Disputes about whether Braganza duties can be implied into contracts are growing in number and frequency.
This Legal Note considers their applicability in a case concerning property valuations, culminating in the litigation in UK Acorn Finance Ltd v Markel (UK) Ltd [2020] EWHC 922 (Comm); [2020] PLSCS 73 between a lender and the company that insured the firm of surveyors that was instructed to provide the valuations.
Background
The lender specialised in the provision of bridging finance for agricultural businesses, and had obtained judgments totalling £13.2m against the surveyors, who had overvalued 11 properties for it over a two-year period. But the surveyors’ insurers had formally avoided the firm’s professional indemnity insurance policies.
The insurers explained that, before the policies were issued, the surveyors were asked to confirm that all their valuation work was for lending institutions that were either UK clearing banks or building societies, and that they had not undertaken any work for sub-prime lenders. This was important because there was a risk that the appetite of sub-prime lenders for higher loan-to-value ratios, and the quality of their borrowers’ covenants, would lead to a higher level of borrower default – and a higher number of negligence claims against the valuers acting for them.
The firm’s answer was that it worked only for UK clearing banks or building societies – even though its valuations for the lender, and others, did not fall into either of these categories.
The firm’s insurance polices included an unintentional non-disclosure clause (UND clause) stating that the insurers would waive their rights to avoid the policies if they were satisfied that “any non-disclosure or misrepresentation was innocent and free from any fraudulent conduct or intent to deceive”. Unfortunately, however, the insurers took the view that the firm had deliberately and dishonestly failed to disclose their work for sub-prime lenders.
Braganza duties
The lender challenged the insurers’ decision to avoid the insurance policies. Consequently, the court had to decide whether the principles laid down in Braganza v BP Shipping Ltd [2015] UKSC 17 should be applied.
The court is more likely to apply Braganza in cases involving an inequality of bargaining power between parties to a contract. It established that, in cases involving the exercise of a contractual discretion, judgment or evaluation of some state of affairs by one party, as a decision-maker, which affects the interests of both, where there is a conflict of interest between them, the court can imply a term that the decision must be judged by reference to the answers to two questions raised in Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223. Did the decision-maker ignore something that should have been taken into account, or consider something that was irrelevant? And, even if the decision-making process itself was flawless, was the resulting decision one that no reasonable person could have made?
In this respect, the lender drew the court’s attention to Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563, which established that the more serious the allegation, or the more serious the consequences of it being true, the more cogent the evidence must be to prove it.
As Lord Hoffman explained in Secretary of State v Rehman [2001] UKHL 47, convincing evidence would be required to be satisfied that an animal seen in Regent’s Park was more likely to have been a lioness than an Alsatian dog. Similarly, cogent evidence is generally required before being satisfied, on the balance of probabilities, that someone has acted fraudulently, as opposed to innocently or negligently.
Wrong approach
The insurance policies predated the Insurance Act 2015 and the judge accepted that the misrepresentations made to the insurers were breaches of warranty that would have entitled them to avoid the policies, were it not for the UND clause, which was a classic example of a provision to which Braganza should be applied.
Furthermore, the implication of a Braganza duty would plainly satisfy the rules relating to implied terms explained in Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72; [2016] EGLR 8. The insurance policies had appointed the insurers as the decision-maker and the court could not substitute its own decision instead. Therefore, unless the unqualified terms of the policies were qualified by the implication of a Braganza duty, it would be open to the insurers to make decisions that were arbitrary, capricious or irrational, which neither party could have intended to permit. So the implication of a Braganza duty was necessary, and gave business efficacy to the contract.
The valuers were chartered surveyors, for whom findings of dishonesty would be very serious, and the evidence suggested that the insurers had failed to approach the question of their honesty with an open mind, taking into account the principles laid down in Re H. They had simply assumed that the firm had dishonestly tried to conceal its work for sub-prime lenders, rather than testing whether that was actually the case by reference to conduct that was apparently inconsistent with their assumption.
The judge accepted that the decision to avoid the insurance policies might have been defensible had the insurers considered all the relevant factors and ignored points that were immaterial. But they had not done so, and that made it very difficult to conclude that the insurers’ decision was one that they were entitled to reach.
Key points
- An insurer was subject to Braganza duties in its role as the decision-maker in relation to an unintentional non-disclosure clause
- It had taken the wrong approach to the question of whether a firm of surveyors had been dishonest and, as a result, its decision to avoid their professional indemnity insurance was irrational
Allyson Colby is a property law consultant
