When a cap on liability is not what it seems

Published 17 December 2019 by Herrington Carmichael LLP

The court of appeal have recently handed down a judgment which highlights the importance of ensuring the terms of your contract are clearly drafted. If they are not, you may find yourself in a position where your liability is more than you first thought.[1] 

In this particular case, which involves an insurance contract relating to a new homes warranty, the insurer thought their liability for a particular claim was capped at £3,634,074 however the courts found in this context that the limit was actually £10,846,076.

The courts were quick to point out that the wording of the contract was not clear in this regard and the insurer may have found themselves in a much better position had the drafting been set out in certain terms.

The Claim

Mr Manchikalapati and others (the leaseholders) were the purchasers of several flats in a new-build residential development known as Lawrence House in Manchester, which consisted of 104 flats in total.

Defects in the development became apparent and the leaseholders and the freeholder commenced legal proceedings in respect of the new homes warranty provider.

The liability of the warranty provider was capped in the contract and one of the questions before the courts was what the exact level of that cap was. This was as a result of the poor drafting in the contract which left two possible interpretations of the relevant clause.

Maximum Liability cap

The insurance policy included a maximum liability cap (MLC) which stated that:

“for a New Home which is part of a Continuous Structure, the maximum amount payable in respect of the New Home shall be the purchase price declared to us subject to a maximum of £25 million.”

One of the key findings in the first instance judgement was that leaseholders claims succeeded, but the MLC capped coverage to the purchase price of the leaseholder’s individual properties. The cost of the remedial works was 9.7 million, but the total purchase price of all the leaseholders’ flats was only around £3.6 million, so damages were capped at the lower figure.

Court of Appeal decision

The leaseholders appealed this decision stating that the correct meaning behind the MLC was that the liability of the warranty holder was capped at the value of all of the flats in the block, and not just those which were presenting the claim.

 In summary, the Court of Appeal allowed the leaseholders appeal and the court found that, whilst the MLC is not clear in all respects, it applied to the total overall value of all 104 flats in the development which was £10.8m.

 The Court of Appeal looked at the MLC in great detail, finding that:

  • The MLC was ambiguous and not well drafted. It was therefore necessary to interpret the MLC in the context of other parts of the insurance policy.
  • The court could also have regard to the obvious commercial purpose of the policy
  • The MLC must be interpreted in a manner which is consistent with, not repugnant to, the purpose of the insurance contract.
  • The Court of Appeal made it clear that a single leaseholder should be able to recover the entire cost of rectifying the present or imminent danger to the health and safety of occupants (as was the situation in this case) and that the entire cost of the remedial work could easily exceed the purchase price of an individual flat (as was the case here).

Conclusion

This Court of Appeal’s decision demonstrates the courts approach to interpreting insurance wording and emphasises the importance of a clear and logical approach to drafting and always ensuring that the parties’ intentions are clearly set out in the contract, or, like the warranty provider in this case, you could face more liability than you bargained for. 

How can we help?

We advise all businesses including construction companies and employers on the contractual relationships and their terms and conditions.  For drafting and negotiation advice on your construction contracts, please contact Mark Chapman on 01276 686222 and Cesare McArdle on 0118 977 4045.

[1] Manchikalapati & others v Zurich Insurance PLC (T/A Zurich Building Guarantee & Zurich Municipal) and East West Insurance Company LTD [2019] EWCA Civ 2163