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

A compromise is not vitiated by common mistake merely because the parties materially miscalculate entitlement. The mistake must make the subject matter of the compromise essentially and radically different from that which the parties believed it to be. A significant reduction in payment may remain a mistake about a detail of the contractual basis rather than a radical change in subject matter. Whether an insurer’s statement about policy construction is a representation or a contention depends on its words and context, judged objectively. A professional recipient expected to hold the policy and form an informed view may receive such a statement as argument. Inducement is not established where the recipient assumes the contention only for settlement purposes and intends to investigate it later.

The insured nightclub’s policy was in fact declaration-linked, although the underwriters’ loss adjuster negotiated a business interruption settlement on the assumption that it was written on a gross-profits basis and subject to average. After settlement, the claimant sought to set it aside or reopen it for common mistake or negligent misrepresentation.

The Deputy High Court Judge found a common mistake but held that it did not vitiate the settlement. He also rejected the misrepresentation claim because the insurer’s statement was a contention rather than a representation and did not induce the settlement. The appeal concerned the proper common-mistake test and the classification and effect of the insurer’s statements.

1. Disposition. Lord Justice Neuberger gave the leading judgment, with Lord Justices Wilson and Ward agreeing. The appeal was dismissed.
2. Common mistake. The Court considered Great Peace Shipping Ltd v Ttsavliris Salvage (International) Ltd [2002] EWCA Civ 1407, [2003] QB 679, including its impossibility-of-performance formulation and its approval of the approach in Associated Japanese Bank (International) Ltd v Credit du Nord SA [1989] 1 WLR 255. It was unnecessary to choose between the formulations because they were substantially equivalent in this context.
3. Applying the test that the mistake must make the subject matter essentially and radically different, the settlement was not vitiated. The parties correctly understood that they were settling a business interruption claim arising from the fire. The mistake concerned the basis on which the policy was written. It did not affect the validity of the policy, the parties, the property, the nature of the business or the risks covered. The resulting reduction in entitlement, although substantial, was not radical. The court left open whether a settlement could be vitiated where the disputed issue had been raised and considered during the negotiations.
4. Misrepresentation. Whether a statement is a representation or a contention depends on the words used in context. The statement must be interpreted objectively by reference to the circumstances known to both parties and the characteristics of the reasonable recipient. The same approach applies to a unilateral statement, as recognised in Primus Telecommunications PLC v MCI Worldcom International Inc [2004] EWCA Civ 957 and Mannai Investment Co Ltd v Eagle Star Life Assurance Ltd [1997] AC 749.
5. The insurer’s statement was properly treated as a contention. It was made to an experienced professional loss assessor who had the schedule and could reasonably be expected to obtain and consider the full policy. Wauton v Coppard [1899] 1 Ch 92 was distinguishable because it concerned a statement to a lay person who lacked the relevant document. The finding of no inducement was also open to the judge: the loss assessor treated the insurer’s position as a contention, assumed it for the settlement, and intended to investigate it later.

• Court of Appeal (Civil Division) dismissed the appeal on 7 February 2007.
• High Court of Justice, Queen’s Bench Division, Commercial Court dismissed the claimant’s claim in a judgment dated 29 March 2006, reported at [2006] EWHC Comm 607.