The decision of the Court of Appeal in Milton Furnitures v Brit Insurance Limited provides an important benchmark by which to assess the operation of seemingly inconsistent and overlapping contractual clauses. This is particularly so when considering the operation of alleged conditions precedent within the context of fire insurance policies that include terms relating to the operation of security alarms. The Court’s decision is considered by Paul Fisher of 4 New Square.
The insured, Milton Furniture Limited (‘Milton’) carried on a business hiring out furniture for use at exhibitions. It was insured under a Commercial Combined Insurance Policy incepting on 17 July 2003 (‘the Policy’). Though originally the Policy named another group company GPE Exhibitions Limited as the insured, Milton had been added to the Policy by the insurer, Brit Insurance Limited (‘Brit’) in December 2004. Fire was a specific risk under the Policy, which covered loss or damage to stock in trade, loss of gross profit and increased cost of working, across a 12-month indemnity period.
Milton sought an indemnity for losses arising at property from which it traded known as ‘Tournament Building’. Tournament Building was comprised of, inter alia, a dwelling house (‘the House’) which was attached to the premises’ warehouse and offices by way of a link building (‘the Link’). Tournament Building had been fitted with a fire alarm system and a burglar alarm. Both of these systems were due to be monitored by SECOM plc (‘SECOM’) pursuant to two separate maintenance contracts. An act of arson by persons unknown start the fire during the morning of 9 April 2005. Tournament Building had been locked and secured on the evening of the 8 April 2005 and the general manager of Milton, Mr Hyams, as well as a subcontractor who worked for Milton on a regular basis, Mr Furley, slept in the House and the Link respectively. The burglar alarm could not be set for all three of the zones that it operated in when the Link and the House were occupied.
Crucially, on the night of the fire, the burglar alarm had not been set, though the fire alarm system was turned on.
Though the provisions of the Policy were recited at length by the Court, the following two were most salient to the Court of Appeal decision.
Section A Protection Warranties entitled ‘Intruder Alarm Warranty’ stated as follows:
‘It is a condition precedent to the liability of the Underwriters in respect of loss or damage caused by Theft and/or attempted Theft that the Burglar Alarm shall have been put into full and proper operation whenever the premises referred to in this Schedule are left unattended and that such alarm system shall have been maintained in good order throughout the currency of this insurance under a maintenance contract with a member of NACOSS.’ (‘PW1’)
General Condition 7 of the Policy, however, stated that:
‘The whole of the protections including any Burglar Alarm provided for the safety of the premises shall be in use at all times out of business hours or when the Insured’s premises are left unattended and such protections shall not be withdrawn or varied to the detriment of the interests of the Underwriters without their prior consent.’ (‘GC7’)
General Condition 17 of the Policy (“GC17”) stated that the observance and fulfilment of all policy conditions ‘shall be a condition precedent to any liability’.
At first instance, Jay J dismissed Milton’s claim for an indemnity on the grounds to be discussed below. Permission to appeal was granted by Clarke LJ on 7 August 2014.
It is worth reading the judgment of Gloster LJ in full to gain an appreciation of all the complicated facets of the case. However, this article considers some of the particularly interesting aspects of the decision.
Was compliance with GC7 a condition precedent to Brit’s liability?
Milton’s appeal in respect of this issue was dismissed. Compliance with GC7 was a condition precedent to Brit’s liability.
Where a contract is based on a standard form contract to which the parties have added special or written clauses, greater weight will be given to the special or written conditions. To the extent that there is a conflict between the general and special/written conditions, the latter will prevail. Gloster LJ agreed with the Appellants that there was good authority on that point.
However, on the fact it was not possible to characterise PW1 as a special or written clause that could take precedence over GC7. They both formed part of the policies’ ‘standard terms’. On a proper construction of the policy as a whole there could be no doubt that GC7 was a condition precedent applying to the burglar alarm in the same way as it applied to the other protections concerning the safety of the premises. The Appellants’ contention was that there was reason to construe the policy as excluding GC7 from application as a condition precedent to the burglar alarm or as a subordinate to PW1. However, the quotation was not as a matter of fact included within the policy and was not flagged by the quotation. The wording of the quotation only proved that PW1 and GC7 both applied. The words included in the policy confirming that PW1 was ‘only acceptable if indicated on the schedule’ could not be construed as excluding by implication the application of GC7. Furthermore, the due observance clause (GC17) applied to GC7.
There was no inconsistency between the two clauses for the following reasons:
(a) GC7 was applicable to all claims, whereas PW1 only applied to claims for ‘theft or attempted theft’. In the light of that fact, the first instance judge had decided that the Appellant’s construction would leave the Respondent in the ‘commercially unacceptable’ position of having no condition precedent to its liability in circumstances where the burglar alarm was not set and the claim was not for one of theft or attempted theft;
(b) GC7 rendered protections provided for the safety of the premises (including burglar alarm) being in use out of business hours or when the premises were unattended, a condition precedent to liability. PW1 rendered the use of the burglar alarm when the premises were unattended a condition precedent to claims for theft or attempted theft. This could be regarded as overlap, but overlap did not constitute inconsistency;
(c) GC7 includes a condition precedent to all claims that all protections provided for the safety of the premises, including the burglar alarm, are not ‘withdrawn or varied to the detriment of the interests of the Underwriters.’ There was no similar requirement in PW1 but Gloster LJ considered that this should not lead to the conclusion that the clauses are inconsistent. GC7 simply imposed an additional obligation on the insured. In fact it underlined that GC7 had a commercial purpose quite separate from PW1.
(d)PW1 imposed an additional obligation on the Appellant to maintain the burglar alarm in good order throughout the currency of the insurance under a maintenance contract with a member of the National Approval Council for Security Systems (NACOSS). This was a condition precedent to any claim for ‘theft or attempted theft’ and was not inconsistent with GC7.
(e)The English courts had long recognised that little weight should be given to an argument based on the redundancy of overlapping clauses within a commercial contract (Arbuthnott v Fagan  Lloyd’s Reinsurance Law Reports 135 Hoffmann LJ (as he then was) at 142; Tektrol v International Insurance Co of Hanover  EWCA Civ 845 (per Buxton LJ at  and ).
Did PW1 reduce or qualify the obligations imposed by GC7?
Gloster LJ found that PW1 did not have that affect on GC7 and that the first instance judge had been wrong to construe the terms in this way.
The first instance judge had been wrong to conclude that his construction of GC7 was a ‘reasonable interpretation’ that limited GC7 ‘to achieve a commercially acceptable result’. Such a construction ignored the express wording of the clause but it also attributed no weight to the fact that where underwriters required the burglar alarm to be set out of business hours or when the Tournament Building was unattended that was both a reasonable and commercially acceptable position. Gloster J’s view was bolstered by her conclusion that the risk of unlawful entry by an intruder was ‘obviously increased outside business hours’ or when the property was left unattended due to the fact that the chances of detection are less.
There was no ‘doubt’ or ‘uncertainty’ that arose as to the scope of Brit’s obligations if GC7 was construed as requiring the alarm and other protections to be set outside of business hours or when the relevant part of the premises were left unattended.
Was Milton in breach of the first limb of GC7?
Gloster LJ found that Brit was entitled to succeed in its defence on the additional basis that Milton was in breach of the second limb of GC7:
(a) Had Milton exercised reasonable or common care, Milton should have known that there was a risk that the monitoring service would be withdrawn;
(b) Milton had acted or failed to act in such a way as to give rise to a real risk that the monitoring service would be withdrawn;
Milton was reckless as to the actual consequences of non-payment of the invoice and as to the risk that the monitoring service would be withdrawn because it failed to pay the invoice (or contest the obligation to make payment) and failed to take any action on the various letters sent to SECOM.
Based on Gloster LJ’s conclusions in respect of the second issue, Milton were in breach of the condition precedent to set the burglar alarm after close of business.
The next question was whether the Tournament Building had been ‘left unattended’ even though the House and Link had in fact been occupied by Mr Hyams and Mr Furley.
It was impossible to conclude that the Tournament Building was being ‘attended’ simply because Mr Hyams and Mr Furely were asleep in two small pats of the Building. The natural meaning of the word ‘attended’ was that someone was keeping the property under observation and that such person was in a position to prevent attempts at interference (StarFire Diamond Rings Limited v Angel  2 Lloyd’s Rep 217 per Lord Denning MR at 219, per Upjohn LJ at ibid and per Diplock LJ at 220. )
The first instance judge’s reasoning (i.e. that because Tournament Building was a large building which ‘could not possibly be subject to effective, active surveillance by one individual’ this meant that the two individuals’ presence counted as ‘attendance’ there) was not convincing. Firstly there was no evidence at trial as to whether one security guard could have effectively patrolled the building at night. Secondly, the size of the building did not have an impact upon the question of whether the building was not ‘left unattended’. Thirdly (and, Gloster LJ said, ‘most importantly’), if there had been one individual awake and undertaking patrols of Tournament Building on a regular basis this might have amounted to ‘attendance’.
If Milton was in breach of the second limb of GC7 by causing or permitting the withdrawal of the burglar alarm monitoring service?
Gloster LJ underlined that given her conclusion in respect of breach of the first limb of GC7 it was not strictly necessary to make a decision on this point.
Nevertheless the Court took the view that the judge was correct to hold that the first limb of GC7 was concerned with the protections used and the second limb should be understood separately as concerned with the maintenance or retention of the protections regardless of whether they were in use on any given occasion.
The wording ‘such protections shall not be withdrawn or varied’ was to be understood as a strict obligation on the insured. However, to the extent that some sort of mental element was also required for the purpose of this term then the relevant test for determining whether or not Milton was in breach was that articulated by Woolf J in Victor Melik & Co Ltd v Norwich Union  1 L1 Rep 523 (i.e. one of reasonable or common care as opposed to recklessness).
The submission of Milton’s counsel that only actual knowledge of cessation of monitoring would be sufficient to trigger non-compliance with GC7 was considered incorrect. It would lead to the insured being entitled to ignore its policy obligations by simply not engaging with the service provider at all and negating any possibility of actual knowledge of cessation or intended cessation.
There were ‘clear evidential bases’ for the judge’s findings that Milton was in breach of the second limb of GC7 and these were said to be ‘consistent with common sense’ (these were reiterated by the Court at paragraph 69 of their judgment).
Though the decision of the Court of Appeal in Milton Furnitures v Brit Insurance Limited was highly fact-sensitive, there are undoubtedly a number of lessons to be taken from Gloster LJ’s carefully articulated judgment. One among many must surely be the warning against seeking to construe policy clauses against an assumption that overlapping terms must necessarily be inconsistent.