No Basis for “Basis of Contract” Clauses! Time to Abolish?
By Luke Gibbons
The judicial unease lamented in Keating v New Ireland Assurance 2.I.R.383 surrounding “basis of contract” clauses is well founded. However, it is contended, that this disapproval is frivolous, as notwithstanding such, these clauses are upheld by Irish courts. This allows insurers, often the more powerful contracting party, convert a pre-contractual representation into a warranty, and thus, gives the insurer a right of repudiation. It is argued, this consistently leaves the insured bearing the loss, and in so doing, undermines the premise on which insurance is based, that being, protecting against future losses. Furthermore, it is submitted, that the rationale used by the courts in upholding these clauses is flawed and in deeming such as valid, the courts are running the risk of ironically circumventing the materiality burden in misrepresentation and nondisclosure, as developed by said courts to protect the insured.
In Keating, the recognised rationale in validating these clauses was freedom of contract. Although, this seems infallible, as two legal entities are willingly entering an agreement. It is contended, that in the insurance context, such does not consider the idiosyncratic reality of these transactions, and ultimately, the inherent imbalance of power between the parties. One argues such, as every business, no matter how powerful, is required to have insurance in some respect. Therefore, it is submitted, as these entities must enter into contracts with insurers, often having no choice in so doing, and not being subject to the EC (Unfair Terms in Consumer Contracts) Regulations 1995; the courts in upholding “basis clauses”, on the grounds of freedom of contract, are failing to acknowledge this inherent imbalance in commercial insurance agreements. The insured is not free to enter into a contract at all, the insured must enter into a contract to avoid future losses and being in breach of relevant law.
As held in Keating, non-disclosure or misrepresentation can only render a contract void if such facts are deemed material, and it is proven that these were known to the insured during declaration. However, “basis clauses” differ, and as denoted from Keating, any undisclosed information, no matter how insignificant, if under a “basis clause” may lead to repudiation. Although post-Keating, “basis clauses” must be outlined in clear terms and if ambiguous the contra proferentem rule shall apply, such judicial intervention is inadequate. It is submitted, the holding, by confirming the validity of “basis clauses”, still arguably allows insurers use suchto circumvent the burden of proving materiality, and ultimately, undermine a threshold designed to protect the insured.
Thus, it is undisputed that reform is needed, however, the question still lies: should “basis clauses” be unlawful? There is some credence in the New Zealand approach, which incorporates a “materiality test” in accessing non-disclosure and misrepresentation under “basis clauses”; much like the approach to warranties in this jurisdiction and the guidelines promulgated in Irish self-regulations. It is argued, that on one hand, this would bring homogeneity to the treatment of warranties, and ultimately, ground “basis clauses” in their foundational origin, that being, as Foss states, “[use] …with…clauses permitting the insurer to avoid the policy… [due to] …material misstatement” (‘Good Faith and Insurance Contracts’ 2010). However, on the other hand, the plaguing question of what is material would still exist. Furthermore, is it contended, that if such is adopted, insurers would cease using “basis clauses” anyhow, as such would not have the “trap[ping]” effect they are designed to have, as described in Zurich General Insurance Co Ltd v Morrison 2.K.B.53. However, reliance on insurers ceasing use and the unpredictability surrounding materiality is too uncertain a basis upon which insurance law should develop.
Therefore, in agreement with the Law Reform Commission, it is proffered, that the Australian approach be adopted, banning “basis clauses” entirely, as such is definitive, and in turn, champions certainty in commercial law. This is also advanced, as Buckley ((2005).12 Commercial Law Practitioner 10) laments, the current self-regulation is “inadequate”; a view solidified by CB Justice v St Paul Ireland (Circuit Court 25/11/2004). Nevertheless, it remains to be seen whether the Oireachtas will stifle this unacceptable practice and remedy the unfortunate reality as described in Anderson v FitzGerald (1853)3.ICLR.475, that “basis clauses…[render the policy] not worth the paper upon which it is written”.