Film Finance: breach of warranty/waiver 1

The ongoing film finance litigation (see previous CMS Cameron McKenna case summaries) has recently generated a further High Court decision of interest to both insurers and reinsurers. Mr Jules Sher QC’s judgment in HIH Casualty and General Insurance Ltd v Axa Corporate Solutions & Another [2001 All ER (D) 384 (Dec) is summarised below:

Recovery action against reinsurer, summary judgment under CPR Part 24.2, repudiatory breach of a promissory warranty, examination of waiver and estoppel.

HIH (the reinsured) pursued two similar actions against AXA (the reinsurer) in respect of payments made to film financiers under two film finance insurance contracts (the underlying policies). The payments loosely reflected the shortfall between production and marketing costs, and lower than anticipated revenues.

Although the underlying policies clearly provided that two “slates” of 6 and 10 films would be produced, only 5 and 7 films were eventually produced. Despite this fact HIH still paid out on the underlying policies and sought a $31m recovery from AXA. [Earlier in these proceedings the Court of Appeal had determined, by way of preliminary issue hearing, that the number of films to be produced constituted warranties in both insurance and reinsurance contracts (see HIH Casualty and General Insurance Ltd v New Hampshire Insurance Company and others [2001] 1 Lloyd’s Rep 3 78 and [2001] 2 Lloyd’s Rep 161)].

Having repudiated HIH’s claims for breach of warranty as the requisite number of films had not been produced AXA then applied to the court for summary judgment under Part 24.2 of the Civil Procedure Rules on the basis that HIH had no real prospect of succeeding with its claims at trial. HIH defended the application by contending that AXA had waived its breach of warranty and, in support of their view, they relied on the fact that AXA had received the risk manager’s reports and had been aware of the reduced number of films before HIH had paid out on the underlying policies.

Following the Court of Appeal’s earlier decision in this case it was common ground that there had indeed been a breach of a promissory warranty (of both primary insurance and reinsurance contracts) in respect of the number of films to be produced HIH and AXA also both accepted that a breach of warranty automatically discharged an insurer or reinsurer’s liability under the policy without the need for any further action or election on their part [see Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd (The “Good Luck”) [1991] 2 Lloyd’s Rep 191) - in which the House of Lords held that promissory warranties are to be treated as conditions precedent to liability].

HIH conceded that AXA was unaware that the reduction in the number of films amounted to a breach of warranty until after the commencement of proceedings. In other words, even if it did know that an insufficient number of films had been produced on the slates AXA would not have known that this entitled it to repudiate HIH’s claims. However, HIH did maintain that AXA’s conduct was consistent with it remaining on risk and that it was not a necessary ingredient in establishing waiver to prove such awareness on AXA’s part.

In dealing with HIH’s arguments the Judge distinguished between the two, and quite distinct, concepts of waiver by election and waiver by estoppel. In doing so he noted that waiver by election usually involved a choice by the waiving party between two inconsistent courses of action. However, insurance contracts are different in that a breach of a promissory warranty discharges the cover automatically without the need for any further action or election on the part of the insurer/reinsurers. Indeed, no choice is involved at all and, following the “Good Luck” (see above), the Judge held that waiver by election had no application in this case.

He then considered waiver by estoppel (i.e. promissory estoppel). This involves a clear and unequivocal representation by the insurer or reinsurer that they will not stand upon their right to treat the cover as having been discharged. A further necessary ingredient of waiver by estoppel is that the insured or reinsured must also have relied upon the insurer or reinsurer’s representation in circumstances where it would be inequitable to allow the insurer or reinsurer to resile from their representation.

Contrary to HIH’s argument that it was not a necessary ingredient in establishing waiver to prove that AXA was aware of its right to repudiate cover the judge contended that “it is of course the essence of this plea that the representation must go to the willingness of the representor to forego its rights… otherwise rights will be lost in total ignorance that they ever existed”. As AXA was unaware of its right to treat the cover as discharged it was entitled to assert a breach of warranty by HIH and to repudiate their claims under the reinsurance contracts.

The Judge added that the point was not so much the awareness of AXA of its right to treat the cover as discharged, but whether it appeared to Clearly, in this case AXA had not given HIH this impression despite the fact that it had received (and had made manuscript notes upon) the risk manager’s reports as the notes were internal to AXA and had never been seen by HIH until disclosure in these proceedings. AXA’s possession of information and its internal note making could not, therefore, found a representation for the purposes of estoppel.

Generally speaking, HIH appeared to rely more upon inaction by AXA than upon any positive representation. As a consequence the Judge reminded the parties that mere inaction could only found a representation in circumstances required for an estoppel by silence; and silence can only amount to a representation where there is a duty to speak and, of course, there was no such duty upon AXA in this case.

In summary, the reinsurance covers were discharged automatically by virtue of HIH’s breach of warranty and, as HIH had no prospect of obtaining a recovery from AXA at trial, their claims were dismissed.

For further information please contact John Hall at [email protected] or on +44 (0)20 7367 3014