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The Facts

From 1 September 2004 GlaxoSmithKline plc (GSK) operated an Employee Car Ownership Scheme (ECOS) under which eligible employees could use their car allowance to purchase a car on a credit sale basis. All cars so purchased were insured under a policy arranged by GSK with the Equity Red Star syndicate (Equity).

If it was necessary to provide cars for occasional business use by employees who were not eligible for the ECOS scheme, GSK hired a vehicle from National Car Rental (National). Insurance for these cars was arranged by National with Axa and paid for by GSK.

The policy for the ECOS vehicles was first placed in 2004. The policy document heading referenced ECOS but included a term that cover was provided to any driver authorised by GSK. The premium was calculated as a flat rate per car. The ECOS policy was renewed without any changes on 1 September 2005 and again on 1 September 2006.

On 5 October 2006 a GSK employee, Ms Ball, was involved in an accident with a motorcyclist, Mr Daniel, whilst driving a car hired by GSK from National. Mr Daniel鈥檚 compensation claim was settled for some 拢4.6m plus costs of which Axa鈥檚 share was 拢2.3m plus half of Mr Daniel鈥檚 costs.

Axa claimed a 50% contribution from Equity on the grounds that there was double insurance in place where the ECOS policy was worded so as to provide cover for Ms Ball. While acknowledging that the ECOS policy wording was wide enough to cover Ms Ball Equity鈥檚 position was that its common intention with GSK had been to arrange cover for the ECOS vehicles only. Equity therefore commenced proceedings seeking rectification of the 2006 insurance contract. GSK agreed but Axa opposed the application.

The Issue

The only issue before the court was whether the contract of insurance should be rectified. If not, Axa would be entitled to a 50% contribution but Axa鈥檚 claim would fail if an order for rectification was made.

The Decision

The judge referred to the decision in Chartbrook Ltd v Persimmon Homes Ltd [2009] in which Lord Hoffmann approved Peter Gibson LJ鈥檚 summary of the requirements for rectification in the earlier case of Swainland Builders Ltd v Freehold Properties Ltd [2002]:

鈥淭he party seeking rectification must show that: (1) the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified; (2) there was an outward expression of accord; (3) the intention continued at the time of the execution of the instrument sought to be rectified; (4) by mistake, the instrument did not reflect that common intention.鈥�

The judge held that it was inherently probable that in 2004 GSK had approached Equity seeking insurance for vehicles within the ECOS scheme but not otherwise and that this is what both parties reasonably understood to be the subject matter of their discussions thereafter.

On the evidence the judge concluded that from the outset the discussions between GSK and Equity showed a common intention that the cover was to be limited to vehicles in the ECOS scheme. In particular the Judge noted that the manner in which the premium was to be calculated 鈥� on a flat rate per ECOS vehicle 鈥� reflected the common intention to cover these vehicles only.

The judge rejected Axa鈥檚 submission that any common intention in 2004 was not present when the ECOS policy was renewed in 2006. Although different personnel had negotiated the 2006 renewal the contemporaneous material concerning the premium payable still demonstrated that the policy was to be limited to the ECOS vehicles.

Finally, the judge held that to exercise his discretion to refuse rectification would be unfair to Equity as it would render Equity liable to contribute to Ms Ball鈥檚 liability which it never intended or agreed to insure and for which it had received no premium.

The judge, therefore, concluded the wide terms of the ECOS policy did not reflect the parties鈥� common intention and ordered rectification of the 2006 insurance contract.

Commentary

For all contracts, rectification is an equitable and therefore, discretionary, remedy so that even where valid grounds exist, the court may decline to order rectification. The applicant must satisfy a high burden of proof because if the court makes an incorrect order for rectification, it can potentially impose terms on a party that were not agreed or intended. The applicant must therefore provide strong and convincing evidence that the written document failed to record the common intention of the parties.

In this instance, Equity were successful, but see Fairstate Ltd v General Enterprise & Management Ltd [2010] for a contrasting result.

Arianne King
Fenwick Elliott LLP