Professional Negligence and Liability

Chapter 5



1. The nature and importance of professional indemnity insurance

5.1 Professional indemnity (“PI”) insurance is a type of liability insurance. It is usually written on a claims-made basis (i.e., it responds to claims in the policy year, or arising from circumstances notified to the insurer in the policy year), and provides an indemnity for certain forms of liability incurred by professionals, including many claims discussed elsewhere in this work. It is critical to claims against professionals. The indemnity under it may well be a claimant’s only real hope of making any substantial recovery, let alone being fully compensated. Meanwhile, the defendant professional will look to their PI insurer to fund and conduct their defence, or, if all else fails, to fund a settlement or pay a judgment. Indeed, such is the importance of PI cover that many regulators positively require that the professionals they regulate have sufficient PI cover.1

2. The structure of this chapter

5.2 Like any other insurance policy, a PI policy is a contract, but is also subject to some specific rules and principles of insurance law, such as the duty to make a fair presentation of risk. This structure - general contract law, overlaid with insurance-specific principles - informs the structure of this chapter: topics which form part of any work on the law of contract are interspersed with topics specific to the law of insurance. The chapter begins by addressing the formation of the contract of insurance and its enforceability before turning to the nature, interpretation, and classification of its terms. Then, it addresses flaws in consent, arising from misrepresentation and material non-disclosure - i.e., failing to make a fair presentation of the risk. Next, the chapter addresses the operation of the policy, and in particular the effect of insuring clauses which determine cover, conditions, and exclusions, before turning to claims by the insured against the insurer, and, finally, third-party claims against the insurer. 2


1. Introduction

5.3 In principle, a contract of insurance is formed just like any other contract. Normally, there must be an offer, acceptance of it, intention to create legal relations, and consideration. On top that, the agreement reached must be certain and complete enough. Yet applying these traditional requirements in the context of insurance is not always easy. How do slips produced by brokers, and the endorsement of the slip by or for an underwriter, or the completion of a proposal form by the prospective insured map onto the traditional scheme of offer and acceptance? What must be agreed about the risk and the premium before the contract’s terms are sufficiently certain? The rest of this section sets out to address how the fundamental requirements for the formation of a contract apply in the context of insurance. It does so by first giving an overview of how parties tend to conclude contracts of insurance (particularly PI insurance). Then it addresses the basic requirements of offer, acceptance, intention to create legal relations, consideration, and what must be agreed for the contract to be certain and complete enough, as well as touching on what is not required. Finally, it considers some issues arising from practices in the insurance market including: using slips; having leading and following underwriters; using proposal forms; using terms which appear to suspend the risk or prevent a contract coming into force; granting temporary cover; and renewals of cover.

2. How contracts of insurance are made

5.4 Generally, the prospective insured will complete a proposal form, and send it to the proposed insurers. The form is typically a standard-form document, created by, or for, the insurers. Through it, the insurers seek information about the prospective insured and the risk. Depending on the answers the insured gives, the insurers may insure the risk, or may not, or may only agree to do so on different terms, making a counter offer. Throughout this process one or both parties may well be acting by intermediaries - e.g., the insured may have a broker. While that may raise issues about agents’ authority if there is a dispute, or about the attribution of their knowledge (for example, whether the insurer’s agent’s knowledge of what it says were undisclosed material circumstances must be attributed to it), the mere presence of agents does not change the basic requirements for a contract. Nor does the fact that now many contracts of insurance are concluded online, as that will often entail the prospective insured completing a form equivalent to a traditional proposal. 5.5 Some contracts of insurance, however, such as those concluded at Lloyd’s, are concluded through a slip.3 A broker, on behalf of the prospective insured, will present a document called a slip, containing the proposed terms of the insurance. Underwriters then accept the risk by signing the slip (sometimes called scratching it) and setting out how much of the risk (in percentage terms) they wish to subscribe for. That is generally enough to create a contract of insurance.4 A leading underwriter may be granted authority by several insurers to agree to certain proposals of insurance for them all.5 The issues arising from this practice are considered below.6

3. The basic requirements

5.6 As explained, the fundamental requirements are as for any other contract. Generally, there must be offer and acceptance,7 plus intention to create legal relations, and consideration. The court is looking for, on an objective assessment, agreement, and it can consider the whole of the negotiations between the parties, and subsequent events and conduct in deciding whether and when there was such agreement.8 The agreement reached must also be sufficiently certain and complete - i.e., address all material terms. In this context, however, intention to create legal relations and consideration rarely raise issues. Thus the focus below is on offer, acceptance, and the need to agree all material terms.

(a) Offer

5.7 The offer may consist of words or conduct.9 Those words, or that conduct, must be an expression of willingness to contract on specified terms, made with intention to be bound as soon as the recipient accepts it.10 That test is applied from the position of a person in the position of the recipient of the alleged offer, with the recipient’s knowledge of the relevant circumstances, acting reasonably.11 One example of conduct typically seen as an offer in the insurance context is a broker putting forward a slip to underwriters to sign.12 Subject to the facts of the particular case (e.g., the offeror requesting particular terms) the courts will readily assume that an offer made by a prospective insured to a prospective insurer is to contract on the insurer’s usual or standard terms.13 That assumption is, however, subject to the insured having some means of knowledge of those terms’ contents (including by their broker).14 5.8 The offer must also be extant and thus available for acceptance when it is said to have been accepted. It will not be if: (i) the offer has been withdrawn, and that withdrawal communicated, before acceptance;15 (ii) there was no time limit for acceptance but a reasonable time has passed without acceptance;16 (iii) there was a time limit for acceptance but it has expired without acceptance;17 (iv) the offer has been rejected (including by a counter-offer) without being accepted;18 or (v.) the offer was expressly or impliedly to determine if a condition was met, and it was met (for example, the insurer makes an offer that is expressly conditional on the risk not materially changing, or an offer is made which is impliedly conditional on the same).19

(b) Acceptance

5.9 Unless the offer requires acceptance in a prescribed form, then it may be express or implied, and take the form of words, or conduct.20 So, for example, execution of the policy can count as acceptance, and acceptance of the premium is strong evidence of acceptance.21 Silence, however, is not sufficient, absent express or implied agreement to that effect.22 If the offer does prescribe a particular mode of acceptance then the question becomes whether it was, on the proper interpretation of the offer, exclusive: if not, then any mode just as advantageous to the offeror will suffice; if so, then the prescribed mode of acceptance must be used.23 5.10 The acceptance itself must be: (i) unequivocal; (ii) unconditional24 (in the sense of corresponding to the offer rather than being a counter-offer - though simply making express what is implicit or putting the same terms in different words will not depart from the terms of the offer and prevent such correspondence)25; (iii) (subject to any question of waiver)26 communicated to the offeror.27 As to the requirement for communication, while normally actual communication is required28 acceptance by post is considered to take place when and where posting happens.29

(c) Certainty and completeness

5.11 The terms of the contract must be certain and complete enough. The courts will, if possible, uphold the agreement, rather than finding it void for uncertainty or incomplete.30 But if there is ambiguity in the essential terms of the agreement (so the parties have failed to show a definite meaning on which the court can safely act - a conclusion the courts are generally reluctant to reach) then unless it is of very minor significance that is ordinarily fatal to enforceability.31 So too if the agreement is missing an essential term.32 In the context of insurance, the essential terms are the parties, the risk, the duration of the insurance, the premium, and the amount of the insurance.33 As explained below, however, not all of these matters must be expressly agreed: others can be filled in by implication. 5.12 Some terms must be expressly agreed: the parties; the risk; the limit of liability. Others, however, can be implied, and that an agreement would be incomplete without them being agreed is not itself a barrier to their being implied (including by being read into the offer leading to agreement).34 They may be implied because they are necessary for the business efficacy of the insurance, or so obvious they go without saying.35 Or they may be implied from: (i) the previous practice of the parties;36 or (ii) market practice (here, the liability insurance market), if it can be identified with certainty, is universally recognised and acknowledged in the market,37 and is reasonable38 so long as it does not contradict the express terms.39 One example of the type of term that can be filled in by implication is the premium. If the insurer has an ordinary rate for the relevant risk, or it was previously insured by the insurer at a given rate, it may be inferred that such rate applies. Or the premium may be marked as to be agreed, but the court may infer (for example, in insurance effected at Lloyds, because of market practice) that the parties intended a reasonable premium to apply, with the court or an arbitrator determining the premium in default of agreement.40

(d) What is not required

5.13 Unless the terms of the offer require them, neither delivery of a policy41 nor payment of the premium42 is needed to form a contract of insurance.

4. Issues arising from practices in the market

5.14 The liability insurance market has some peculiar practices, which can make deciding whether, when, and on what terms an agreement was reached less straightforward than it might be. Below, we address those mechanisms, and their impact on the formation of the contract of insurance.

(a) The use of slips

5.15 Issues can arise about the relationship between a slip, and the policy issued afterward. Strictly, there is no general rule on this, and ultimately their precise relationship will turn on their proper construction. Generally, however, the court will be willing to assume that although the contract may be formed on the insurer subscribing, but also that the policy better reflects the terms of the agreement than the slip. In Youell v. Bland Welch, Philips J said that the “natural assumption is and should be that the wording of the policy has been designed the better to reflect the agreement between the parties” (though in that case it was common ground that the policy was meant to supersede the slip).43 Similarly, in HIH v. New Hampshire Rix LJ said that although “it may well now be possible to talk of a general presumption that a policy is intended to supersede a slip”,44 though that comment was obiter. Indeed, in that case the court reconciled the terms of the slip and the policy rather than simply subordinating the former to the latter.45 Whether a slip is admissible in interpreting a policy on questions of construction is considered in more detail below, in the context of policy interpretation.46

(b) Leading and following underwriters

5.16 Sometimes a lead underwriter will be authorised by following underwriters to accept declarations under an open cover or a line slip. Then, their agreement creates a binding contract with the following underwriters if the risk would fall within scope of the cover, but not otherwise.47 That is because: (a) the agreement of the lead underwriter to accept the risk “triggers” a binding contract, rather than being an act of agency on behalf of the following underwriters; (b) the scope of the cover is available to the insured so there is no further representation about the lead underwriter’s authority.48

(c) Proposal forms

5.17 Many contracts of insurance are concluded through a process that involves the insured submitting a proposal form. As explained below, statements made in the proposal form, and the answers the insured gives to questions in it are important: inaccurate or incomplete answers can raise issues of misrepresentation and non-disclosure, the answers to which may be completed by ambiguity in the question or answer.49 Further, so far as the Insurance Act 2015 does not apply (e.g., to contracts pre-dating 12 August 2016) terms called “basis clauses”, explained below, can be used to convert statements in the form into warranties.50 In the context of other types of insurance, issues have arisen as to who, when the insured completes the form with help from the agent’s insurer, that agent is acting for in helping to complete the form.51 But these issues are uncommon in PI insurance, where often the insured’s agent (i.e., broker) will negotiate with the insurer.

(d) Terms suspending the risk or preventing a contract coming into existence

5.18 Insurers will sometimes make cover subject to delivery of the policy, receipt of the premium, or various subjectivities being met. The effect of such terms is a question of construction. The possible answers are as follows.
  • (1) The condition must be met for there to be a binding contract (e.g., if imposed in response to a proposal for insurance, the insurer has, on the proper construction of their conditional response, made a counter-offer which can only be met by meeting the condition).52
  • (2) There is a binding contract, but under its terms the insurer is not on risk unless the condition set is met.53 There are then two possibilities: the insurer is treated as being on risk from the moment the contract was formed,54 once the condition is met; or the insurer is on risk only from when the condition is met.55
  • (3) There is a binding contract, and the insurer is on risk from formation, but cover may be defeated if a given condition is not met in time, or a condition that must be met stops being met, so that there is a condition subsequent that can defeat cover.56
  • (4) There are two contracts: one immediately, giving temporary cover (this is discussed below) with another contract, of longer duration, coming into existence if a given condition is met (or not met, depending on the terms of the offer).57
  • (5) The condition does not affect whether there is a contract or the insurer comes on risk58- e.g., it is an administrative formality.
5.19 The answers to issues as to when the contract was concluded and when the insurer came on risk are important. Ordinarily the insured’s duty to make a fair presentation of risk (or to refrain from non-disclosure and making misrepresentations, if the pre-Insurance Act 2015 regime applies) runs only until formation, and the insurer will not be liable to indemnify the insured if they are not on risk.

(e) Temporary cover

5.20 Insurers sometimes grant temporary cover pending their final decision on the prospective insured’s proposal (or certain conditions being met: see paragraph 5.18 above). This tends to be a feature of other kinds of insurance (e.g., motor) but is addressed here for completeness. The temporary cover may well, in the first instance, be granted through the broker. In the context of non-marine insurance, brokers will often have express, actual authority to grant temporary cover. Even if they lack such actual authority then if left in possession of cover notes they will have (subject to notice on the prospective insured’s part of any want of authority) apparent authority to do so.59 Further, the Court of Appeal has held that in non-marine insurance a broker will, save in exceptional cases, have implied authority to grant temporary cover on behalf of the insurer.60 A contract for temporary cover is subject to the normal rules of contract formation and interpretation (though its temporary nature may affect how a reasonable observer would understand it), and, as with any other non-consumer contract of insurance, must follow a fair presentation of the risk (as discussed in paragraphs 5.60-5.118 below).61 It will usually take effect at once (as otherwise it would be largely pointless).62 How long it persists is a matter of construction, though usually it will last for the period specified in it, subject to determination on notice by the insurer.63 The temporary cover will often be expressly subject to the insurer’s usual terms for the type of risk in question, and that provision will generally be effective.64 With no express provision, the best view is that any temporary cover is sought on the insurer’s usual or standard terms.65 There is, however, some authority for the proposition that the insured will not be bound by terms which it would be unreasonable to expect compliance with, unless they had notice of them.66

(f) Renewals of cover

5.21 PI policies are normally for defined periods (e.g., a policy year) and so each renewal for a new year creates a new contract. This is important for three main reasons. First, the insurer is not, without more, bound to renew (and, similarly, neither is the insured). Second, the terms may change; though absent express agreement to the contrary, it is ordinarily assumed that renewals are on the terms of the previous policy.67 Third, just like any other contract of insurance the new contract created by renewal must come after a fair presentation of the risk (or, where the pre-Insurance Act 2015 regime applies, not induced by misrepresentation or material non-disclosure).


5.22 Even if a contract of insurance has been made, issues may arise as to its enforceability. Here, we consider two reasons why an otherwise valid contract of insurance, which is not said to be void, or voidable and avoided, may not be enforceable: illegality, and public policy; and lack of insurable interest.

1. Illegality and public policy

5.23 A contract may be unenforceable (or a claim under it barred) because of illegality. The law of illegality is complex, and has recently undergone significant development as a result of a series of appellate decisions, beginning with Patel v. Mirza.68 In general terms, an illegality defence can arise. In the context of insurance generally, issues surrounding illegality can arise in many ways: (i) the policy may have been concluded in breach of a statutory prohibition (e.g., by an insurer without authorisation);69 (ii) it may be illegal in inception or in performance;70 (iii) it may be to insure property which is tainted by illegality;71 (iv) the insured may have, by their own deliberate wrongdoing, caused the loss for which they seek an indemnity (in that they either intended to cause the loss, or intended the wrongdoing but not the loss, while the loss was the natural and probable result of the wrongdoing);72 or (v) the insured may have, while carrying out a crime, incurred liability for negligence or some other non-deliberate wrong, for which they now seek an indemnity.73 A full treatment of how issues surrounding illegality can arise in the context of insurance or the law of contract generally is beyond the scope of this chapter.74 But issues relating to illegality can and do often arise in the context of PI insurance, because questions may arise as to when the rules governing illegality stop a professional (or a third party stood in their shoes) seeking an indemnity from their insurer for the consequences of their own unlawful conduct (or that of a member of the professional’s firm) - i.e., in situations (iv) and (v) above. It is those most often arising issues which we address here.

(a) Sources of rules on illegality

5.24 It is important to distinguish, at the outset, between two sources of rules on illegality. One is the policy itself. So the contract of insurance itself may preclude the insured recovering an indemnity where (for example) the wrong for which they are liable was deliberate, or arose during them committing a crime. Indeed, it is presumed that the parties did not intend the insured to recover where, by their own deliberate act, they bring about the event for which they seek an indemnity (in the sense of the insured’s wilful act - even if lawful - being the direct, immediate cause of the loss, or the insured deliberately embarking on a course of conduct in which there is a clear risk of the loss happening).75 This is a matter of construction of the policy; not public policy or external rules of law. Many policies also have express terms precluding recovery in similar circumstances. For example, a clause may preclude any claim arising out of, based on, or attributable to the committing of any dishonest or fraudulent act if any such act is established by a decision of a court or arbitral tribunal, or an admission of the insured. Equally, many policies include terms excluding liability for intentional or deliberate acts (with these terms often read as applying when both the act and loss are intended but not where the act is intended yet the loss is not, and even recklessness as to the consequences of the act may not suffice, depending on interpretation of the clause),76 or criminal conduct.77 Applying these rules simply turns on interpreting the contract and applying its provisions. It does not involve detailed consideration or weighing of the public policy factors pointing towards and away from barring the claim followed by some sort of judgment on whether the claim should be barred in the way the external rules of law about illegality do. Rather, the rules and the consequence of any illegality are whatever the contract, properly interpreted, says they are. The second source of rules, however, consists of external rules of law which bar certain claims as a matter of public policy. It is those rules with which we are mainly concerned.

(b) When the rules on illegality are engaged

5.25 The first question is when those external rules are engaged. That question breaks down into two sub-questions: what level of wrongdoing is needed to potentially support an illegality defence; and whose wrongdoing is required (and in particular when, if ever, will an agent or employee’s wrongdoing suffice)?78 As to what type or level of wrongdoing is needed to potentially raise an illegality defence, not just any type of wrong will suffice. There is nothing to stop a party insuring against liability for innocently or carelessly committed civil wrongs, such as their own negligence, or breach of contract, or copyright infringement.79 The only types of act which can lead to an illegality defence are: (i) crimes; (ii) civil wrongs in relation to which dishonesty or corruption are elements of the cause of action; (iii) certain anomalous categories of misconduct (e.g., prostitution) which are not themselves crimes but are considered contrary to public policy and involve criminal liability for secondary parties; and (iv) breach of statutory rules enacted for the public interest and prescribe civil sanctions of a penal character (e.g., some competition law statutes).80 Even then, there is a residual category of strict liability offences when the party who commits them is not privy to the facts making them unlawful, which will not engage the illegality principles.81 So, for example, suppose that professional A, carries out act B carelessly, and unintentionally causes loss to C, to whom they owe a contractual duty and tortious duties, and sought an indemnity for their liability to C, the rules about illegality are irrelevant. Now suppose that A’s carrying out act B also amounted to a crime. Then the rules on illegality would apply, and the court would need to decide whether to deny A’s claim for illegality on the ground of illegality (and indeed it would have to decide that even if the insurer did not take the point).82 There is a split in the cases about whether the outcome of that process is a foregone conclusion - there are motor insurance cases suggesting the claim would not be barred; Gray v. Barr suggests it would.83 But ultimately the best view is that the answer will depend on the court’s view about whether allowing the claim would undermine the integrity of the legal system, with that view reached by considering the factors set out in Patel v. Mirza, as explored in paragraph 5.27 below.84 5.26 That leaves the other sub-question identified above: whose wrongdoing counts for the illegality defence? There is nothing to stop an insured insuring against the illegal acts of their employees. So, for example, in Lancashire County Council v. Municipal Mutual Insurance Ltd a chief constable and county council could recover under a liability policy for criminal and unconstitutional acts of their police officers.85 Difficulty arises, however, in relation to corporate insureds when the wrongdoing is attributed to the company - so that it is no longer just the employee’s wrongdoing, but that of the company itself. Whether the acts and intention of the employee or agent fall to be attributed to the insured turns on the rules of attribution, which in turn depend on the context in which attribution has arisen and the purpose of the substantive rule in relation to which that question has arisen.86 The reasoning in KR v. Royal Sun Alliance plc suggests that the acts and intention of those who are to be considered, in effect, the company (i.e., who are the directing mind and will or alter ego of the company, rather than just employees) will be attributed to the company for the illegality rules.87 It is hard to see why the acts and intention of at least those persons should not be attributed to the corporate insured: if not them, then who?

(c) The effect of illegality

5.27 If there is unlawful conduct of the right type to potentially support an illegality defence, and it is treated as the claimant’s misconduct, then the court can bar the claim. The final question is whether it should. To decide that question, the court will ask whether allowing the claim to proceed would be inconsistent with policies to which the legal system gives effect, and thereby undermine its integrity.88 In answering that question, it will consider: (i) then purpose of the rule that has been breached; (ii) any other public policies which will be made ineffective or less effective by denying the claim; and (iii) the proportionality of denying the claim.89 The first two factors are to be considered at a high level of generality, and the court will not be expected to admit or address evidence on matters such as the effectiveness of the criminal law in one scenario or another.90 The court is simply identifying the public policies to which the law gives effect which are engaged by whether to allow the claim, and determine whether allowing the claim would be consistent with them, or, if there are competing policies where the balance lies.91 It is at stage (iii), proportionality, that the court will scrutinize the detail of the particular case.92 In applying this approach, which stems from Patel v. Mirza, 93 pre-Patel authorities are of precedential value, unless their reasoning cannot stand with the reasoning in Patel or can be considered wrongly decided in the light of the reasoning in Patel.94 The following points can also usefully be made regard to the application of this approach:
  • (1) What is called the narrow rule in Gray v. Thames Trains, that a claim seeking to recover losses caused by the imposition of a sentence for a crime is barred, has survived Patel untouched,95 and so where a claim seeks to recover such losses the outcome of the analysis above is essentially preordained.
  • (2) What is called the wider rule in Gray v. Thames Trains, that a claim seeking compensation for damage which is a consequence of (in the sense of being immediately caused by) their own criminal act is barred, is of precedential value but must now be read subject to Patel.96
  • (3) There was previously tension between a series of motor insurance cases, and Gray v. Barr.97 In the former group of cases illegality did not preclude an indemnity where there was an intentionally committed criminal act (e.g., drunken, reckless driving) leading to unintended, accidental loss (a car accident). In the latter case, the court seemed to suggest that if the insured intentionally carried out a criminal act, causing unintended loss, but the loss which they seek an indemnity for was foreseeable and probable as a result (as it would be in the drunken, reckless driving scenario) illegality would bar any indemnity claim. The best view is that while those cases might have some precedential value, or be instructive, trying to distinguish them into two categories of case, one where illegality will always preclude a claim for unintended loss resulting from an intended criminal act, and one where it will never do so, would be wrong.98 The right approach now, when faced with an intentional act, which is a crime, causing unintended loss, is to work through the Patel analysis.99 It may be that in cases involving PI insurance the importance of the insurance for innocent third parties comes into play at (at least) the second stage of the analysis, just as the importance of the insurance to innocent victims of dangerous drivers was recognised in the motor cases.

(d) Third parties and illegality

5.28 One final question which can arise in the context of PI insurance is whether an insurer can rely on an illegality defence they would have against the insured, against a third party who acquires the insured’s rights under the Third Parties (Rights Against Insurers) Act 1930 or the Third Parties (Rights Against Insurers) Act 2010. There is first instance authority in relation to the 1930 Act to the effect that any illegality defence is personal to the insured and cannot be relied on against the third party.100 But there is subsequent Court of Appeal authority to the opposite effect: the third party can be in no better position that the insured, so the insurer can rely, as against the third party, on any illegality defence against they have against insured.101 The same is true of any defence based on the construction of the policy.

2. Insurable Interest

5.29 An insured must have an insurable interest. In the context of PI insurance, this requirement arises from the nature of the contract. If the insured lacks an insurable interest in the subject matter of their professional indemnity insurance then they will have suffered no loss against which they can be indemnified, and the policy will be, if the insurer takes the point, unenforceable.102 The best view is that in the context of PI insurance, the subject-matter lies in the assets of the insured which are covered against loss in the event of their being liable to third parties.103 This also reflects Lord Eldon’s classic description of an insurable interest as “a right in the property, or a right derivable out of some contract about the property, which in either case may be lost upon some contingency affecting the possession or enjoyment of the party”.104 On this view liability is not the subject-matter of the insurance but the event or contingency against which the insured’s assets are insured. In any event, a person can insure against their own liability. As to when the insured must have their insurable interest, the answer is that they must have the interest at the time of loss but need not have it at the time of the contract. That would be necessary only if the Life Assurance Act 1774 applied to liability insurance, and it does not.105


5.30 Insurance contracts are subject to the same rules of interpretation as other contracts. Within the last decade the Supreme Court has considered those rules of interpretation in a series of cases: Re Sigma Finance Corp,106 Rainy Sky SA v. Kookmin Bank,107 Arnold v. Britton 108 and Wood v. Capita Insurance Services Ltd.109 Those decisions build on the earlier House of Lords decisions in Investors Compensation Scheme v. West Bromwich Building Society,110 and Chartbrook Ltd v. Persimmon Homes Ltd.111 In The Ocean Neptune,112 Popplewell J accurately113 summarised the effect of those cases, and the general principles governing the interpretation of contracts in the following terms:114

“The court’s task is to ascertain the objective meaning of the language which the parties have chosen in which to express their agreement. The court must consider the language used and ascertain what a reasonable person, that is a person who has all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract, would have understood the parties to have meant. 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 the objective meaning of the language used. If there are two possible constructions, the court is entitled to prefer the construction which is consistent with business common sense and to reject the other. Interpretation is a unitary exercise; 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 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; 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. 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. 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.”

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