Insurance Contracts CP - Law Reform Commission

y English judges to any extent, and the Law Commissions in their Consultation Paper comment that
there are no cases in which s.2(2) has been applied to an insurance contract. 51
4.42 Steyn J defended his refusal to apply s.2(2) on the basis that to do so would undermine the
‗policing‘ function inherent in the law of misrepresentation. Clearly there is much force in this where the
misrepresentation has been made fraudulently and even negligently. It has no applicability in relation to
the innocent misrepresentation made without fault. Nevertheless, there is the possibility of retaining the
insurer‘s right to avoid a policy on the basis that the proposer has made a negligent misstatement or
negligent misrepresentation, while at the same time tempering the disproportionate effect of the
rescission remedy, by providing that financial adjustments or damages are to be the primary relief
following a negligent misstatement or a negligent misrepresentation: rescission would be reserved to
extreme ‗policing‘ situations. One possible approach would be to turn to section 45(2) of the Sale of
Goods and Supply of Services Act 1980, the counterpart to the English statutory provision considered in
Highlands Insurance. Section 45(2) provides:
―Where a person has entered into a contract after a misrepresentation has been made to him
otherwise than fraudulently and he would be entitled, by reason of the misrepresentation, to
rescind the contract, then, if it is claimed in any proceedings arising out of the contract that the
contract ought to be or has been rescinded, the court may declare the contract subsisting and
award damages in lieu of rescission, if of opinion that it would be equitable to do so, having
regard to the nature of the misrepresentation and the loss that would be caused by it if the
contract were upheld, as well as to the loss that rescission would cause to the other party.‖
4.43 The Northern Ireland decision in Odyssey Cinemas Ltd v Village Theatres Three Ltd 52 provides
a useful illustration of how the court may utilise the discretion. This case concerned a claim by a
commercial tenant to rescind the lease of a cinema based upon misrepresentations concerning noise
emanating from adjoining licensed premises. The lessor‘s solicitors who made the misrepresentation
were held to have done so negligently but not fraudulently or recklessly. In the Northern Ireland High
Court, Deeny J turned the subsection on its head when holding that it would be inequitable not to award
damages in lieu of rescission. No bona fide effort was made by the lessee to deal with the noise problem,
characterised by Deeny J as ―not an inherent and irreparable defect in the premises.‖ The lessor was a
mark for damages – indeed the lessor was owed rent by the lessee. Rescission if granted would have
disproportionate consequences. In essence the lessee was seeking to use a misrepresentation relating
to a minor problem as the basis for resiling from what turned out to be a bad bargain. On appeal, the
Northern Ireland Court of Appeal considered rthat Denny J had erred in concluding that damages would
be reduced by contributory negligence, as such, under the 1967 Act. Nonetheless, the Court also
accepted that this was one of the factors that could be tgaken into account in determining whether
rescission or damages was the appropriate remedy. Indeed, the Court considered that this reinforced
Denny J‘s view that damages rather than rescission sould be more suitable; and rtemitted the case to him
on this basis.
4.44 It might be possible to build upon section 45(2) by providing the judge or the Ombudsman with
a number of indicative factors that could be reference points when the section 45(2) discretion arises in
the context of insurance contracts dispute resolution. These factors could include:
the factual context in which the misrepresentation was made
the practicality of providing the insurer with an alternative remedy in damages
the availability of a remedy to the proposer against a third party such as an insurance broker
the relevant insurance sector and the reaction within it had no misrepresentation been made (ie
would the proposal have been declined, loaded etc.)
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52
July 2007, page 25. Indeed, Clause 4, specifically Clause 4(3) of the Consumer Insurance (Disclosure and
Representations)Bill 2011 stipulates that for careless misrepresentations the sole remedies for
misrepresentation are found in the schedule to the Bill, apparently making resort to section 2 of the 1967 Act
impossible.
[2010] NICh 1, [2010] NICA 25.
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