Kyle Bay Ltd (t/a Astons Nightclub) v Underwriters Subscribing Under Policy No. 019057/08/01

A compromise of an insurance claim is a contract and may, in principle, be rescinded for misrepresentation. The public policy favouring finality does not create an immunity from the ordinary incidents of contract.

Common mistake does not avoid a settlement merely because the parties proceeded on an erroneous view of the policy or the law. The mistake must make performance impossible, or render the subject matter essentially and radically different from that which the parties believed it to be.

Statements made during settlement negotiations must be examined carefully. A party’s assertion of its interpretation of a policy may be an argument or opinion rather than a representation of fact.

The claimant’s nightclub was destroyed by fire. Its business interruption policy was expressed in the schedule to be declaration linked, although the underwriters’ underwriting intention was that cover should be on a gross profits basis subject to average.

The claim was settled on the basis that average applied. The claimant later contended that the policy was declaration linked and sought to reopen the settlement on grounds of construction, rectification, common mistake, misrepresentation, and an alleged condition precedent.

The central questions were whether the policy was subject to average and whether the settlement could be avoided or treated as conditional because the parties had misunderstood the policy’s effect.

1. Construction. The policy and schedule, read together, clearly provided declaration-linked cover. The standard policy wording supplied the applicable regime, including the upper limit of 133⅓% of the estimate. The cover was therefore not subject to average.

2. Rectification. Rectification required a continuing common intention, outwardly expressed, that the insurance should be on a gross profits basis. The mistake was unilateral on the underwriters’ side. There was no common intention and no sharp dealing justifying rectification for unilateral mistake.

3. Common mistake. Applying Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407, the settlement was performable and was in fact performed. The mistaken assumption about the policy’s legal effect made the settlement a poor bargain, but did not make performance impossible or render the subject matter essentially and radically different. The settlement was not void.

4. Misrepresentation. A compromise may be rescinded for misrepresentation, but the court must distinguish a representation from an argument or contention made in negotiations. The letter stating that the policy was not declaration linked and that average applied was, in context, an account of the underwriters’ position, or at most an honestly held opinion. It was not a misrepresentation of fact. The later settlement calculation likewise did not represent that the policy was on a gross profits basis. The inducement issue was therefore academic, although the court found no inducement.

5. Condition precedent. The correspondence did not create an express or implied condition that the settlement would lapse if average proved inapplicable. The parties intended finality. A party wishing to reserve rights against a subsequent legal determination must secure an express term.

The claim failed. The settlement remained binding.