Scotbeef contracted with D&S Storage to use its warehouse facilities to store meat.
Over 100,000kg of meat went bad and Scotbeef sued D&S. D&S argued that its liability was limited by the Food Storage & Distribution Federation terms (the “FSDF terms”) in the contract.
This argument failed, however, because D&S had not in fact incorporated the FSDF terms in the contract with Scotbeef. D&S went into liquidation and Scotbeef brought proceedings against D&S’ liability insurers; Lonham, under the Third Parties (Rights against Insurers) Act 2010.
Lonham defended the claim on the basis that it had no liability to D&S under the policy, since D&S had misrepresented that it incorporated FSDF clauses in its contracts in breach of the following clause:
DUTY OF ASSURED CLAUSE
It is a condition precedent to the liability of Underwriters hereunder:-
i. That the Assured makes a full declaration of all current trading conditions;
ii. That during currency of this policy the Assured continuously trades the conditions declared and approved by Underwriters in writing;
iii. That the Assured shall take all reasonable and practicable steps to ensure that their trading conditions are incorporated into all contracts entered into by the Assured.
The High Court held that all 3 sub-clauses had to be construed together and that the status of the three sub-clauses had to be considered in the context of the duty of fair presentation. Sub clause iii) put D&S in a worse position than the Insurance Act 2015 and so had to satisfy the transparency requirements of the act, which it did not.
In other words, the judgment looked at a condition precedent through the lens of the duty of fair presentation. Even allowing for the fact that the “Duty of Assured” clause was peculiar, it was a curious decision.
Lonham successfully appealed the High Court’s decision, and the Court of Appeal took the opportunity to bring the legal analysis back to more familiar ground.
The Court of Appeal held that sub-clause 1 was a representation to which the duty of fair presentation was indeed relevant. Sub-clauses 2 and 3, however, were warranties and conditions precedent to indemnity under the policy to which sections 10 and 11 of the Insurance Act 2015 were relevant. Both of those sub-clauses concerned future business operations and required D&S to trade on agreed terms and to incorporate certain trading conditions into new contracts.
The policy expressly provided that breach of a condition precedent entitled Lonham to decline the claim. Furthermore, under the Insurance Act 2015 s.10(2) an insurer has no liability for a loss occurring after a breach of warranty where that breach was left unremedied. That was the situation in this case.
The Court of Appeal concluded that Lonham was not liable to indemnify D&S and so Scotbeef’s claim failed.
The insurance community may feel justifiable relief that it does not need to review all conditions precedent or warranties through the lens of the duty of fair presentation. This case does highlight, however, that contracts containing representations can be relevant to the duty of fair presentation. It also vividly illustrates the litigation risk posed by unclear policy wording – here, where a clause failed to distinguish clearly between representations and warranties.
If you would like to discuss this topic further, please get in touch.
Andrew Schütte - Partner & Head of Reinsurance
Neema Daniel - Assistant Solicitor
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