a Risk Specific Condition Precedent). Applicable Principles

B.1 Construction of contractual provisions including in insurance contracts

[24]The applicable principles of contractual construction, which also apply to the construction of insurance contracts, are well established and were common ground between the parties. The Insured referred, in particular, to the judgment of the Supreme Court in Rainy Sky v Kookmin Bank

[2011] 1 WLR 2900

at [14] to [30], Mr Hall Taylor, on behalf of Insured, extracting the following principles from the judgment: a) the ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant [14]; b) the mere fact that a term in the contract appears to be particularly unfavourable to one party or the other is irrelevant [19]; c) words should be given their natural and ordinary meaning as understood by ordinary people having background knowledge reasonably attributable to parties in the position of the contracting parties at the material time (i.e. ordinary people of ordinary intelligence with a reasonable understanding of insurance) [20]; d) where the parties had used unambiguous language the court should apply it, but it was not necessary to conclude that unless the most natural meaning of the words produced a result so extreme as to suggest that it was unintended, the court had to give effect to that meaning. The court should have regard to all the relevant surrounding circumstances and if there were two possible constructions the court was entitled to prefer the construction which was consistent with business common sense and to reject the other [21]-[30]. The Insured also prayed in aid the contra proferentem principle that any ambiguity should be construed against the draftsman of the contract, here Insurers.

[25]Towergate referred to the well known words of Lord Hoffmann in Investors Compensation Scheme v. West Bromwich B.S.

[1998] 1 WLR 896

and the judgment of Lord Clarke JSC in Rainy Sky, and identified that primacy should be accorded to the rule that words should be given their natural and ordinary meaning, as understood by reasonable people, having the background knowledge reasonably attributable to parties in the position of the contracting parties at the time of the contract.

[26]In relation especially to insurance policies, it follows that the words used ought to be given the interpretation which having regard to the context and circumstances, would be placed on them by ordinary men of normal intelligence conversant with the subject matter of the insurance - see MacGillivray 11th Edit. 10-052, cited with approval by Flaux J in A.C. Ward & Son v. Catlin(Five) Ltd

[2010] 2 All ER 683

at [164].

[27]In case of doubt or ambiguity, preference will be given to a construction which accords with business commonsense - see Antaios Compania Naviera SA v. Salen Rederierna AB (“The Antaios”)

[1985] AC 191

, per Lord Diplock at 201. This process can involve looking at the commercial consequences of any particular construction - see Re Sigma Finance Corp

(2009) UKSC 2

per Lord Mance at [12].

[28]Insurers referred to the principles identified by Lord Neuberger JSC in Arnold v Britton

[2015] AC 1619

at [14]-[23] (with whom Lord Sumption and Lord Hughes JJSC agreed), in particular what was said by Lord Neuberger at [15]-[17], emphasising that the Court is required positively to ascertain what the language in the contract means:- “15 When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean", … And it does so by focussing on the meaning of the relevant words,… in their documentary, factual and commercial context. That meaning has to be assessed in the light of(i) the natural and ordinary meaning of the clause,

(ii) any other relevant provisions of the lease,

(iii) the overall purpose of the clause and the lease,

(iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and

(v) commercial common sense, but

(vi) disregarding subjective evidence of any party's intentions… 16 For present purposes, I think it is important to emphasise seven factors. 17 First, the reliance placed in some cases on commercial common sense and surrounding circumstances (eg in Chartbrook

[2009] AC 1101

, paras 16-26) should not be invoked to undervalue the importance of the language of the provision which is to be construed. The exercise of interpreting a provision involves identifying what the parties meant through the eyes of a reasonable reader, and, save perhaps in a very unusual case, that meaning is most obviously to be gleaned from the language of the provision. Unlike commercial common sense and the surrounding circumstances, the parties have control over the language they use in a contract. And, again save perhaps in a very unusual case, the parties must have been specifically focussing on the issue covered by the provision when agreeing the wording of that provision.”

[29]Whilst there was, for a time, a debate as to whether the decision in Arnold v Britton had “rowed back” from the guidance on contractual interpretation given in Rainy Sky, Lord Neuberger in Wood v Capita Insurance Services Limited

[2017] 2 WLR 1095

made clear that this was not the case, stating at paragraphs [10] to [15] that:

"10 The court's task is to ascertain the objective meaning of the language which the parties have chosen to express their agreement. It has long been accepted that this is not a literalist exercise focused solely on a parsing of the wording of the particular clause but that the court must consider the contract as a whole and, depending on the nature, formality and quality of drafting of the contract, give more or less weight to elements of the wider context in reaching its view as to that objective meaning. In Prenn v Simmonds [1971] 1 WLR 1381 (1383H-1385D) and in Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 (997) , Lord Wilberforce affirmed the potential relevance to the task of interpreting the parties' contract of the factual background known to the parties at or before the date of the contract, excluding evidence of the prior negotiations. When in his celebrated judgment in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 Lord Hoffmann (pp 912-913) reformulated the principles of contractual interpretation, some saw his second principle, which allowed consideration of the whole relevant factual background available to the parties at the time of the contract, as signalling a break with the past. But Lord Bingham in an extra-judicial writing, A new thing under the sun? The interpretation of contracts and the ICS decision Edin LR Vol 12, 374-390, persuasively demonstrated that the idea of the court putting itself in the shoes of the contracting parties had a long pedigree. 11 Lord Clarke elegantly summarised the approach to construction in Rainy Sky at para 21f. In Arnold all of the judgments confirmed the approach in Rainy Sky (Lord Neuberger paras 13-14; Lord Hodge para 76; and Lord Carnwath para 108). Interpretation is, as Lord Clarke stated in Rainy Sky (para 21), a unitary exercise; where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense. But, in striking a balance between the indications given by the language and the implications of the competing constructions the court must consider the quality of drafting of the clause ( Rainy Sky para 26, citing Mance LJ in Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd (No 2) [2001] 2 All ER (Comm) 299 paras 13 and 16); and it must also be alive to the possibility that one side may have agreed to something which with hindsight did not serve his interest: Arnold (paras 20 and 77). Similarly, the court must not lose sight of the possibility that a provision may be a negotiated compromise or that the negotiators were not able to agree more precise terms. 12 This unitary exercise involves an iterative process by which each suggested interpretation is checked against the provisions of the contract and its commercial consequences are investigated: Arnold para 77 citing In re Sigma Finance Corpn [2010] 1 All ER 571, para 10 per Lord Mance. To my mind once one has read the language in dispute and the relevant parts of the contract that provide its context, it does not matter whether the more detailed analysis commences with the factual background and the implications of rival constructions or a close examination of the relevant language in the contract, so long as the court balances the indications given by each. 13 Textualism and contextualism are not conflicting paradigms in a battle for exclusive occupation of the field of contractual interpretation. Rather, the lawyer and the judge, when interpreting any contract, can use them as tools to ascertain the objective meaning of the language which the parties have chosen to express their agreement. The extent to which each tool will assist the court in its task will vary according to the circumstances of the particular agreement or agreements. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. But negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement. There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type. The iterative process, of which Lord Mance spoke in Sigma Finance Corpn (above), assists the lawyer or judge to ascertain the objective meaning of disputed provisions. 14 On the approach to contractual interpretation, Rainy Sky and Arnold were saying the same thing. 15 The recent history of the common law of contractual interpretation is one of continuity rather than change. One of the attractions of English law as a legal system of choice in commercial matters is its stability and continuity, particularly in contractual interpretation."

[30]In the present case, and in relation to the issues of construction that arise, it matters not whether one starts from the text of the Policy, or its surrounding factual matrix. I readily accept that interpretation is, as Lord Clarke stated in Rainy Sky (para 21), a unitary exercise, and where there are rival meanings, the court can give weight to the implications of rival constructions by reaching a view as to which construction is more consistent with business common sense.

B.2 True Warranties

[31]A “true insurance warranty” (referred to in this judgment as a Warranty) is a term of the policy which takes effect as a condition precedent to the existence of any cover under it, rather than in relation to any particular risk, or claim or class of claims arising from that risk. Following breach of a true warranty discharge of the insurer from any liability at all on the policy is automatic, and is not dependent upon a decision by the insurer to treat the contract as at an end – see section 33 of the Marine Insurance Act 1906 and The Good Luck

[1992] 1 AC 233

per Lord Goff at 203.

[32]In this regard section 33 of the Marine Insurance Act 1906 provides:- “33(1) A warranty, in the following sections relating to warranties, means a promissory warranty, that is to say, a warranty by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts.

(2) a warranty may be express or implied.

(3) A warranty as above defined, is a condition which must be exactly complied with, whether it be material to the risk or not. If it be not so complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date.”

[33]All cover is vitiated under the policy from the date of breach of a true warranty, and this is so regardless of any nexus between the breach and the loss. As Lord Mansfield said in De Hahn v Hartley (1766) 99 ER 1130 at [345]-[346]:

“… a warranty must be strictly complied with. Suppose a warranty to sail on the 1st August, and the ship did not sail till the [2nd], the warranty would not be complied with. A warranty in a policy of insurance is a condition or a contingency, and unless that be performed, there is no contract. It is perfectly immaterial for what purpose a warranty is introduced; but, being inserted, the contract does not exist unless it is literally complied with.”

[34]The use of the word “warranty” is, but is no more than, an indication that a true warranty was intended, or as it has been put, a good starting point from which such an intention may be inferred – see Sugar Hut Group Ltd and Ors v. Great Lakes Reinsurance (UK) Plc and Ors [2011] Lloyds’ Law Rep IR 198, per Burton J at 41:

“41. The fact that the word “warranty” is used in the policy is a good starting point in favour of so construing it (see Colinvaux & Merkin's Insurance Contract Law Vol II at B-0137) but it is fair to say that, since a true warranty has the same impact as a condition precedent, in relation to whose effect there can be no doubt, and since in this policy there were expressed to be conditions precedent (e.g. the Waste Condition Precedent), there may be more room for argument. An alternative construction of such a warranty is that it is ‘merely’ a suspensory condition, i.e. whereby the obligation of the insurer is suspended during the period of breach. It may be easier to construe a warranty as a suspensory condition where the obligation by the insurer is to comply with some deadline (e.g. as in Kler Knitwear Ltd v Lombard General Insurance Co Ltd [2000] Lloyd's Rep IR 47 ) than where there is a warranty as to a state of affairs.”

[35]Other judges have questioned the utility of the word “warranty” even as a starting point. Thus Mackinnon J in Roberts v Anglo-Saxon Insurance Co (1926) Lloyds’ Law Rep. 154 at 157 stated:

““Warranted used only for the following purposes – Commercial travelling”

. Now nothing turns on the word “warranted”; the word “warranted” is always used with the greatest possible ambiguity in a policy. Because a phrase begins with the word “warranted” in a policy it does not by any means mean that that is a condition.”

[36]The fact that the operation of a true warranty is draconian, has led the courts to state that if underwriters want such protection then it is up to them to stipulate for it in clear terms. Thus as was said by Saville LJ (as he then was) in Hussein v Brown [1996] 1 Lloyd’s Rep. 627, 630:

“it must be remembered that a continuing warranty is a draconian term … the breach of such a warranty produces an automatic cancellation of the cover, and the fact that a loss may have no connection at all with that breach is simply irrelevant. In my view, if underwriters want such protection, then it is up to them to stipulate for it in clear terms.”

[37]Towergate refer to numerous other authorities to similar effect in relation to warranties and terms in insurances generally, both recent (eg Elafonissos Fishing and Shipping Co v. Aigonon Insurance Co

(2012) EWHC 1512

at [50]) and older (eg Hide v Bruce (1783) 3 Doug 213, Anderson v. Fitzgerald (1853) 4 HL Cases 484, 510, Provincial Insurance Co v. Morgan

(1933) AC 240

and Sweeney v. Kennedy (1948) 82 LL Rep 294 at 302).

[38]Examples where there have been express provisions spelling out that a term was a true warranty (by reference to the consequences of non-compliance with the same) include, AC Ward & Son Ltd v Catlin (Five) Ltd

[2010] 2 All ER 683

and Thomson v Weems (1884) 9 App Cases 671.

[39]In AC Ward & Son Ltd v Catlin (Five) Ltd the policy expressly provided :

“Whenever and wherever it is stated hereafter that a particular Section of the Policy of Insurance is subject to a Warranty, it is hereby declared and agreed that the said Warranty shall be deemed to apply to the whole Policy of Insurance and not just to the particular Section of the Policy, unless otherwise stated. A Warranty is a fundamental Term or Condition of the Insurance the breach of which voids the Contract from the time of breach.”

[40]A number of cases, including HIH Casualty & General Insurance v New Hampshire Insurance Co [2001] 2 All E.R. (Comm) 39, refer to the “root of the transaction” test when establishing the nature of a particular provision as a warranty. HIH concerned a dispute between the claimant insurer and the defendant reinsurers arising out of a policy of pecuniary loss indemnity insurance which provided collateral for the financing of six films. The peril insured was the risk that revenues from the “six revenue generating projects” concerned would fail to reach the sum insured within a certain period. It was held that the terms of both the insurance contracts and the reinsurance contracts alleged by the defendants to be warranties, namely the six-film or ten-film slates, were true warranties and were terms of both the insurances and reinsurances.

[41]At paragraphs 101 of his judgment in HIH Casualty Rix LJ stated as follows:- “101 In my judgment, once the six film term is established as a term of the insurance or reinsurance contract, the grounds for holding it to be a warranty are very strong. It is a question of construction, and the presence or absence of the word “warranty” or “warranted” is not conclusive. One test is whether it is a term which goes to the root of the transaction; a second, whether it is descriptive of or bears materially on the risk of loss; a third, whether damages would be an unsatisfactory or inadequate remedy. As Bowen LJ said in Barnard v. Faber

[1893] 1 QB 340

at 344:

“A term as regards the risk must be a condition.”

Otherwise the insurer is merely left to a cross-claim in a matter which goes to the risk itself, which is unbusinesslike ( ibid ; see also Ellinger & Co v. Mutual Life Insurance Company of New York

[1905] 1 KB 31

at 38). In the present case, the six film term would seem to answer all three tests. It is a fundamental term, for even if only one film were omitted, the revenues are likely to be immediately reduced. That will not matter if the revenues already exceed the sum insured, for in that case there can be no loss in any event. Where, however, the revenues fall below the sum insured, the loss of a single film may be the critical difference between a loss or no loss, and will in any event be likely to increase the loss. For the same reason the term bears materially on the risk. A cross-claim would be an unsatisfactory and inadequate remedy because it would never be possible to know how much the lost film would have contributed to revenues. The very fact that the making of the six films lies under the “INTEREST” line emphasises the importance of the term and its direct bearing on the risk…”

[42]Burton J quoted from this passage with approval in Sugar Hut, supra, at [41], stating that he derived considerable help from this passage. Sugar Hut concerned claims under a property and business interruption policy issued by the defendant insurers, insuring three night clubs in Brentwood, Fulham and Basildon. The policy contained what was entitled, “The Frying and Cooking Equipment (Kitchen) Warranty” (the “Kitchen Warranty”) which read:

“It is warranted that: … (b) all frying and other cooking ranges, equipment, flues and exhaust ducting will be kept securely fixed and free from contact with combustible materials; (c) all extraction hoods, canopies, filters and grease traps will be cleaned at least every 2 weeks; (d) all extraction ducts will be cleaned regularly and maintained and checked at least once every six months by a specialist contractor.”

(emphasis added)

[43]There were also terms referred to as a Burglar Alarm Warranty and a Waste Condition Precedent. A fire occurred at the Brentwood premises on 13 September 2009 causing substantial loss. The cause of the fire was never established, although it was clear that the origin of the fire was not in the kitchen ducting (as noted at paragraph 22 of the judgment). Insurers denied liability on four grounds(1) non-disclosure of facts relating to companies (defined as the “Old Companies”),

(2) breach of the Kitchen Warranty;

(3) breach of the Burglar Alarm Warranty and

(4) breach of the Waste Condition Precedent. Burton J held that insurers were entitled to avoid the policy for non-disclosure in relation to the Old Companies, and if they had not been so entitled they were excused liability by virtue of the insured’s breaches in respect of the Kitchen Warranty and Burglar Alarm Warranty at Brentwood, there being no breach of the Waste Condition Precedent.

[44]In relation to the Kitchen Warranty, Burton J found that this was not a true warranty but a suspensive warranty / suspensive condition continuing at the date of the fire so there was no cover under the policy (including in respect of the fire), even though there was no causal connection between the breach of the Kitchen Warranty and the fire. Insurers place particular reliance on Burton J’s reasoning as they say identical issues arise in relation to the proper construction of the Electrical Inspection Warranty. In this regard whilst recognising that every case turns on its own facts, Insurers invite me to follow Burton J’s reasoning and construe the Electrical Inspection Warranty to like effect. Insurers also refer me to what is said by the editors of MacGillivray on Insurance Law (13th Edit.) at para 11-002 about the court’s approach where similar provisions to those under consideration by the court have been construed by a court of the same or higher jurisdiction in the past.

[45]In relation to the Kitchen Warranty, the question for the court on that occasion was whether the wording “all extraction ducts will be cleaned regularly and maintained and checked at least once every sixth months by a specialist contractor” (emphasis added)meant that the extraction ducts had to be cleaned:(a) every six months from the date of the last clean, or

(b) every six months from the date of policy inception. After consideration of the policy wording and the need for a business-like construction, Burton J adopted the former interpretation, holding at paragraph 42 that:

“Hence the defence left to the Claimants was by way of construction, namely that an obligation to check “at least once every 6 months” meant “at least every 6 months starting with the date of inception of the policy”

. It was suggested that this would be analogous with the obligation under sub clause (c) of the warranty whereby the hoods etc would be cleaned “at least every 2 weeks”, which it was submitted should also mean every two weeks starting with the inception of the policy, because in both cases the future tense was used. In my judgment the use of the future tense is not determinative; of course the cleanings and the checkings will take place in the future, but the question is whether their regularity is by reference to the last such checking or cleaning. Mr Stuart-Smith argues that, in relation to the six-month checking, it must mean six months since the last such check, because otherwise, on the assumption of an annual policy, there will only be one such check, the one after six months, before the policy expires. It seems to me clear that, as a matter of business efficacy, what is required is that there should be a check every six months, i.e. once six months has expired since the last check.”

[46]Insurers submit that the same considerations, and reasoning, apply to the dispute in this case, and that if the court were to adopt Towergate’s construction of the Electrical Inspection Warranty, the result would be that which was rejected by Burton J in Sugar Hut. They also say that Towergate’s construction of the Electrical Inspection Warranty is unbusinesslike, and would strip it of any commercial purpose. The proper construction of the Electrical Inspection Warranty is addressed in due course below.

B.3 Suspensive Warranties / Suspensive Conditions

[47]The distinction between a true warranty and a “suspensive warranty” / “suspensive condition” (also referred to in some of the older authorities as a “description of risk” or “risk delimiting clause”) was explained by Morland J in Kler Knitwear Ltd v Lombard General Insurance Company Limited [2000] Lloyd’s Rep. I.R. 47, 49-50, citing with approval the words of Mr Justice Lambert in the Canadian case of Case Existological Laboratories Ltd v Century Insurance Co. of Canada (“The Bamcell II”)

[1986] 2 Lloyd’s Rep 528

at 533.

[48]In Kler the court was concerned with a sprinkler installation warranty by virtue of which it was warranted that within 30 days of renewal of a policy of insurance the sprinkler system must be inspected by an approved sprinkler engineer with all necessary rectification work carried out within 14 days of the inspection report being received. An inspection was only carried out about 60 days late on 25 August 1989. On 27 October 1989 one of the claimant’s properties suffered storm damage, and the claimant sought to recover under the policy for damage to raw materials and finished goods and for disruption of the business. The defendants asserted that the claim was barred on the ground that the inspection clause was a true warranty which had been broken – the relevant issue for determination (there was also an issue as to whether there had been an inspection) was whether on the proper construction of the clause within the context of the policy it was a warranty or a suspensive condition. Morland J concluded that it was a suspensive condition (which on the facts had been remedied at the time of the loss). In such circumstances Morland J did not have to consider whether, if the suspensive condition had not been complied with, there would have been cover for the storm damage.

[49]At paragraphs 49 to 50 of his judgment Morland J stated as follows in relation to true warranties versus suspensive conditions:

“The distinction between a “warranty” and a “suspensive condition” is well explained by Mr Justice Lambert in the Canadian Case, The Bamcell II [1986] 2 Lloyd's Rep 528 at page 533:— “The clause that is said to be an express warranty appears in the policy under the heading “Special Conditions”

. It reads: WARRANTED that a watchman is stationed on board the BAMCELL II each night from 2200 hours to 0600 hours with instructions for shutting down all equipment in an emergency. It is admitted by the assured that a watchman was not stationed on board Bamcell II after the insurance came into effect some months before the sinking, and that the watchman who had been stationed on the vessel before the policy was procured ceased to be stationed on the vessel as soon as the policy came into effect. The opening of the deck valves in this case occurred in the early afternoon and sinking occurred shortly thereafter, long before 2200 hours. So the clause bears no relationship whatever to the risk or to the occurrence that caused the loss. But the insurers say that it is a warranty and that if it is a warranty it must be exactly complied with, whether it is material to the risk or not. They point to ss. 35, 36 and 37 of the Marine Insurance Act . The assured says that it is not a warranty and is instead a suspensive condition which limits the risk. That is, if a loss occurs between 2200 hours and 0600 hours, or if a loss is caused by something that occurs between those hours, and there is no night watchman present, or even if there is a night watchman present, if there was no night watchman present on earlier nights between those hours, then the policy does not give rise to liability on the part of the assured. But if the loss is totally unconnected with the presence or absence of the watchman it was not the intention of the parties that the policy should not apply to the loss. In support of this argument he says that the use of the word “warranted” is not conclusive and that the nature of the matter covered by the clause must be considered to determine whether the parties intended to create a warranty or whether they intended to create a “suspensive condition” or “warranty delimiting the risk”. He says that the parties can not have intended that if the watchman was late one night, or even missed a night, then the insurers should be discharged from liability for the remainder of the term of the policy. Counsel for the assured referred to MacGillivray & Parkington on Insurance Law, 6th edition at p. 263, where under the heading “Suspensive Condition” a warranty is distinguished from a term which delimits the risks covered under the policy. The final paragraph under the heading of “Suspensive Condition”, at p. 264, reads in this way: Clauses of this nature are sometimes referred to as “warranties descriptive of the risk” or “delimiting the risk”. This usage is not an accurate one, but it serves as a reminder that a court may be prepared to construe a clause as one descriptive of the risk even though the word “warranty” or “warranted” appears in it, as where a case was “warranted used only for the following purposes”. That case illustrates the point that there is no magic in the word “warranted” which is frequently used with considerable ambiguity in policies.” Mr Justice Lambert's distinction accords with a number of English authorities to which I was referred:— Farr .v. Motor Traders Mutual [1920] 3 K.B. 699 (See per Bankes L.J. at P.674) Roberts .v. Anglo-Saxon Insurance [1927] 27 Lloyd's List 313 (See per Bankes L.J. at p.314 De Maurier .v. Bastion Insurance [1967] 2 Lloyd's List 550 (See per Donaldson J. at p. 558) C.T.N. .v. General Accident [1989] 1 Lloyd's Rep. 288 (See per Macpherson J. at p.302).” “The clause that is said to be an express warranty appears in the policy under the heading “Special Conditions”. It reads: WARRANTED that a watchman is stationed on board the BAMCELL II each night from 2200 hours to 0600 hours with instructions for shutting down all equipment in an emergency. It is admitted by the assured that a watchman was not stationed on board Bamcell II after the insurance came into effect some months before the sinking, and that the watchman who had been stationed on the vessel before the policy was procured ceased to be stationed on the vessel as soon as the policy came into effect. The opening of the deck valves in this case occurred in the early afternoon and sinking occurred shortly thereafter, long before 2200 hours. So the clause bears no relationship whatever to the risk or to the occurrence that caused the loss. But the insurers say that it is a warranty and that if it is a warranty it must be exactly complied with, whether it is material to the risk or not. They point to ss. 35, 36 and 37 of the Marine Insurance Act . The assured says that it is not a warranty and is instead a suspensive condition which limits the risk. That is, if a loss occurs between 2200 hours and 0600 hours, or if a loss is caused by something that occurs between those hours, and there is no night watchman present, or even if there is a night watchman present, if there was no night watchman present on earlier nights between those hours, then the policy does not give rise to liability on the part of the assured. But if the loss is totally unconnected with the presence or absence of the watchman it was not the intention of the parties that the policy should not apply to the loss. In support of this argument he says that the use of the word “warranted” is not conclusive and that the nature of the matter covered by the clause must be considered to determine whether the parties intended to create a warranty or whether they intended to create a “suspensive condition” or “warranty delimiting the risk”. He says that the parties can not have intended that if the watchman was late one night, or even missed a night, then the insurers should be discharged from liability for the remainder of the term of the policy. Counsel for the assured referred to MacGillivray & Parkington on Insurance Law, 6th edition at p. 263, where under the heading “Suspensive Condition” a warranty is distinguished from a term which delimits the risks covered under the policy. The final paragraph under the heading of “Suspensive Condition”, at p. 264, reads in this way: Clauses of this nature are sometimes referred to as “warranties descriptive of the risk” or “delimiting the risk”. This usage is not an accurate one, but it serves as a reminder that a court may be prepared to construe a clause as one descriptive of the risk even though the word “warranty” or “warranted” appears in it, as where a case was “warranted used only for the following purposes”. That case illustrates the point that there is no magic in the word “warranted” which is frequently used with considerable ambiguity in policies.” Farr .v. Motor Traders Mutual [1920] 3 K.B. 699 (See per Bankes L.J. at P.674) Roberts .v. Anglo-Saxon Insurance [1927] 27 Lloyd's List 313 (See per Bankes L.J. at p.314 C.T.N. .v. General Accident [1989] 1 Lloyd's Rep. 288 (See per Macpherson J. at p.302).”

Roberts .v. Anglo-Saxon Insurance [1927] 27 Lloyd's List 313 (See per Bankes L.J. at p.314

[50]Those other authorities that Morland J referred to have also been cited to me, and I bear them well in mind when construing the Electrical Inspection Warranty. Kler was itself cited by Burton J in Sugar Hut in the passage that I have already quoted earlier but will repeat for ease of reference:

“An alternative construction of such a warranty is that it is ‘merely’ a suspensory condition, i.e. whereby the obligation of the insurer is suspended during the period of breach. It may be easier to construe a warranty as a suspensory condition where the obligation by the insurer is to comply with some deadline (e.g. as in Kler Knitwear Ltd v Lombard General Insurance Co Ltd [2000] Lloyd's Rep IR 47 ) than where there is a warranty as to a state of affairs.”

[51]Farr v Motor Traders Mutual [1920] 3 K.B. 669 concerned motor insurance in respect of two taxi cabs against damage by external means. In the proposal (which contained a basis clause) it was stated that each cab was to be driven in one shift per 24 hrs. In August 1918, whilst one of the cabs were undergoing repair, the other cab was driven in two shifts per 24 hours for a very short time, and from that time until the accident in respect of which a claim was made, the two cabs were driven in one shift only. The Court of Appeal held that the statement was not a true warranty but was descriptive of the risk (i.e. a suspensive condition), indicating that the cab whilst being driven in more than one shift per 24 hours would cease to be covered by the policy but would be covered whilst being driven in one shift.

[52]Bankes LJ (with whom Scrutton LJ and Warrington LJ agreed) stated as follows at pages 673-674:

“The only question for decision by the learned judge, and by us, is whether the answer to one of the questions constitutes a warranty by the assured. If, as a matter of construction, it can properly be held that the question and answer amount to a warranty, then, however absurd it may appear, the parties have made a bargain to that effect, and if the warranty is broken, the policy comes to an end. The position is very clearly and accurately put in MacGillivray on Insurance Law, p. 360, to which Scrutton L.J. has called my attention. In the section dealing with representations and warranties in fire policies he says: “It is a little doubtful how much is to be inferred from the mere description in a fire or burglary policy of the premises or goods insured. It may be put in three ways: (i.) that the description is a representation of the state of the premises or goods; (ii.) that the description is a definition of risk; (iii.) that the description is a warranty that the premises or goods shall correspond thereto.”

In this case the question which we have to decide is whether the particular statement in the proposal form is a definition of the risk or a warranty. Then he says:

“But if the description is embodied in the policy” —which is the case here — “either actually or by reference, it has at least the force of a limitation of the risk to be run. In this view the premises or goods will be covered by the policy so long, but only so long, as they comply with the description, and if the description is considered merely as a limitation of the risk and not a warranty the insurer will not be wholly discharged, but the policy will merely cease to attach until the property once more corresponds to the description.” … The question is whether we are to construe the question and answer, as the defendants contend, as a warranty, the effect of which would be that in August, when the cab was driven in two shifts per day, the policy came to an end; or whether we are to construe them, as Rowlatt J. has construed them, as words descriptive of the risk, indicating that whilst the cab is driven in one shift per 24 hours the risk will be covered, but that if in any one day of 24 hours the cab is driven in more than one shift, the risk will no longer be covered and will cease to attach until the owner resumes the practice of driving the cab in one shift only. In my opinion, having regard to the nature of the question, it is impossible to construe the answer thereto as a warranty. … I think that the view taken by Rowlatt J. upon the construction of this contract is the correct one” (my emphasis) “It is a little doubtful how much is to be inferred from the mere description in a fire or burglary policy of the premises or goods insured. It may be put in three ways: (i.) that the description is a representation of the state of the premises or goods; (ii.) that the description is a definition of risk; (iii.) that the description is a warranty that the premises or goods shall correspond thereto.”

[53]Roberts .v. Anglo-Saxon Insurance [1927] 27 Lloyd's List 313 concerned insurance of a motor vehicle which contained a clause, “Warranted used only for the following purposes: commercial travelling”. Whilst being driven (other than for commercial purposes) from Morriston over the Black Mountains, the car caught fire, and insurers declined to indemnify the insured. The Court of Appeal (Scrutton and Bankes LJJ and Romer J) set aside the award of the arbitrator. They construed the clause as words descriptive of the risk and as such amounting to a suspensory condition. Bankes LJ referred to, and applied his reasoning in Farr when identifying the applicable principles as to the construction of the clause. He stated at page 314L as follows:

“… If this matter had come before me either as an arbitrator or as a Judge of first instance or as a Judge sitting to decide the question on a special case stated for the opinion of the Court, I should have had no hesitation whatever in saying that in my opinion the true construction of this clause is the construction which was put upon the language of the insurance policy in the case of Farr v. Motor Traders’ Mutual Insurance Society, [1920] 3 K.B. 669, namely, that in this class of policy when persons insert clauses, whether described as warranties or whether described as part of the description of the vehicle, indicating that the vehicle is to be used in some restricted way, my opinion in that case, and in this case and in similar cases, is and would be that the parties had used that language as words descriptive of the risk, and that, as a result, when the vehicle is not being used in accordance with the description it is not covered; but it does not follow at all that because it is used on some one occasion, or on more than one occasion, for other than the described use, the policy is avoided. It does not follow at all. If the proper construction, on its language, is a description of the limitation of the liability, then the effect would be that the vehicle would be off cover during the period during which it was not being used for the warranted purpose, but that it would come again on the cover when the vehicle was again used for the warranted purpose. I am quite clear shout that, and I have no difficulty in expressing my opinion in reference to that matter.”

(emphasis added)

[54]He rejected the apparent approach of the arbitrator which was to have regard to whether the use was in some way causative of the loss, stating at page 314R:- “I assume, therefore, that the arbitrator commenced by stating that at the time of the fire the car was not being used for commercial travelling. Then he goes on to say that that factwas in no was either a contributory cause of the fire or the actual cause or loss of the motor vehicle by the fire . . . Now, if he puts that in because that was to him a sufficient reason for holding that the warranty clause had no application to the case at all-if that is what he means by that-it is perfectly obvious that this is an error on the face of the award, because it is quite immaterial whether or not the fact that the car was being used in this way was or was not "a contributory cause of the fire or the actual cause or loss of the motor vehicle by the fire."

[55]Scrutton LJ adopted the same reasoning and concluded (at page 315R) that the clause was a promise as to the future use of the car limiting the risk which the insurance company had undertaken and meaning that if a loss occurs when it is not being used for commercial travelling the insurance company is not liable. Romer J at 317R reached a conclusion to like effect.

[56]C.T.N. Cash and Carry Ltd v General Accident [1989] 1 Lloyd’s Rep. 299 concerned burglary and money insurance over premises insured, the policy including a term, “It is warranted that the secure cash kiosk shall be attended and locked at all times during business hours” – at a time when the kiosk was unattended for a short period of time, a robbery took place in an aisle (not at the kiosk). Macpherson J held that the clause was not a true warranty but a clause delimiting the risk (i.e. a suspensive condition) and since the robbery took place during business hours when the kiosk was not attended and causation did not arise with respect to a risk delimiting clause the insurer defendants succeeded in their defence.

[57]Macpherson J (after expressly referring to Farr and quoting from passages in the judgments of Bankes and Scrutton LJJ in Roberts v Anglo-Saxon Insurance) stated at pages 303-304:

“I have, I say, firmly reached the conclusion that this is a risk delimiting clause, both by way of impression and by way of identification as assisted by the authorities to which I was referred. … I am convinced this robbery took place in business hours. That again is partly a matter of impression and common sense, and I am, unfortunately for the insured, driven to the firm conclusion that that was so. … Therefore, in my judgment, this robbery took place when the kiosk was not attended and it took place during business hours. In those circumstances, since causation does not arise with respect to a risk delimiting clause, the insurers are entitled to succeed.”

(emphasis added)

[58]Towergate (and by association the Insured) places reliance upon certain observations of Donaldson J in the De Maurier .v. Bastion Insurance [1967] 2 Lloyd's List 550. In that case the insurer agreed to insure the plaintiffs’ jewellery in respect of all risks. It was “[Warranted] road vehicles (whether owned by the assured or otherwise) fitted with locks and alarm system (approved by underwriters) and in operation”. On 1 July 1966 jewellery to the value of over £40,000 was stolen from the boot of the plaintiffs’ car at a time when (amongst other matters) unknown to the plaintiffs the alarm had an intermittent fault. On 24 August 1966 the plaintiffs’ employee (while walking to a car which was hired to the plaintiffs under a hire-purchase agreement) was robbed of jewellery valued at £28,056. The insurers denied liability for both losses alleging (amongst other matters) that the locks and alarm warranty was a true warranty and rendered the policy void ab initio. The plaintiffs averred that the insurers had affirmed the policy after the first loss. In the event the insurers admitted liability in respect of the second loss at trial so that the only matter for determination as such, was in relation to the proper construction of the locks and alarm warranty in the context of the first loss.

[59]The analysis of Donaldson J in relation to the nature of the locks and alarm is entirely consistent with previous (and subsequent) authority, Donaldson J concluding that it was a suspensive warranty rather than a true warranty. Thus he stated at 558R-559L:

“I have already held that the representation contained in the information paragraph was immaterial although false, and it follows that the contract was not voidable ab initio upon grounds of misrepresentation. I also hold, as was ultimately conceded, that the warranty delimits and is part of the description of the risk and is not of a promissory character. By a warranty of a promissory character I mean a warranty by the assured that a particular state of affairs will exist, breach of which destroys a substratum of the contract and entitles the underwriter to decline to come on risk or, as the case may be, to terminate the risk as from the date of breach. In the marine field "warranted free from capture and seizure" is a warranty of the former character leaving the contract effective in respect of loss by other perils. "Warranted to sail on or before a particular date" is, however, of a promissory character, breach of which renders the contract voidable. The commercial reasoning behind this legal distinction is clear, namely, that breach of the former type of warranty does not affect the nature or extent of the risks falling outside the terms of the warranty; breach of a promissory warranty may, however, materially affect such risks.”

[60]Donaldson J therefore held that the locks and alarm warranty was not a true warranty but rather was a condition that delimits and is part of the description of the risk (i.e. a suspensory condition), finding that the insurers were under no liability in respect of the first loss. That was the ratio of the case. As insurers had admitted liability for the second loss what was said in relation to the second loss was obiter. It is clear that Donaldson J was unimpressed with the insurers’ stance in relation to the second loss both legally and as a matter of fair dealing. It appears he would have held insurers liable, but there is no detailed legal analysis and no discussion of any alleged need for a causal link between breach of a suspensory condition and a loss claimed. His views would be perfectly justifiable on the basis that (as a matter of construction of the clause in question) the suspensory condition was only directed at loss relating to the vehicle, and did not suspend cover for other risks such as robbery. That is unobjectionable as a matter of construction, but it does not justify the submission that there must be a causal connection between the breach of the suspensory condition and the loss, or that there is any general rule that a suspensory condition / warranty descriptive of the risk can only bite if its subject matter can be shown to relate to the circumstances of the loss (as Towergate submits).

[61]What Donaldson J actually stated at 560R-561L is as follows:

“In the case of the first loss, the theft was undoubtedly facilitated by the absence of security locks and the defect in the alarm system. In such circumstances the commercial justification for the defences based on these matters is clear. A different situation arises in relation to the second claim. There the defences are based on matters which bear no relation to the circumstances giving rise to the loss. Counsel for the plaintiffs gave the defendants every opportunity to put forward any commercial justification for their attitude in refusing to pay this claim, but none was forthcoming. If any party to proceedings is minded to enforce his strict legal rights, effect will be given to those rights. Nevertheless a special relationship exists between the Commercial Court and the commercial community whose interests it seeks to serve. Reliance upon defences for which there is no apparent commercial justification damages not only the party which adopts that course, but also the whole market in which he operates. The parties are the best judges of what is in their own interests, but the Court cannot be indifferent to courses of conduct which may damage the market as a whole. It may be powerless to act, but it is not powerless to comment and to warn. In the circumstances I was much relieved to be told by Mr. Le Quesne at the very end of his argument that the defendants, on advice, had decided to admit liability in respect of the second loss. I have no doubt that this advice was very sound for at least two reasons. First, I have no doubt that these defences are bad in law, the warranty not being of a promissory nature and the representation not being material. Second, a submission to judgment even at this late stage may avoid or minimize any damage to the reputation for fair dealing which has in the past been enjoyed and will I trust continue to be enjoyed by the London insurance market.”

[62]Towergate submits that in the years following the De Maurier decision until the coming into force of the Insurance Act 2015, the law has generally been applied to preclude insurers from taking advantage of a breach of policy terms which fall short of true warranties, to deny claims arising out of unrelated circumstances. Indeed Towergate go so far as to say that following what was said by Donaldson J in De Maurier in practice few reputable insurers have since been inclined to rely on this kind of defence (referring also to The Law Commission’s Final Recommendation (No.353) which records at [13/37], that although warranties were commonly found in small business contracts, “we did not find any cases in which an insurer had attempted to refuse a claim solely because of a breach of warranty that had no connection to the claim.”).

[63]However, ultimately every case turns on its own facts, and it is always a matter of construction of the clause in question (construed purposefully and in context) to establish what the nature of that clause is, and applying the principles I have identified, to establish whether it is a true warranty or a suspensive condition, or only a risk specific condition precedent requiring a causal connection, and whether it provides a defence to the particular claim or claims in question. Thus whilst it is perfectly possible that a Court will conclude that a suspensory condition does not extend to unrelated risks on the proper construction of the clause in question, there is no general legal principle that a suspensory condition only operates as a defence if its subject matter can be shown to relate to the circumstances of the loss. Of course in the present case Insurers submit that the Electrical Inspection Warranty is directed at the risk of fire and it is a fire that occurred (regardless of whether any fault in the electrical installation in fact caused the fire) so Insurers say that the criticisms of Towergate in relation to Insurers’ stance is in any event unwarranted.

[64]I would simply add at this point, that the debate as to extent of the scope of any suspensive condition is academic if Insurers are correct in their submission that the Insurance Electrical Warranty is a suspensive condition directed at the risk of fire and suspends cover for losses in respect of fire until it is fulfilled, regardless of whether all cover is suspended (as Burton J found in Sugar Hut).

[65]It would unduly lengthen my analysis of the authorities if I were to refer to all the authorities referred to by the parties before me concerning warranties and suspensive conditions. Suffice it to say that I have read, and had regard to, all such authorities that were referred to by the parties. I will, however, mention two further authorities relied upon by Towergate in this regard, namely Printpak v AGF Insurance Ltd (1999) 1 Al ER 466 and Mint Securities v Blair [1982] 1 Lloyd’s Rep. 188.

[66]The former case concerned a “commercial inclusive policy”. The structure of the policy was based on its division into sections, and the assured could decide which sections it wished to adopt as the ones covered by the policy, so that although it was a single contract it did not have to be treated as a seamless contractual instrument. The commercial inclusive indorsements were all stated to be “operative only as stated in the policy schedules” and those words explicitly wrote the warranty into the section in which it appeared and not others. Accordingly, it was (unsurprisingly) found that the burglar alarm warranty was only operative in relation to claims under section B (cover against theft) and not others (such as section A which covered stock against fire). Hence any breach of section B did not discharge insurers’ liability in respect of a fire that occurred covered under section A. The case is an illustration of an issue of construction, namely as to what sections of a policy a particular warranty relates to, and the fact that it was unrealistic to argue on the facts that particular warranties (eg a money warranty) applied across the policy as a whole.

[67]The latter case, Mint Securities v Blair [1982] 1 Lloyd’s Rep. 188, is no more than an illustration of the operation of true warranties and what amounted to breaches of the same. Mint Securities concerned a policy directed to the insurance of cash, by a security firm whose business was the handling of cash in transit. Stipulations in the policy about the recruitment, security vetting and training etc of employees, and the procedures in place for moving cash, were held to be true warranties, because each of them went to the risk profile of the insured business generally, and hence to the root of a policy which covered the risks associated with that particular business. The warranty was that procedures in the proposal form would not be varied, and Staughton J indicated that a casual non-observance by a minion of the stipulation that no more than £10,000 should be out of a cash-carrying vehicle at any one time was not a variation. He held however that there were, on the facts, variations that were not casual breaches, and amounted to breaches of warranty in relation to minimum employment, and training periods and checking of references.

B.4 Due Observance Clauses

[68]General Condition 14 of the Policy provided as follows:

“14. Observance a) The due observance and fulfilment of the terms of this Policy insofar as they relate to anything to be done or complied with by the Insured shall be conditions precedent to any liability of the Insurers to make any payment under this Policy. b) The truth of statements and answers in the Proposal and declaration are the basis of this Policy and if anything referred to shall be untrue, the Policy shall be null and void.”

[69]The present dispute does not concern a consideration of the effect of basis clauses such as Condition 14 b). However both Insurers and Towergate rely upon Condition 14 a). Insurers submit that the effect of Condition 14 a) is that if a term is not complied with no liability arises so that, in relation to the Electrical Inspection Warranty, if that Electrical Inspection Warranty is not complied with, and it is not a true warranty, but is a suspensory condition, then that suspensory condition operates as an unfulfilled condition precedent to liability so that Insurers are under no liability to indemnify the Insured.

[70]For their part Towergate and the Insured recognise that due observance clauses have most often been considered by the courts in the context of requiring compliance with stipulated machinery for the making of claims (eg giving timely notice, furnishing particulars and supplying documents etc) as a condition of the insurers’ liability to meet particular claims affected by the stipulation (referring to cases such as Pilkington UK Ltd v. CGU Insurance Plc

(2005) 1 All ER 283

, Parker v. NFU Mutual [2013] Lloyd’s Rep. I.R. 253 and Axa Insurance UK Plc v. Thermonex [2013] Lloyd’s Rep. I.T. 323). However they submit that if the policy as a whole permits such a construction, application of due observance clauses could be extended to other kinds of stipulations such as money carrying warranties, kitchen warranties and the like. I accept that this is conceptually possible (indeed the due observance clause is relied upon by Insurers if the Electrical Inspection Warranty is not a true warranty), though the nature of any particular term, and the relevance or otherwise of any due observance clause, is always a matter for construction of a policy as a whole.

[71]Towergate refers in this regard to what is stated in Colinvaux Law of Insurance 10th Edit. (2014) at 7.015: “If the term broken is expressed, or can be construed, as a condition precedent to the liability of the insurers, then breach of that term prevents the assured from bringing a claim for a loss to which the condition relates. The insurers need not prove any prejudice. The policy itself is unaffected, so that past claims remain good and future claims may be made in the usual way.” (Towergate’s emphasis)

[72]Towergate also refers to the cases of Aspen Insurance UK Ltd and Ors v. Pectel Ltd,

[2008] EWHC 2804

and Kazakhstan v. NCM

[2001] All ER 708

(Comm). In Aspen Teare J considered a due observanceclause, referred to as Condition 13, providing that “liability of Underwriters shall be conditional on the Assured...observing the terms and conditions of this insurance”. He stated at [65]: “A purposive construction of condition 13, as opposed to a literal construction, would therefore construe condition 13 as follows: “The liability of the underwriters to indemnify the assured in respect of a claim for an indemnity shall be conditional upon the assured observing the terms and conditions of the policy with regard to that claim.”...the effect of condition 13 as suggested by the Defendant would be so draconian that very clear words would be required to achieve it. In circumstances where the condition can be sensibly construed in a manner which does not have the suggested draconian consequences the required clear words are absent from condition 13.” (Towergate’s emphasis).

[73]Towergate submits that due observance clauses take effect as conditions precedent to the insurers’ liability to meet specific claims, “arising out of circumstances to which the term relate”. What has to be construed in the present case are the specific words of Condition 14 a) which refer expressly to “anything to be done or complied with” (which would include the Electrical Inspection Warranty) and spell out the consequences of non-compliance with the same. In any event, whether Towergate’s submissions in this regard assist them (even assuming such submissions are correct) depends on the purpose of the Electrical Inspection Warranty and the risk to which it relates and how the claim is to be characterised, as will be addressed in due course below.

The Policy Terms

[74]By the Policy (JWGG/00141274/2009/001) entitled, “Leisure Policy Schedule”, Insurers provided insurance to the Insured in respect of the Hotel against various risks specified in the “Sums Insured Property Schedule” including Buildings (Section A), Contents (Section B) Business Interruption (Section C), Liability (Section D), Money (Section E), Frozen food (Section F), Loss of Licence (Section G), Book Debts (Section H), as well as “bolt-on” Commercial Legal Protection, Equipment Breakdown and Key Person Cover.

[75]Insurers’ case is that fire was an insured risk under all sections of the Policy save there was no obvious relevance of fire in the context of the “bolt-on” extra covers. It was common ground that risks associated with fire was covered under Buildings and Contents (though the Insured and Towergate point out that Buildings cover also extended to other matters e.g. subsidence) as well as Business Interruption and Liability Cover. Whilst not formally conceded by the Insured, it is clear that risks associated with fire were also covered under Money (“loss of or damage to Money or any other property as insured by any Extension under this section by any cause occurring at the Premises” and “Extensions…Property Damage to… a) cases, bags, belts or waistcoats”), Frozen Food and arguably under Loss of Licence (loss of licence could be consequential upon a fire) and Book Debts (debit balances resulting from damage insured under Contents). On any view, therefore, fire was a risk insured under many sections of the Policy and matters impacting on the risk of fire would be of obvious importance to Insurers.

[76]The period of insurance was from 3 December 2009 until 2 December 2010, “[a]nd any subsequent period for which the insurers shall accept a premium at renewal date” and so was a 12 month policy, albeit it contemplated the possibility that the Insurers, in Insurers’ option (given the words “for which Insurers shall accept a premium”) might agree to the Policy’s renewal. In this regard under, “Special Conditions and Endorsements” the Policy also provided (as appears below), “Unless otherwise specified it is agreed that all Special Conditions and Endorsements attaching to and appearing on previous versions of this Schedule are deemed to apply to this Certificate.” Thus, in the event of renewal, the specified Conditions and Endorsements attaching to and appearing on versions of the Schedule in the previous year or years would apply to the renewal. Of course, there was no guarantee that there would be a renewal either by the Insured or agreed by Insurers, or that the terms of any renewal would remain identical (and the Policy was not itself a renewal).

[77]The Sums Insured Property Schedule was immediately followed by “Special Conditions and Endorsements” in the following terms:

“Special Conditions and Enforcements: Unless otherwise specified it is agreed that all Special Conditions and Endorsements attaching to and appearing on previous versions if this Schedule are deemed to apply to this Certificate DFF1 - Deep Fat Frying Warranty It is noted that General Policy Condition 8. Frying Apparatus Warranty is replaced with the following: Deep Fat Frying Warranty It is warranted that with regards to deep fat frying installations: 1. Frying and cooking equipment and the ducted extracted system be at least 150mm clear of any combustible materials; 2. Frying equipment be fitted with a thermostat designed to prevent the temperature of the fat or oil exceeding 205℃ or alarm bells that operate when the temperature of the fat exceeds 205℃; 3. Frying range be equipped with tight fitting lids or pull down covers; 4. Sump boxes and drip trays be emptied at least once every seven days; 5. Extraction hoods, canopies, fat/grease collectors and filters be cleaned at least once every seven days; 6. Extraction ducts and flues be inspected internally and cleaned at least once a year by trained CORGI registered personnel who hold current certification of Gas Safety Competence and Identity Card relating to the type of equipment being inspected and serviced in the case of gas heated ranges or by a contractor on the roll of the NICEIC in the case of electricity heated ranges; 7. Frying range be serviced and cleaned at least once a year by trained CORGI registered personnel who holds current certification of Gas Safety Competence and Identity Card relating to the type of equipment being inspected in the case of gas heated ranges or by a contractor on the roll of the NICEIC in the case of electrically heated ranges. 8. A full record be kept of the servicing and cleaning of the frying ranges and its extraction ducts and flues; such records be kept elsewhere than at the premises and be available to Insurers on request. 9. The following equipment is provided in the vicinity of the fryer in a clearly accessible position a) a fire extinguisher suitable for use on fat or oil fires and b) a fire blanket MCR - Money Carryings Warranty It is warranted that money in transit referred to in Section E – Money, Item (1) shall be accompanied by the under noted until disbursement: Up to £3,000 to be carried by Employee 1 £3,001 to £5,000 to be carried by 2 Employees £5,001 to £7,500 to be carried by 3 Employees £7,500 to £10,000 to be carried by 4 Employees Over £10,000 to be carried by a professional security company. PGO001 - Electrical Installation Inspection Warranty It is warranted that the electrical installation be inspected and tested every five years by a contractor approved by the National Inspection Council for Electrical Installation Contracting (NICEIC) and that any defects found be remedied forthwith in accordance with the Regulations of the Institute of Electrical Engineers PGO002 – Daily Waste Warranty It is warranted that all trade refuse and waste material be swept up, bagged or binned and removed daily out of the Buildings and that all oily or greasy waste and cloths be kept in metal receptacles and removed outside every night. PGO003 – Portable Heating Warranty It is warranted that no portable heater other than domestic electric heaters in the office portions be kept or used on the Premises. PGO004 – Index Linking The Insurers will adjust the Sums Insured in line with suitable indices of costs and the renewal premium for this Section will be based on the adjusted Sum Insured Survey required within 30 days”

DFF1 - Deep Fat Frying Warranty Deep Fat Frying Warranty It is warranted that with regards to deep fat frying installations: MCR - Money Carryings Warranty Up to £3,000 to be carried by Employee 1 £3,001 to £5,000 to be carried by 2 Employees £5,001 to £7,500 to be carried by 3 Employees £7,500 to £10,000 to be carried by 4 Employees PGO001 - Electrical Installation Inspection Warranty PGO002 – Daily Waste Warranty PGO003 – Portable Heating Warranty PGO004 – Index Linking Survey required within 30 days”

PGO004 – Index Linking

[78]There were, therefore, various express terms of the Policy that were described, on their face, as warranties, including the Electrical Inspection Warranty. Most of those warranties were directed at the risk of fire and with reducing that risk – i.e. the Deep Fat Frying Warranty, the Electrical Inspection Warranty, the Daily Waste Warranty and the Portable Heating all of which are self-evidently imposed by Insurers, and agreed to by the Insured, to reduce the risk of fire (as is obvious on their face). It will also be noted that it was stated that “Survey required within 30 days”. There was no evidence before me in relation to any such survey that took place.

[79]There then followed the “Proposal/Statement of Facts”. Amongst other matters, it was identified that the approximate date of the business starting trading was December 2007 and that the business was a “Hotel or Guest House (no leisure facilities)”. There was also a section on “Security & Fire Protection”, with questions asked including “Does the premises have adequate Fire Extinguishing Appliance coverage to BS 5306” (answered in the affirmative) and “Does the premises have an Automatic Fire Alarm, LPC approved without monitored signalling to a central station” and similar question about any monitored system (each answered in the negative). Again such provisions reinforce the fact that matters associated with the risk of fire were of importance to Insurers.

[80]There followed the detailed terms of the “Hotels & Guest Houses Leisure Package Insurance Policy”. Part A, under “Policy information (not forming part of this Policy)” identified that the Policy consisted of (amongst other matters) , “the General Policy Definitions Exclusions and Conditions which incorporate definitions and terms that apply to the whole Policy” and “any Endorsement(s) which might apply to the Policy or individual Sections and which incorporate cover amendments extensions limitations and such like.” Under “Duration of Cover” (which is obviously to be read subject to the Special Conditions and Endorsements) it was stated that, “The insurance is normally for a period of 12 months unless shown differently on the Policy Schedule”.

[81]In Part A under “Introduction”, at paragraph 1.3 it was stated:

“In consideration of the payment of the premium the Insurers will indemnify the Insured within the terms of and subject to the exclusions and conditions of this Policy in respect of liability, loss and damage as set out in each Section and/or Endorsement occurring in connection with the Business during the Period of the Insurance or any subsequent period for which the Insurers agree to accept payment of premium.”

[82]The General Policy Conditions included at Condition 11 terms in relation to “Intruder Alarm Installation” that provided at 11(iii):

“(iii) It is a condition precedent to liability under this Policy that the Insured fulfils all of its obligations under this General Policy Condition 11 and no claim under this Policy shall be payable unless all of the terms of this General Condition 11 have been complied with.”

[83]As already noted above General Condition 14 provided as follows:

“14. Observance a) The due observance and fulfilment of the terms of this Policy insofar as they relate to anything to be done or complied with by the Insured shall be conditions precedent to any liability of the Insurers to make any payment under this Policy. b) The truth of statements and answers in the Proposal and declaration are the basis of this Policy and if anything referred to shall be untrue, the Policy shall be null and void.”

IEE Wiring Regulations and Guidance Note

[84]It will be recalled that the Electrical Inspection Warranty provided that it was warranted that the electrical installation be inspected and tested every five years by a contractor approved by the National Inspection Council for Electrical Installation Contracting (NICEIC) and that any defects found be remedied forthwith in accordance with the “Regulations of the Institute of Electrical Engineers”.

[85]The relevant regulations are the IEE Wiring Regulations Seventeenth Edition BS 7671:2008 Requirements for Electrical Installations, and the IEE have produced Guidance Note 3 in relation thereto (the “Guidance Note”). The relevant statutory regulations include the Electricity at Work Regulations 1989 (the “Regulations”). As was common ground before me, these are all matters that form part of the surrounding factual matrix to the construction of the Electrical Inspection Warranty.

[86]By Regulation 3, every employer has a duty to comply with the Regulations and Regulation 4 provides that: “4-(1) All systems shall at all times be of such construction as to prevent, so far as reasonably practicable, danger.

(2) As may be necessary to prevent danger, all systems shall be maintained so as to prevent, so far as is reasonably practicable, such danger” “Danger” being defined as the risk of injury in Regulation 2.

[87]As is readily apparent from the Guidance Notes, the purpose of periodic inspecting and testing is to provide, amongst other matters, for the safety of persons, and protection against damage to property by fire. In this regard the Guidance Note provides at paragraph 3.1: “3.1 Purpose of periodic inspection and testing The purpose of periodic inspection and testing is to provide, so far as is reasonably practicable, for: 1. the safety of person and livestock against the effects of electric shock and burns in accordance with the general requirements of Regulation 131.1, and 2. the safety of person and livestock against the effects of electric shock and burns in accordance with the general requirements of Regulation 131.1, and 3. protection against damage to property by fire and heat arising from an installation defect, and 4. confirmation that the installation is not damaged and deteriorated so as to impair safety, and 5. the identification of installation defects and non-compliance with the requirements of the Regulations which may give rise to danger.” (my emphasis)

[88]Thus, whilst it is obvious from the face of the Electrical Inspection Warranty itself that the commercial purpose of including a requirement that the electrical installation be inspected and tested within a specified time period is to reduce the risk of an insured peril occurring – namely fire (for the simple reason that if there are any deficiencies in electrical wiring the risk of fire is increased), this is reinforced by the terms of the Guidance Notes relating to the applicable testing regime.

[89]In this regard the Guidance Notes identify why periodic inspection and testing is needed, which reinforces the relevance of such matters to an insurer providing cover in respect of an associated peril namely fire. In this regard paragraph 3.2 of the Guidance Note provides:

“3.2 Necessity for periodic inspection and testing Periodic inspection and testing is necessary because all electrical installations deteriorate due to a number of factors such as damage, wear, tear, corrosion, excessive electrical loading, ageing and environmental influences. Consequently: 1. legislation requires that electrical installations are maintained in a safe condition and therefore must be periodically inspected and tested – Tables 3.1 and 3.2 2. licensing authorities, public bodies, insurance companies, mortgage lenders and others may require periodic inspection and testing of electrical installations, as is for example the case for houses in multiple occupation (HMOs) – Tables 3.1 and 3.2”

[90]Damage, wear, tear, corrosion, excessive electrical loading, ageing and environmental influences upon electrical wiring are all matters which self-evidently increase the risk of fire. Periodic inspecting and testing goes to reduce the risk of a fire occurring by facilitating the remedying of defects (as contemplated by the Electrical Inspection Warranty itself).

[91]Paragraph 3.3 of the Guidance Note expressly refers to, and sets out Regulation 4(2) of the Electricity at Work Regulations 1989 that has already been quoted above, whilst paragraph 3.5 provides that, “Electrical installations should not be left without any attention for the periods of years that are normally allowed between formal inspections.”

[92]There is an issue between the parties as to what the normal frequency of inspection is, in particular as to whether it is five years, the period specified in the Electrical Inspection Warranty. This is addressed at paragraph 3.7 and Table 3.2 of the Guidance Notes:

“3.7 Frequency of inspection The frequency of periodic inspection and testing must be determined taking into account: 1. the type of installation 2. its use and operation 3. the frequency and quality of maintenance 4. the external influences to which it is subjected. Table 3.2 provides guidance on the initial frequency of formal inspections of electrical installations as well as the routine checks. The ‘initial frequencies’ in the title of the table refers to the time of interval between the issuing of the Electrical Installation Certificate on completion of the work and the first inspection. However, the competent person carrying out subsequent inspections may recommend that the interval between future inspections be increased or decreased as a result of the findings of their inspection… … In short, the inspector being a competent person should apply engineering judgment when deciding upon intervals between inspecting and testing an installation and may use the recommendations of Table 3.2 to suggest a suitable starting point for such a decision. … Table 3.2 Recommended initial frequencies of inspection of electrical installations Type of installation Routine check sub-clause 3.5 Maximum period between inspections and testing as necessary Reference (see key below) General installation Domestic - Change of occupancy/10 years Commercial 1 year Change of occupancy/5 years 1, 2 Educational establishments 4 months 5 years 1, 2 Hospitals 1 year 5 years 1, 2 Industrial 1 year 3 years 1, 2 Residential accommodation at change of occupancy/1 year 5 years 1 Offices 1 year 5 years 1, 2 Shops 1 year 5 years 1, 2 Laboratories 1 year 5 years 1, 2 Buildings open to the public Cinemas 1 year 1 to 3 years 2, 6, 7 Church installations 1 year 5 years 2 Leisure complexes (excluding swimming pools) 1 year 3 years 1, 2, 6 Places of public entertainment 1 year 3 years 1, 2, 6 Restaurants and hotels 1 year 5 years 1, 2, 6 Theatres 1 year 3 years 2, 6, 7 Public houses 1 year 5 years 1, 2, 6 Village halls/community centres 1 year 5 years 1, 2 Reference key 1. Particular attention must be taken to comply with SI 1988 No. 1057 – Electricity, Safety, Quality and Continuity Regulations 2002 (as amended). 2. SI 1989 No. 635 – Electricity at Work Regulations 1989 (Regulation 4 & Memorandum). … 6. Local Authority Conditions of Licence”

(emphasis added) The frequency of periodic inspection and testing must be determined taking into account:

Reference key

[93]It is apparent from paragraph 3.7, and Table 3.2, that the period of 5 years (in the case of a hotel) relates to the initial frequency of formal inspections, and that the competent person carrying out subsequent inspections may recommend that the interval between future inspections be increased or decreased.

[94]The “Periodic Inspection Report for an Electrical Installation” in respect of the Hotel (in the same form as is contemplated by, and attached to the Guidance Note) was dated September 2003. The estimated age of the electricals is stated to be “not known”, evidence of “Alterations or Additions” is estimated at “6 years”. The installation is “installation of hotel” and under “Limitations” it is stated “the fire alarm was not tested / inspected by ourselves”, “no lifting or dismantling of floor boards”. Under “Next Inspection” it is stated (as part of the pre-printed form) “We recommend that this installation is further inspected and tested after an interval of not more than” and the figure inserted is “10 years”. The pre-printed form under “Extent and Limitations” provides, “The inspection has been carried out in accordance with BS 7671 : 2008 (IEE Wiring Regulations as amended). Cables concealed within trunking and conduits, or cables and conduits concealed under floors, in roof spaces and generally within the fabric of the building or underground have not been inspected.”

[95]Thus, in the present case, the last inspection was in September 2003 and based on a ten year recommendation it could be up until September 2013 (nearly 4 years after inception, and nearly 3 years after expiry of the Policy) before the electrical inspection was next tested. However, in the instant case, Insurers stipulated, and the Insured agreed, to the terms of the Electrical Inspection Warranty. This contemplated a more frequent testing regime, on both Insurers and the Insured’s construction, than once every ten years, namely every five years (as is common ground).

[96]However Insurers’ and the Insured’s construction produces very different results - and Insurers submit their construction is the only business-like construction consistent with the commercial purpose of the Electrical Inspection Warranty, and that the Insured’s construction makes no business sense whatsoever, does not further the commercial purpose of the Electrical Inspection Warranty and would not reduce the risk of fire, a risk in respect of which Insurers agreed to indemnify the Insured.

[97]As for the commercial purpose of the Electrical Inspection Warranty, it is clear (and I find) that the purpose of the Electrical Inspection Warranty is to ensure so far as possible that the electrical installation is sound and without defect, occupiers are protected, and the risk of fire is reduced – hence the warranty requires inspections to be carried out by contractors approved by the National Inspection Council for Electrical Installation Contracting and defects found remedied forthwith in accordance with the Regulations of the Institute of Electrical Engineers. This is reinforced by the very reasons for testing as identified in paragraphs3.1 and

3.2 of the Guidance Note, including that the purpose of periodic inspection and testing is to “provide so far as reasonably practicable, for…protection against damage to property by fire and heat arising from an installation defect…and confirmation that the installation is not damaged or deteriorated so as to impair safety.”

[98]The respective constructions of the parties are addressed in detail below. The effect of the rival constructions is, however, as follows. On the Insurers’ construction, the 5 year period is calculated from the date of the last inspection, and if no inspection has been carried out in the last 5 years then the inspection would have to be undertaken prior to or immediately at the time of inception (with no cover until such inspection had taken place). This would meet the commercial purpose of ensuring that the risk of fire is minimised by there having been an inspection (and any remedial work) within the last 5 years.

[99]On the Insured’s construction, the Electrical Inspection Warranty was (per paragraph 10(2) of Towergate’s Defence) “a representation or stipulation on the part of the [Insured] that during the currency of the insurance (including in the event of subsequent renewals of the Policy) the [Insured] would inspect and test the electrical installation every five years” (emphasis added). Thus, on the Insured’s construction, there would be no obligation, in what is a 12 month policy, for an inspection during the period of the risk, and there is no guarantee that there would be a subsequent renewal, or if so on what terms, and with which subscribing insurers (nor would there be any particular incentive to undertake testing in subsequent years but prior to five years expiring). It would not minimise risk (and Insurers’ exposure) in respect of fire at all. It could be 11 years since the previous inspection, and 4 years after expiry of the Policy before there was any inspection. In such circumstances Insurers submit that the Insured’s construction, cannot be correct, is contrary to the commercial purpose, and is an unbusinesslike construction. I address the respective constructions in due course below. The construction of the Electrical Inspection Warranty

E.1 The Electrical Inspection Warranty

[100]For ease of reference the wording of the Electrical Inspection Warranty is repeated below:- “PGO001 - Electrical Installation Inspection Warranty It is warranted that the electrical installation be inspected and tested every five years by a contractor approved by the National Inspection Council for Electrical Installation Contracting (NICEIC) and that any defects found be remedied forthwith in accordance with the Regulations of the Institute of Electrical Engineers.”

E.2 Insurers’ construction of the Electrical Inspection Warranty

[101]The Insurers submit that the Electrical Inspection Warranty is clear and unambiguous, and that the ordinary and natural meaning of the words of the stated warranty that the electrical installation “be inspected and tested every five years” is that the 5 year period is calculated from the date of the last inspection, and if no inspection has been carried out in the last 5 years then the inspection would have to be undertaken prior to, or immediately upon inception (with no cover until such inspection had taken place). This would meet the commercial purpose of ensuring that the risk of fire is minimised by there having been an inspection (and any remedial work) within the last 5 years. By reference to the well-established principles as to contractual construction that have been identified in section B.1 above, including those identified in Arnold v Britton and Rainy Sky, Insurers submit (with a degree of repetition and overlap) as follows (modified to take into account my findings above viz inspection periods in the Guidance Note):(1) The natural and ordinary meaning of the Electrical Inspection Warranty is clear. There was a warranty or promise that the electrical installation be inspected and tested every five years. The natural meaning was that inspections had to take place within five years of the prior inspection. There is an internal timetable by reference to other inspections. There is no reference to inspection having to occur within five years of inception. A reasonable person with the background knowledge available to the parties would think that to be a nonsense, since the Warranty could never have any application to this annual insurance policy on such a construction.

(2) The Policy insured against fire, and indeed cover in respect of fire formed part of most sections of the Policy (as identified above). Fire cover was therefore at the very heart of the insurance being provided (and Insurers’ risk exposure). It would make neither commercial nor business commonsense for a central provision, the purpose of which was to reduce the risk of fire, not to require the electrical installation to have been inspected in the last five years or immediately at or prior to inception.

(3) A reasonable person having all the background knowledge available to the parties would know that inspections of electrical installations should be undertaken on a regular basis. Ordinarily the regularity of inspection would be determined by reference to the time of the previous inspection, just as the regularity of cleaning in a similar warranty or condition would be determined by reference to the previous time of cleaning (see, in this regard, the conclusions of Burton J in Sugar Hut where he reached a similar conclusion).

(4) The Insured would know that the last known inspection was in September 2003.

(5) The parties would know that there were regulations which applied to electrical installations, in particular the British Standard British Standard 7671 Requirements for Electrical Installations IEE Wiring Regulations, as referred to in paragraph 10 (3) of Towergate’s Defence, and examination of the 17th Edition current in 2009 would reveal the purposes of periodic inspection and testing (as has been identified above), specifically to provide so far as is reasonably practicable for the safety of persons and protection against damage to property by fire.

(6) The parties would know that those Regulations were referred to in the Electrical Inspection Warranty as was the requirement for the inspection to be undertaken by an approved contractor (approved by the National Inspection Council for Electrical Installation Contracting).

(7) The parties would know that the words in the Electrical Inspection Warranty were in the context of measures to reduce the risk of fire, as identified in paragraph 3.1 of the Guidance Note, and as is accepted by Towergate in paragraph 8(3) of its Defence.

(8) The parties would know that the Electrical Inspection Warranty would be of no relevance to the Insurers if the measures to reduce the risk of fire could never be required to occur within the period of insurance and would only be required to occur four years after the insurance cover had come to an end.

(9) As to the documentary context, the parties would know that the Electrical Inspection Warranty was within a group of warranties (including the Deep Fat Fryer Warranty, the Daily Waste Warranty, and the Portable Heating Warranty) each of whose purposes was to reduce the risk of fire and its consequences.

(10) The parties would know the factual context that a defective electrical installation could have very serious consequences in a hotel and that the requirement in the IEE Regulations for periodic inspection and testing was for the benefit of the Hotel, its owners/lenders, its guests, other visitors and the Insurers.

(11) The parties would know that the commercial context reflected the risk which would be caused by a defective electrical installation, both to the business of the Hotel and the business of the Insurers if there was a fire. That risk could be lessened if the electrical installation was inspected a maximum of five years after the last installation or immediately if the last inspection had taken place more than five years earlier. The risk would be increased (and Insurers’ monetary exposure would be increased) if the next inspection did not have to take place until 2014, 11 years after the last inspection (as the Insured and Towergate contend).

(12) The overall purpose of the Electrical Inspection Warranty was to reduce risk to both the Hotel and the Insurers, in accordance with the guidance in the IEE Regulations. It would be pointless reducing that risk four years after the Policy had come to an end.

(13) The Insurers had an interest in ensuring that the Insured had tested the electrical installation within the last 5 years or would do so immediately upon inception. To do so reduced the risk of an insured event occurring. The Insured’s and Towergate’s construction of the Electrical Inspection Warranty offends against both that commercial interest and the purpose of the Policy; it permits the Insured to have the benefit of the Policy notwithstanding that there had been no testing of the electrical installation within the last five years.

(14) Commercial common sense would not countenance construction of a condition in a policy where the agreed purpose was to reduce risk, which could never have any effect or relevance in this annual policy. On the other hand it would countenance a construction which meant that the Electrical Inspection Warranty did have some effect if it was referable to the time of the last inspection, which was consistent with the purposes of periodic testing and inspection that the IEE Regulations provided for.

(15) A reasonable person would consider that the regularity of inspection should be by reference to the last inspection, not by reference to the commencement of the insurance policy. If the latter, it would have the effect of resetting the clock and rendering the time of the last inspection irrelevant. If the last inspection had been four years prior to inception, the next inspection would not be required to occur until nine years after that, which would be contrary to the commercial purpose of the Warranty (that I have, in the event, found), and would be utterly irrelevant to this policy of insurance in this period of insurance (and might only arguably be relevant in any repeated renewal of the policy, when it came to the fifth year of such annual policies, even assuming the Insured chose to renew each year, the Insurers agreed to renew each year, and the terms remained the same).

[102]Insurers also submit that if, contrary to their submissions as identified above, the Electrical Inspection Warranty was to be regarded as ambiguous then it is well established that the court should take into account the commercial object or purpose of the provision – see Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 A.C. 1101 and the West Bromwich caseat 912 – 913, the need for a business-like construction of an ambiguous clause being repeated by the Supreme Court in Rainy Sky at [21] – [30], Insurers referring also to what was said by Gloster LJ in Amlin Corporate Member Ltd v Oriental Assurance Corp [2014] 2 Lloyd’s Rep. 561 at [30].

[103]With regards insurance policies specifically, Insurers refer to the need to adopt an interpretation that “yields business common sense” or “make[s] good commercial sense” as considered by Lord Diplock in the House of Lords in The Miramar

[1984] 2 Lloyd’s Rep 129

at 131, by Neil LJ in Turner v Manx Line [1990] 1 Lloyd’s Rep. 137 at 142, Neil LJ in The Fina Samco [1995] 2 Lloyd’s Rep. 344 at 350 and Burton J in Sugar Hut at [42]. They also refer to the observations of the editors of MacGillivray on Insurance Law 13th Edit. as to the need to adopt a business-like approach to construction that takes into consideration the purpose and nature of the policy in paragraphs 11-007 – 11-009 thereof.

[104]When construing a particular clause, the court should consider the context of the clause in the policy as well as the policy as a whole (see BAI (Run Off) Ltd v Durham [2012] 1 W.L.R. 867, per Lord Mance at [19]), and the prevailing circumstances at the time that the policy was entered into. As Lord Mustill said in Charter Reinsurance Co. Ltd v Fagan [1997] A.C. 313, 384, “The words must be setin the landscape of the instrument as a whole”. The landscape of the Policy as a whole was to provide cover in the event of insured risks coming to pass (including the risk of fire). The purpose of the Warranties was to minimise the chance of those risks coming to pass. They were concerned with preventing fire and minimising the consequences if fire did occur.

[105]To the extent that there is an ambiguity in the wording of the Electrical Inspection Warranty (which Insurers deny), application of the aforementioned principles of construction should lead the court to conclude that the electrical installation should be inspected and tested every five yearsfrom the date of the last inspection or immediately at inception of the Policy if the last inspection was more than five years before inception. Any other construction of the Electrical Inspection Warranty offends against the aforementioned rules, was not what was intended by the parties and makes no business, or common, sense.

[106]Finally, and whilst recognising that each case turns on its own facts, and the particular words of the policy under consideration, Insurers submit that the court should take into consideration previous decisions of the court on identical or materially identical policy wording (referring to MacGillivray on Insurance Law (13th Edit.) at paragraph 11-002 as to previous interpretations placed on phrases or forms of words in insurance contracts and the court’s approach thereto). In this regard Insurers submit that an identical dispute arose over extremely similar policy wording in Sugar Hut. The question for the Court on that occasion was whether the wording “all extraction ducts will be cleaned regularly and maintained and checked at least once every sixth months by a specialist contractor” (emphasis added) meant that the extraction ducts had to be cleaned:(a) every six months from the date of the last clean, or

“Hence the defence left to the Claimants was by way of construction, namely that an obligation to check “at least once every 6 months” meant “at least every 6 months starting with the date of inception of the policy”

[107]Insurers submit that the same considerations, and reasoning, apply to the dispute in this case, and that the same conclusion should be reached, whereas if Towergate’s construction were adopted the result would be that which was (rightly) rejected by Burton J in Sugar Hut.

E.2 Towergate’s and the Insured’s construction of the Electrical Inspection Warranty

[108]As a preliminary point I note that both Towergate and the Insured each address the proper construction of the Electrical Inspection Warranty, after addressing the question of whether it is a warranty, a suspensive condition or a risk specific condition precedent and the majority of their submissions are devoted to the former (most obviously so in the case of Towergate, who only address the construction issue at paragraphs 67 to 75 of their submissions starting on page 20 of their submissions). Whilst it is, perhaps, more logical to construe what a provision means before determining the nature of the provision (because of the relevance of the meaning and purpose of the provision to its characterization) it ultimately does not matter in which order the issues are concerned.

[109]Towergate and the Insured’s construction is that the words “be inspected and tested every five years” means “every five years starting with the date of imposition of the stipulation” (i.e., at least for present purposes, from inception of the Policy) (paragraph 67 of Towergate’s Skeleton Argument).

[110]The Insured (in its Skeleton Argument) submits that the words of the Electrical Inspection Warranty are forward looking and a statement of current intention of the Insured. The choice of tense is future, the use of “be inspected and tested” and “be remedied” most naturally being interpreted as “will be”. It says that alternative clear language, if the intention had been otherwise, could have been either “has been inspected and tested” (if intended solely to relate to past inspections) or “is inspected and tested” (which reflects current practice without future promise) or “is and will be inspected and tested” (to reflect current and intended future practice). It constituted a statement of current intention of the Insured at the time of inception that going forward the electrical installation would be inspected and tested at least once every five years and that the Insured would forthwith remedy any defects found in accordance with (then) current IEE Regulations.

[111]It is said that in appraising their risk, insurers may well obtain and consider past inspections, tests and remedial risks. They may also require immediate further inspection, testing, remedying and certification of the electrical installation. Many insurers do, these Insurers did not. They are seeking to make up for that by bolting on an obligation which was not there, and to apply an interpretation which strains the natural and objective meaning of the language used. If Insurers had wanted to require an obligation that inspection, testing and remedial work should be within 5 years of the date of last inspection they could have included it, by appropriate use of tenses.

[112]It is pointed out that if Insurers’ argument were to be correct then, on the facts, the Insured would be in breach and entirely without any cover from inception and unless and until inspection, testing and remedial work was carried out (on Insurers’ construction). The Insured submits that no reasonable person would have expected or interpreted that from the wording of the Electrical Inspection Warranty and that it is contrary to business common sense, as the Insured would be entirely uninsured and at risk in respect of all risks irrespective of cause solely because of non-compliance with that warranty (on Insurers’ construction).

[113]Towergate adopts and develops the Insured’s submissions. Towergate submits that the choice of grammatical tenses in stipulations in insurance policies is always important, and in any cases of doubt, are usually construed so as to limit rather than enlarge the obligation imposed, in the context of the span of time over which a given state of affairs is asserted to subsist. For example a warranty that a life assured is now and has always been strictly temperate, relates to the past and the present but not to the future (Thompson v. Weems

(1884) 9 App Cas 671

). A warranty that machinery and plant are properly fenced, refers to the state of affairs when the warranty is given and implies no particle of futurity whatever (referring to the judgment of See Greene MR in Woolfall & Rimmer v. Moyle

[1942] 1 KB 66

at 71). By contrast, a warranty that machinery etc be fenced, which is the form of words often adopted in modern policies, usually conveys that the warranted state of affairs will subsist during the period of cover. In this connection, the use of the single word be is generally deemed preferable to will be, which is sometimes construed as referring to no more than a representation as to the insured’s intentions at the date of the warranty (referring to Kirkbride v. Donner

[1974] 1 Lloyd’s Rep 549

and Hair v. Prudential Assurance

[1983] 2 Lloyd’s Rep 667

where statements that, respectively, drivers will be aged over 25 and premises will be occupied were construed as statements of current intention only).

[114]Towergate submits that the wording used in the so-called warranties in the Policy may be contrasted with the original Frying Apparatus Warranty set out at General Policy Condition 8 which uses the words “is” and “are” rather than “be” (“is” fitted, “is”fixed, “are” cleaned, “is” provided etc). It is submitted that the use of the expression “be” in all the new fire risk stipulations (be filled, be equipped, be emptied, be cleaned, be serviced, be remedied forthwith etc), which it is submitted is a deliberate change, shows that in each case the Insured is required to ensure that the requisite action is taken during the subsistence of the insurance cover.

[115]It is submitted in the case of the Electrical Inspection Warranty, the requirement that the electrical installation be inspected and tested every five years is closely linked with the further requirement that any defects found be remedied forthwith and is to be construed as a single composite obligation on the basis that there is no virtue or benefit to the insurer in five yearly inspections and tests, if nothing is done when defects are found. It is submitted that it is impossible to construe the composite obligation, including the second element, to remedy defects forthwith, other than prospectively, i.e. by taking be remedied to mean will be remedied, while avoiding any implication that the stipulation relates only to a current intention.

[116]It is submitted that it conversely strains language to construe an obligation to remedy (defects) forthwith as if it said or by necessity implied that within the previous five years defects had been remedied forthwith upon discovery to a specified technical standard. Nor, it is said, is it likely that any reasonable insurer would request an insured who had come to the property in the comparatively recent past to give an assurance about the technical quality and standard of historical remedial work; or that any reasonable insured would be prepared to give such an assurance in relation to a potentially very technical stipulation, relating to a time when such an insured might have no knowledge of or control over what electrical work had been carried out.

[117]Towergate submits that the requirements of BS 7671 are technically detailed, and the issue of whether historically (i.e. prior to the Insured’s occupation) these requirements had been met, is not something with which an ordinary commercial insured could reasonably be expected to engage. It is said that if the insurer requires such an assurance, it is simple for him to ask for it, by requiring the production of a current electrical certificate – if this is what Insurers intended to achieve they failed in that objective by failing to make any mention of such a certificate in the Electrical Inspection Warranty.

[118]It is said that a construction whereby “every five years” is “every five years starting from the assumption of this obligation” makes sense if it is assumed that as part of their appraisal of the risk Insurers will obtain information about the date and/or completeness of any previous inspections etc in the usual way from third parties in a position to give them, i.e. the authors of relevant certificates, and/or a surveyor appointed by insurers to make an inspection. It is pointed out that in the present case the stipulations set out in the relevant part of the Schedule of the Policy are followed by the words “Survey required within 30 days.” Towergate submits that this suggests that the Electrical Inspection Warranty (PG01) was a standard Primary and General wording intended for use in conjunction with the requirement for an insurance survey which Towergate speculates would include a check on the history of the electrical installation and its current status (however there is no evidence before me either as to what survey was intended, and whether any survey took place, and in any event the warranties in the Special Conditions and Endorsements are free-standing warranties separate from what might or might not transpire from any survey).

[119]It is also submitted that the purpose of stipulations such as the Electrical Inspection Warranty is further to reduce risk by reference to the insured’s promise that regular inspections of the installation and remedial work will be maintained during the currency of the insurance (my emphasis). This may, however be a point against Towergate’s construction for, as discussed below, the Electrical Inspection Warranty does not have that consequence in the context of a 12 month policy. Towergate submits that the Electrical Inspection Warranty also provides some incidental comfort that the Insured is putting himself forward as sufficiently well-organised and reliable to assume the relevant responsibility, and reference is made to the case of Kler v. Lombard General Insurance [2000] Lloyd’s Rep. I.R. 47, in which Morland J observed at [49] that, “a promise as to future conduct … may effect the assessment of risk and the level of premiums because a proposed insured who is willing to give an obligation as to his future conduct may be giving an indication of his reliability and business efficiency.” However it might be thought that a promise as to an existing state of affairs (which would be the position on the Insurers’ construction) is a still more powerful indication of an insured’s reliability and business efficacy.

[120]Bringing all of its submissions together, Towergate submits that the ordinary and natural meaning of the words used in the Electrical Inspection Warranty is that the stipulation to inspect and remedy defects at five yearly intervals imports an obligation to do so at those intervals during the currency of the Policy, or, if sooner, on the expiry of the current certificate; and cannot fairly be construed as a promise that it was done within a five year window prior to the assumption of the risk. It is said that if Towergate are correct in this submission, the contra proferentem principle has no application. It is rather a question of construing the stipulation strictly in accordance with the commercial objectives of both parties (not just Insurers); bearing in mind that any proven breach of the stipulation (however characterised) could have the effect of vitiating cover, thus frustrating the purpose of the Policy. E. 3. The fundamental difficulty with Towergate’s and the Insured’s construction of the Electrical Inspection Warranty

[121]There is a fundamental, and ultimately insurmountable, difficulty in relation to the construction that Towergate and the Insured seek to place upon the Electrical Inspection Warranty, namely that the words “be inspected and tested every five years” means “every five years starting with the date of imposition of the stipulation”, which is that the Policy is a 12 month policy, and such a construction accordingly renders the Electrical Insurance Warranty meaningless in the context of a 12 month policy, does not reduce the risk of fire, and offers no protection for either the Insured and anyone using the Hotel, or the Insurers bearing the risk of fire. As such it is an unbusinesslike and uncommercial construction, that does not reflect the commercial purpose of the Electrical Inspection Warranty as I have identified and found. As Insurers put it in their letter of 24 January 2011 to Towergate, “The interpretation which you placed on the Warranty would in our view render the Warranty meaningless in annual policies.”

[122]The difficulty faced by Towergate and the Insured in relation to their construction is recognised in how the matter is pleaded by Towergate at paragraph 10(2) of Towergate’s Defence) submitting that the Electrical Inspection Warranty is “a representation or stipulation on the part of the [Insured] that during the currency of the insurance (including in the event of subsequent renewals of the Policy) the [Insured] would inspect and test the electrical installation every five years” (my emphasis added).

[123]This construction itself does not bear examination. First, on Towergate’s own construction (and that of the Insured), there is no stipulation on the part of the Insured that during the currency of the Policy (i.e. within the 12-month Policy period) the Insured would inspect the electrical installation, for on Towergate’s construction the Insured has up to 5 years to test the electrical installation – the Insured would not be required to do so within 12 months. That is an inherent part of Towergate’s construction, and on the basis of which Towergate’s construction is to be tested. This reveals that Towergate’s construction fails to give any commercial meaning or effect to the Electrical Inspection Warranty in what is a 12 month policy.

[124]Secondly, not only do the added words “including in the event of subsequent renewals of the Policy” reveal why Towergate’s construction does not work in the context of a 12 month policy (and Towergate’s recognition of that fact), but this construction does not assist Towergate and the Insured either. True it is that under “Special Conditions and Endorsements” it is provided, “Unless otherwise specified it is agreed that all Special Conditions and Endorsements attaching to and appearing on previous versions of this Schedule are deemed to apply to this Insurance” but as Insurers rightly point out, there is no guarantee that there would be a subsequent renewal or what the terms of that renewal would be (the Insured had, after all, changed insurer that year and it might or might not do so again, and the insurance that is available, and insurers willing to subscribe, and on what terms, may change), and additionally any renewal was in the option of Insurers (“And any subsequent period for which Insurers shall accept premium at renewal date”) (emphasis added).

[125]To these two points I would add that I do not consider that Towergate’s premise as to the effect of a renewal is necessarily correct. It does not follow that upon renewal the Electrical Inspection Warranty, properly construed, necessarily means that there would have to be an electrical inspection within four years (and within three years the next year and so on). But even assuming that the Electrical Insurance Warranty in a future year was to be so construed that hardly remedies the vice of Towergate’s and the Insured’s construction. There would still be no obligation to perform an electrical installation test in that renewed year, or indeed for a number of further years. Even assuming the terms of the Policy remained the same, and the Policy remained in place year after year, there would be no requirement for an electrical installation test until into the fourth annual renewal and (potentially) nearly five years after initial inception, despite Insurers being on risk on a series of annual policies for annual premium, without the Electrical Inspection Warranty having provided any protection from, or reduction in, the risk of fire, a central aspect of the cover provided and the obvious purpose of the clause. The position would be no better if Towergate’s suggestion that the Insured might be under an obligation to inspect the electrical installation upon the expiry of the existing certificate were the correct construction, given that this would not be within the 12 month period (or for many years), but there is, in any event, nothing in the wording of the Electrical Inspection Warranty that would justify such an interpretation.

[126]To repeat what Lord Neuberger said in Arnold v Britton at [15] “15 When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean", … And it does so by focussing on the meaning of the relevant words,… in their documentary, factual and commercial context. That meaning has to be assessed in the light of(i) the natural and ordinary meaning of the clause,

(ii) any other relevant provisions of the lease,

(iii) the overall purpose of the clause and the lease,

(iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and

(v) commercial common sense, but

(vi) disregarding subjective evidence of any party's intentions…”

[127]The construction of Towergate and the Insured that the words “be inspected and tested every five years” means “every five years starting with the date of imposition of the stipulation” is one that is contrary to(i) the ordinary and natural meaning of the words (given reference to 5 years in a 12 month policy),

(ii) the other warranties that related to reducing the risk of fire (as quoted and addressed above),

(iii) the overall purpose of the clause (to ensure so far as possible that the electrical installation is sound and without defect, occupiers are protected, and the risk of fire is reduced),

(iv) the facts and circumstances known or assumed by the parties at the time the Policy was entered into (as set out above in Insurers’ submissions which I recount at paragraph 102(3)-(13) above and which I am satisfied, and find, are facts and circumstances that were known or assumed by the parties at the time of contracting), and

(v) commercial common sense (their construction being a meaningless and unbusiness-like construction that flouts business common sense). As such the construction of Towergate and the Insured stands to be, and is, rejected.

E4. The proper construction of the Electrical Inspection Warranty

[128]I consider that the Electrical Inspection Warranty, properly construed in accordance with the applicable contractual principles identified in section B.1 above, including Arnold v Britton and Rainy Sky, is clear and unambiguous, and that the ordinary and natural meaning of the words that the electrical installation “be inspected and tested every five years” is that the 5 year period is calculated from the date of the last inspection, and if no inspection has been carried out in the last 5 years then the inspection would have to be undertaken immediately (with no cover until such inspection had taken place). This meets the commercial purpose of ensuring that the risk of fire is minimised (whilst also protecting the safety of the Insured and occupiers of the Hotel) by there having been an inspection (and any remedial work) within the last 5 years.

[129]This is an entirely business-like construction (indeed I consider the only business-like construction). It consists of a warranty, or promise, that the electrical installation be inspected and tested every five years, with its own internal timetable by reference to previous inspections. In terms of the intention of the parties, it reflects what a reasonable person having all the background knowledge which would have been available to the parties would have understood the parties to be using the language of the contract to mean. It stands to be contrasted with Towergate’s and the Insured’s construction which makes no commercial sense, and offers protection neither to the Insurers nor the Insured since the Electrical Inspection Warranty could never have any application to this annual insurance policy.

[130]The Policy insured against fire, and indeed cover in respect of fire formed part of most sections of the Policy as I have already addressed above. Fire cover was therefore at the very heart of the insurance being provided (and Insurers’ risk exposure). It makes every commercial sense that Insurers would require, and that an Electrical Inspection Warranty required, that the electrical installation would have been inspected and tested in the 5 years preceding the Policy, or would be so tested prior to, or immediately upon, inception. In contrast, it would make neither commercial nor business common sense for a central provision, the purpose of which was to reduce the risk of fire, not to require the electrical installation to have been inspected in the last five years or prior to, or immediately upon, inception.

[131]In terms of the correct construction of the Electrical Inspection Warranty, I accept and adopt the submissions of the Insurers that are set out at paragraph 102(1)-(15) above each of which supports the construction for which Insurers advocate, and which I have found represents the proper construction of the Electrical Instruction Warranty.

[132]More specifically, and assessing the meaning of the Electrical Inspection Warranty in its documentary, factual and commercial context by reference to the matters identified by Lord Neuberger in Arnold v Britton each one of those matters supports the construction I have found.

[133]Addressing them in turn. The first is the natural and ordinary meaning of the Electrical Inspection Warranty. I have already expressed my conclusions on that in the preceding paragraphs. The key words are that “the electrical installation be inspected and tested every five years”. The reference to 5 years, in an annual policy, can only mean, and can only be understood to mean, that the 5 year period is calculated from the date of the last inspection, and if no inspection has been carried out in the last 5 years then the inspection would have to be undertaken immediately – the sense being conveyed therefore, and it is being promised that, there has either been an inspection in the last 5 years, or that one will be undertaken immediately.

[134]In Sugar Hut the relevant warranty was that extraction ducts “will be cleaned…and checked at least once every six months” which was clearly the use of the future tense. In the instant case the word is “be”. That word could be construed in the future tense, but that is not inevitably so. The word “be” is capable of applying to testing that has already occurred. However even if it is considered that the future tense is being used that is not determinative (as Burton J rightly recognised in Sugar Hut), as the question is whether the relevant time period is by reference to the last inspection or a future inspection. That can be tested by applying the fifth of the relevant matters commercial common sense. Applying commercial common sense, the only business-like construction of the Electrical Inspection Warranty is that the five years apply to the last inspection. Put another way (as it was put by Burton J in Sugar Hut), as a matter of “business efficacy” what is required is that the electrical installation has been inspected and tested within the last five years.

[135]There are a number of reasons why it does not assist to focus on individual words such as “be” or the words used “be inspected and tested”. The first, and foremost, reason is that words are not to be construed in isolation, in a vacuum, on their own, but by reference to the sentence, the clause and the contract as a whole, (crucially) set against the admissible factual matrix. In that context, the words cannot bear the meaning ascribed to them by Towergate and the Insured, and in that context Insurers’ construction accords with commercial common sense. Secondly, the tense is not determinative (as addressed in the previous paragraph). Thirdly, one is construing the words used, not what words might have been used. It is often submitted that if a party had intended a particular meaning then it could have used other words, or spelled matters out by reference to different words (as Towergate and the Insured submits). That is not, generally, a particularly useful aid to interpretation, particularly by reference to the same words but used with different tenses. It certainly does not trump giving words a commercial and businesslike meaning and one that accords with commercial common sense.

[136]The next matter to be considered are any other relevant provisions of the Policy. Here, I consider that a number of the other warranties strongly support Insurers’ construction of the Electrical Inspection Warranty. They help identify the commercial purpose of this group of warranties – which is to reduce the risk of an insured peril, namely fire. Many warranties go to that – the Deep Fat Frying Warranty, the Electrical Inspection Warranty, the Daily Waste Warranty and the Portable Heating Warranty – these reinforce that the commercial purpose of the warranties is to reduce the risk of fire, which is consistent with Insurers’ construction but quite simply inconsistent with Towergate’s and the Insured’s (which mean that the Electrical Inspection Warranty would not reduce the risk of fire at all). In addition, and whilst it is rarely fruitful to place too much reliance on the wording of other contractual provisions (as ultimately one is construing the words used in the provision being construed, and not the words used in other provisions which may or may not have the same meaning), some of those warranties clearly support the same construction and for the same reasons. The Deep Fat Fryer warranty is a case in point. It would make no sense for the warranty that “extraction ducts and flues be inspected internally and cleaned at least once a year” (emphasis added) if this was prospective so that the requirement could be fulfilled on day 364 of an annual policy.

[137]The next matter to be considered are the facts and circumstances known or assumed by the parties at the time of contracting. These again strongly support Insurers’ construction. They are set out at length at paragraphs 102(3)-(13) above by reference to Insurers’ submissions. In particular, the following key facts and circumstances were known or would be assumed by the parties at the time of contracting:-(1) A reasonable person having all the background knowledge available to the parties would know that inspections of electrical installations should be undertaken on a regular basis. Ordinarily the regularity of inspection would be determined by reference to the time of the previous inspection, just as the regularity of cleaning in a similar warranty or condition would be determined by reference to the previous time of cleaning (again see, in this regard, the conclusions of Burton J in Sugar Hut when he reached a similar conclusion).

(2) The Insured would know that the last known inspection was in September 2003.

(3) The parties would know that there were regulations which applied to electrical installations, in particular the British Standard British Standard 7671 Requirements for Electrical Installations IEE Wiring Regulations, as referred to in paragraph 10 (3) of Towergate’s Defence, and examination of the 17th Edition current in 2009 would reveal the purposes of periodic inspection and testing (as has been identified above), specifically to provide so far as is reasonably practicable for the safety of persons and protection against damage to property by fire.

(4) The parties would know that the Electrical Inspection Warranty would be of no relevance to the Insurers if the measures to reduce the risk of fire could never be required to occur within the period of insurance and would only be required to occur four years after the insurance cover had come to an end.

(5) As to the documentary context, the parties would know that the Electrical Inspection Warranty was within a group of warranties (including the Deep Fat Fryer Warranty, the Daily Waste Warranty, and the Portable Heating Warranty) each of whose purposes was to reduce the risk of fire and its consequences (as identified above).

(6) The parties would know the factual context that a defective electrical installation could have very serious consequences in a hotel and that the requirement in the IEE Regulations for periodic inspection and testing was for the benefit of the Hotel, its owners/lenders, its guests, other visitors and the Insurers. That risk could be lessened if the electrical installation was inspected a maximum of five years after the last installation or immediately if the last inspection had taken place more than five years earlier. The risk would be increased (and Insurers’ monetary exposure would be increased) if the next inspection did not have to take place until 2014, 11 years after the last inspection (as the Insured and Towergate contend).

[138]The next matter to consider is the overall purpose of the Electrical Inspection Warranty. This has already been addressed at length. The purpose of a provision is a powerful aid to construction and is itself a determinative factor in the present case. The overall purpose of the Electrical Inspection Warranty is clearly to ensure that the risk of fire is minimised (whilst also protecting the safety of the Insured and occupiers of the Hotel) by there having been an inspection (and any remedial work) within the last 5 years. Whilst of obvious benefit to the Insurers, it is also of benefit to the Insured (and indeed all occupiers of the Hotel). That purpose is met by the Insurers’ construction, it is not by Towergate and the Insured’s construction.

[139]The fifth and final of the matters identified by Lord Neuberger in Arnold v Britton is commercial common sense. This is itself a powerful, and decisive consideration, which is at the heart of the issues of construction. It is a central reason for accepting Insurers’ construction and rejecting that of Towergate and the Insured. I have already addressed this aspect at length. As Lord Diplock said in Miramar Maritime Corporation v Holborn Oil Trading Ltd [1984] A.C. 676, 682, as quoted by him in The Antaios at page 201C, “There must be ascribed to the words a meaning that would make good commercial sense” and as Lord Diplock said in The Antaios itself, “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 yield to business commonsense.” Never were these sentiments more apt than when considering the rival constructions of the Insurers versus those of Towergate and the Insured, and accepting that of the Insurers.

[140]Standing back, and taking all the matters together, I am in no doubt whatsoever that a reasonable person having all the background knowledge which would have been available to the parties would have understood the parties to be using the language of the Electrical Inspection Warranty to mean that the 5 year period is calculated from the date of the last inspection, and if no inspection has been carried out in the last 5 years then the inspection would have to be undertaken immediately (with no cover until such inspection had taken place), and I find that that is the proper construction of the Electrical Inspection Warranty.

[141]I do not consider any of the submissions of the Insured or Towergate that I have identified above, and to which I have given careful consideration, detract from the matters that I have identified or lead to a different conclusion. I have already addressed why I do not consider that the Electrical Inspection Warranty is forward looking and a statement of current intention of the Insured. That is an unbusinesslike construction, and the points in support of such a construction, including the language used (the use of the word “be”) and what other language could have been used (as developed by Towergate and noted at paragraphs 114 and 115 above), are not determinative, and do not justify giving the Electrical Inspection Warranty a construction that is uncommercial and contrary to the commercial purpose of the Electrical Inspection Warranty.

[142]Equally there is no evidence about what this, or any other insurer, might do in terms of obtaining and considering past inspections, tests and remedial risks. The same is true of what was intended by way of the survey that was referred to. The fact that the Insurers could have required production of a current inspection certificate is beside the point. Insurers chose to impose a warranty. What is known, and was known by the parties at the time of contracting, was that Insurers required that the Insured warrant in terms of the Electrical Inspection Warranty. The provision is clearly set out in the Special Conditions and Endorsements that any putative insured would read or would be taken as having read. The Insured need not know the technicalities of BS 7671 to understand what was required. I note in passing, however, that the wording of what became the Policy was provided in a quotation to the Insured (prior to inception) under cover of an email dated 27 November 2009 from Towergate. In any event part of any broker’s duties includes making the insured aware of the terms of a proposed insurance and any particular requirements thereof including any warranties or other important terms in a policy.

[143]The Insured would be aware (and in any event is to be taken as being aware) of when the last electrical inspection took place. The Insured could easily have checked the matter. Equally if there was any doubt, or he was concerned as to whether anything had been found in the past, or remedied in accordance with the regulations of the Institute of Electrical Engineers, he could easily have had the electrical installation inspected and tested. After all, and quite apart from the Insured’s obligations under the Policy, it was in the Insured’s interests, and the interests of its customers, in terms of safety, and the protection of its asset against fire, for such inspection to take place. The Insured would potentially only be entirely uninsured and at risk of all risks irrespective of cause, if it failed to comply with the warranty (I address the actual consequences in section F below).

E.5 The Insured’s breach of the Electrical Inspection Warranty

[144]On the basis that the 5 year period is calculated from the date of the last inspection, as I have found, it is common ground that as no inspection was carried out in the last 5 years, or at the time of inception, the Insured was in breach of the Electrical Inspection Warranty, and for the avoidance of doubt I so find. I address in the next section, section F, the consequences of that breach.

[145]In sections B.2 and B.3 I identified the applicable legal principles to determine whether a clause in an insurance contract is a true warranty (breach of which renders the Policy void ab initio without any intervention by the insurer), or a suspensive warranty/suspensive condition (in respect of all or some risks), or merely a term of the policy requiring compliance as a condition precedent to an insurer providing cover in respect of the risk or risk to which the stipulation relates (defined for present purposes as a Risk Specific Condition Precedent).

[146]As already noted, the Insurers’ case is that the Electrical Inspection Warranty is a true warranty or alternatively is a suspensive warranty/suspensive condition suspending either all cover under the Policy, or alternatively all cover under the Policy for losses arising out of fire. In contrast, the Insured submits that the Electrical Inspection Warranty is not a true warranty or a suspensive warranty/suspensive condition in relation to all cover or all cover for losses arising out of fire but only a term of the Policy requiring compliance as a condition precedent to Insurers’ liability to provide cover in respect of risks relating to the electrical installation i.e. if not complied with and the fire was in fact caused by the electrical installation then it would not be covered (see paragraph 9 (b) of the Insured’s Skeleton Argument and paragraphs 7 (a) and 21 of Towergate’s Skeleton Argument).

[147]I will turn first to the question of whether the Electrical Inspection Warranty is a true warranty applying the principles in section B.2, in particular those identified by Rix LJ in HIH, namely:

“It is a question of construction, and the presence or absence of the word “warranty” or “warranted” is not conclusive. One test is whether it is a term which goes to the root of the transaction; a second, whether it is descriptive of or bears materially on the risk of loss; a third, whether damages would be an unsatisfactory or inadequate remedy. As Bowen LJ said in Barnard v. Faber [1893] 1 QB 340 at 344: “A term as regards the risk must be a condition.”

Otherwise the insurer is merely left to a cross-claim in a matter which goes to the risk itself, which is unbusinesslike ( ibid ; see also Ellinger & Co v. Mutual Life Insurance Company of New York

[1905] 1 KB 31

at 38).”

[148]In doing so I also bear well in mind what was said by Saville LJ in Hussein v Brown and other judges in similar authorities (as set out in paragraph 37 above) about underwriters stipulating for a true warranty in clear terms if they want such protection.

[149]Whether one regards it as a good starting point or not (as it was put by Burton J in Sugar Hut at [41]) or simply as, but no more than, an indication that a true warranty was intended, in the present case the language used in the Electrical Inspection Warranty is the language of a true warranty – the clause itself is defined in terms of the “Electrical Inspection Warranty” and the clause provides “it is warranted that”. Of course, that is not conclusive (see HIH, supra), not least because the word is often used with the greatest possible ambiguity in insurance policies (as it was put by Mackinnon J in Roberts v Anglo-Saxon Insurance Company).

[150]In addition, the consequences of the breach of the Electrical Inspection Warranty are not spelled out in the Electrical Inspection Warranty (such as was the case in authorities such as AC Ward & Son Ltd v Catlin (Five) Ltd). In relation to the proposal form, General Condition 14 contains a basis clause whereby it is provided in General Condution14(b) that, “the truth of statements and answers in the Proposal form are the basis of this Policy and if anything referred to shall be untrue, the Policy shall be null and void”, whilst in relation to the Policy itself, General Condition 14(a) provides that, “the due observance and fulfilment of the terms of this Policy insofar as they relate to anything to be done or complied with by the Insured shall be conditions precedent to any liability of the Insurers to make any payment under this Policy.” Thus, there is a distinction in consequence drawn between untrue statements in the proposal voiding the Policy, and breaches of terms of the Policy as conditions precedent to liability under the Policy. Neither this distinction, nor the fact that the Electrical Inspection Warranty does not spell out the consequences of non-compliance with the same is, however, conclusive as to how the clause is to be construed. Ultimately every clause has to be construed in its documentary, factual and commercial context applying the applicable principles in relation to warranties, suspensive conditions and conditions precedent.

[151]Applying the tests identified by Rix J in HIH, the first question is whether the Electrical Inspection Warranty is a term that goes to the root of the contract? Here the commercial purpose of the Electrical Inspection Warranty is important – as I have found the purpose of the Electrical Inspection Warranty is to ensure, so far as possible, that the electrical installation is sound and without defect, occupiers are protected, and the risk of fire is reduced.

[152]Fire is an insured risk under all sections of the Policy save there was no obvious relevance of fire in the context of the “bolt-on” extra covers. It was common ground that risks associated with fire were covered under Buildings and Contents (though the Insured and Towergate point out that Buildings Cover also extended to other matters e.g. subsidence) as well as Business Interruption and Liability Cover. Whilst not formally conceded by the Insured, it is clear that risks associated with fire were also covered under Money (“loss of or damage to Money or any other property as insured by any Extension under this section by any cause occurring at the Premises” and “Extensions…Property Damage to..cases, bags, belts or waistcoats”), Frozen Food and arguably under Loss of Licence (loss of licence could be consequential upon a fire) and Book Debts (debit balances resulting from damage insured under Contents). On any view, therefore, fire is a risk insured under many sections of the Policy and matters impacting on the risk of fire are of obvious importance to Insurers. In circumstances where indemnification in respect of fire arises in relation to almost every section of the Policy and the commercial purpose of the Electrical Inspection Warranty is, in particular, to minimise the risk of fire in the context of the electrical installation this first test could well be answered in the affirmative i.e. that the Electrical Inspection Warranty is a term that goes to the root of the contract.

[153]The second test is whether it is descriptive of or bears materially on the risk of loss. Whilst there is cover in respect of a number of different sections, the Electrical Inspection Warranty does bear materially on the risk of fire and loss by fire, which is covered under many sections of the Policy. Again this test could be said to be satisfied.

[154]The third test is whether damages would be an unsatisfactory or inadequate remedy. It can be said that a cross-claim would be an unsatisfactory and inadequate remedy, particularly if (as the Insured alleges) the risk that the Electrical Inspection Warranty is directed at were to be construed narrowly as fire causatively due to defect in the electrical installation. It might never be possible to identify whether a fire was caused by a defect in electrical installation, particularly if a fire was particularly fierce and destroyed all the evidence so that a mere cross-claim would be an unsatisfactory or inadequate remedy. Again this test could be said to be satisfied.

[155]In circumstances where each of the three tests identified in HIH are capable of being answered in the affirmative, this points strongly towards the proper construction of the Electrical Inspection Warranty being a true warranty notwithstanding the fact that this is not spelled out, and that it is possible to argue that other clauses described as “warranties” in the same section (for example the Money Carryings Warranty) probably would not satisfy any of these tests, with the result that some other clauses that are described as warranties probably are not warranties.

[156]A key aspect when construing whether any term is a true warranty is to consider what the clause means (having regard to its commercial purpose). In the present case the Electrical Inspection Warranty is to be construed, as I have found, on the basis that the 5 year period for inspection and testing of the electrical installation is to be calculated from the date of the last inspection, and if no inspection has been carried out in the last 5 years then the inspection would have to be undertaken immediately (with no cover until such inspection had taken place) in the context of the commercial purpose of the Electrical Inspection Warranty which is to ensure so far as possible that the electrical installation is sound and without defect, occupiers are protected, and the risk of fire is reduced

[157]The proper construction of the Electrical Inspection Warranty therefore contemplates that if there has not been an inspection in the last 5 years it is to be undertaken immediately, with no cover until such inspection has taken place. Thus the envisaged consequence of an inspection not having taken place is not that the Policy be void ab initio (the consequence of a true warranty) but rather that there was an obligation to undertake an inspection immediately. This supports the conclusion that the Electrical Inspection Warranty is a suspensive condition, suspending cover under the Policy until complied with rather than a true warranty. The contrary construction would be that the requirement to undertake an inspection immediately is part of the true warranty so that if the electrical installation is not inspected immediately the Policy is void, and there can never be any cover (absent further contractual agreement or arguably affirmation).

[158]It is certainly strongly arguable that the Electrical Inspection Warranty is a true warranty for all the reasons I have identified. However, on balance, I consider that the proper construction is that the Electrical Inspection Warranty is a suspensive condition (or in the language used in older cases a warranty descriptive of the risk or delimiting the risk), which reflects the intention of the parties by reference to what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language of the contract to mean.

[159]That leaves the question as to the nature of the suspensive condition. Here the key is the commercial purpose of the Electrical Inspection Warranty set against the backdrop of the cover provided by Insurers and the associated risks to which Insurers were exposed. The purpose of the Electrical Inspection Warranty is to ensure, so far as possible, that the electrical installation is sound and without defect, occupiers are protected, and the risk of fire is reduced. That risk of fire is relevant to almost all aspects of the cover to be provided by Insurers, and is at the very heart of important aspects of the cover including Buildings, Contents, and Business Interruption.

[160]I am in no doubt that having regard to the meaning of the Electrical Inspection Warranty that I have found, and the commercial purpose of the Electrical Inspection Warranty that I have found, the proper construction of the Electrical Inspection Warranty is that it is a suspensory condition, suspending all cover under the Policy from the date of breach (in this case the date of inception) due to the importance of such inspection and testing to minimise the risk of fire, a key peril insured under almost all sections of the Policy (though, as appears below, it is not necessary that cover be suspended in respect of all risks, for there to be no cover in the present case).

[161]This was, of course, the same conclusion as was reached by Burton J in Sugar Hut. It has been submitted that Sugar Hut was wrongly decided and I should not follow it. I do not reach my decision on the basis of following the decision of Burton J in Sugar Hut. I simply note that the same conclusion was reached by a highly experienced Commercial Court judge, well versed in the applicable principles of insurance law. In such circumstances had I considered that a different conclusion was justified, I would have given careful consideration as to whether I was correct in the view I had formed before I chose to depart from the view expressed by such a judge. In the event, the conclusions of Burton J do no more that confirm the conclusion I have reached. It is accordingly neither necessary nor appropriate for me to consider whether Sugar Hut was rightly decided on its particular facts in relation to an all risk policy covering multiple properties. I would simply add that I consider that Burton J was clearly right in the views he expressed as to the proper construction of the extraction duct cleaning requirement and that time ran from the previous inspection (as it does under the Electrical Inspection Warranty).

[162]It is an academic, and ultimately sterile debate however, as to whether the Electrical Inspection Warranty, as a suspensory condition suspended all cover under the Policy, as what we are concerned with is cover for losses arising out of fire. Even if, contrary to my finding as aforesaid, the Electrical Inspection Warranty was not a suspensory condition suspending all cover under the Policy, I am under no doubt whatsoever that the Electrical Inspection Warranty suspended all cover for losses arising out of fire, which is all that matters for determination of the preliminary issue, and I accordingly so find in the alternative.

[163]Such a conclusion accords with the meaning of the Electrical Inspection Warranty I have found and its commercial purpose – until the risk of fire has been minimised, and therefore the commercial purpose of the clause carried out, there is to be no cover for losses arising out of fire, the very peril against which the Electrical Inspection Warranty is directed. This, indeed, is a meaning of the clause which makes good commercial sense and what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language of the contract to mean. Before there can be any cover for losses arising out of fire, the electrical installation needs to be inspected and tested (if it has not already been inspected and tested in the last five years).

[164]Such a person would know all the matters identified in paragraph 102(3)-(13) above and, most pertinently of all, that the purpose of the clause was to minimise the risk of fire. Such a person would also know that it is notoriously difficult to identify the cause of a fire, especially if there has been extensive damage destroying the property, including the subsuming of the wiring itself, as a result of which it may never be possible to identify the actual cause of the fire, or establish the state of the electrical wiring and installation generally immediately before the fire. They would recognise that in such circumstances that pending such inspection, there would not be any cover in respect of losses arising out of fire.

[165]In contrast, it would be a commercial nonsense, and an entirely unbusinesslike construction for the Electrical Inspection Warranty only to suspend cover in respect of losses arising of defects in the electrical installation pending inspection of the electrical installation but not losses arising out of fire generally, still less that it would only suspended cover in respect of fire proved to be caused by defects in the electrical installation. First, suspensive conditions suspend cover in respect of particular risks – here losses arising out of fire – it is artificial in the extreme to suggest that cover be suspended in respect of the risk of there being defects in the electrical installation which in turn (may have) caused a fire. Put another way, such a construction would be to slice the insured risks which were covered too thinly. Secondly, such a suspensive condition would offer little or no protection to an insurer bearing the risk of loss, as it might be difficult (and expensive) to prove the cause of a fire, and indeed in many cases causation might always remain unknown or unknown without lengthy, and costly, investigation. Thirdly, such a term would cause uncertainty which would impact upon an insured as much as an insurer – it would not be clear whether an insured was entitled to an indemnity on the facts as known (and potentially without expert evidence that might or might not ultimately shed further light on such facts). Such a construction cannot possibly reflect the objective common intention of the parties at the time of contracting.

[166]The position therefore is that irrespective of whether the Electrical Inspection Warranty was in fact a true warranty or simply a suspensory condition of the nature I have found, Insurers were not on cover in respect of losses arising out of fire, at the date of the fire, and I so find.

[167]The Electrical Inspection Warranty was a suspensive condition for the reasons I have given. Compliance with it was not a mere condition precedent to liability, at least not one requiring some causal connection between the breach and the loss. In the context of a suspensory condition there is no requirement that there be any causal link between the breach of the suspensory condition and the loss. Having regard to the meaning of the Electrical Inspection Warranty I have found, and its commercial purpose as I have found, the proper construction of the Electrical Inspection Warranty is that it was a condition suspending cover (for the reasons that I have given above in particular concerning its importance to the overall cover being offered) quite unconnected to whether the breach caused the loss in respect of which indemnification is sought. This is also entirely consistent with General Condition 14(a) of the Policy that, “the due observance and fulfilment of the terms of this Policy insofar as they relate to anything to be done or complied with by the Insured shall be conditions precedent to any liability of the Insurers to make any payment under this Policy” which imposes no causal connection in the context of breaches of the Policy.

[168]However, yet further, even if (contrary to the above findings), the Electrical Inspection Warranty was (as Towergate and the Insured submit) merely “a term of the Policy requiring compliance as a condition precedent to Insurers’ liability to provide cover in respect of risks to which the stipulation related” (paragraph 7(a) of Towergate’s Written Skeleton) (my emphasis) – i.e. a Risk Specific Condition Precedent, the risk to which the stipulation related was fire, and I so find. Accordingly there was no cover in respect of fire until the term was complied with (namely the inspection and testing of the electrical installation), and that condition precedent to liability not being fulfilled at the time of the fire, Insurers are under no liability to the Insured in respect of the sums claimed, and I further so find.

[169]In this regard, and for the same reasons that I have already identified above, the “risks to which the stipulation related” cannot possibly be the risk of a fire due to a defect in the electrical installation, as opposed to the risk of fire generally. That would be a contrived and unbusinesslike construction.

[170]In the above circumstances Insurers are not under any liability to indemnify the Insured in respect of the sums claimed, and I so find.

[171]Of course even if, contrary to all the above, the Electrical Inspection Warranty was merely “a term of the Policy requiring compliance as a condition precedent to Insurers’ liability to provide cover in respect of risks to which the stipulation related” and, contrary to all the above, the “risks to which the stipulation related” was the risk of a fire due to a defect in the electrical installation and not the risk of fire generally, then there would remain the question as to whether the fire was caused by a defect in the electrical installation. This was not the subject matter of the preliminary issue and, subject to any amendments as might have been necessary to the Amended Particulars of Claim, would have been a matter for trial thereafter in any event.

The Letter of 21 December 2010

[172]It will be recalled that in their letter of 21 December 2010 (the Letter), Insurers noted the fact that during the 5 year period prior to the date of inception of 3 December 2009 no inspection of the electrical installation of the premises had been carried out and it was stated:- “This means:- 1. You are therefore in breach of the Electrical Installation Inspection Warranty PG001. For that reason we hereby void the above policy from inception on 3 December 2009; and 2. Alternatively, cover under the policy was suspended from the date of inception of 3 December 2009 and accordingly the policy would not respond to this claim.”

[173]It is suggested by Towergate and the Insured that this amounted to a repudiatory breach of the Policy. However in the light of my findings Insurers were not in breach, still less repudiatory breach, of the Policy and I so find. For the reasons that I have given Insurers are under no liability to the Insured in respect of the losses claimed.

[174]Even if, contrary to my findings, the Electrical Inspection Warranty was a term of the Policy requiring compliance as a condition precedent to Insurers’ liability to provide cover in respect of risks to which the stipulation related, and the “risks to which the stipulation related” was the risk of a fire due to a defect in the electrical installation and not the risk of fire generally, then it would have remained possible that Insurers would not have been in breach, because they would have had a defence to the claim if the fire was caused by a defect in the electrical installation, and proved the same at trial. If that was the position they would not have been in repudiatory breach in writing as they did – they would have been proved correct in declining to indemnify the Insured.

[175]Yet further, even if (contrary to my findings) Insurers had been in repudiatory breach in writing as they did, there is no evidence before me that could properly have been regarded as an acceptance of any such repudiatory breach (including the matters asserted at paragraph 54 of Towergate’s Skeleton Argument). As is well-established, an unaccepted repudiatory breach is a “thing writ in water” and of no effect, with the contract remaining alive for the benefit and burden of both parties. Indeed far from accepting any alleged repudiatory beach, and contrary to the assertions made before me, I consider that the Insured’s conduct throughout has been entirely consistent with maintaining that the Policy is extant and that Insurers are liable thereunder. However whether or not this is so does not arise for consideration on the facts, given my findings that Insurers are under no liability to the Insured.

The Preliminary Issues

[176]For completeness I answer the Preliminary Issues in the following overall terms:-(1) The Electrical Inspection Warranty required the electrical installation be inspected and tested every five years from the date of the last inspection, and if not previously inspected and tested within five years from the date of the last inspection it required the electrical installation be inspected and tested at or prior to inception of the Policy.

(2) The Electrical Inspection Warranty was a suspensive warranty / suspensive condition suspending all cover under the Policy alternatively all cover under the Policy for losses arising out of fire.

(3) Insurers were not in repudiation of the Policy in circumstances where, as found, they are under no liability to the Insured under the Policy.

[177]I trust that the parties will be able to agree an order in the light of my judgment including as to costs and any consequential matters, but if any areas of disagreement remain I will hear argument at the time of the hand-down of this judgment.