Law Comissions propose warrantee wind up

The English and Scottish Law Commissions have now published their second Issues Paper, this time dealing with warranties. The perceived mischiefs are that consumers do not understand "basis of the contract" clauses and that breach of warranty can automatically discharge an insurer from liability even if unconnected to the loss. It is therefore proposed that all "basis of the contract" clauses are abolished, together with warranties of past or existing fact in a consumer context, although they may survive in business contracts.

In a change from their position in their first Issues Paper in September, the Law Commissions are now suggesting that their proposals on misrepresentation should be mandatory for business insurance as well as consumer contracts. This would mean that, as far as warranties are abolished and statements are treated as representations, it will be necessary for insurers to show materiality under the new test and remedies will only be available if it can be shown that the misrepresentation was fraudulent or negligent.

Such warranties that are allowed to remain, for example, those as to future conduct, will be subject to new procedural and substantive requirements, including the need for a causal connection with the loss. Various models were considered for describing the connection between the breach and the loss, including "increasing the risk of" and "causing" the loss. The "contribute to" test finally chosen does, however, appear wider than the concept of proximate cause familiar in insurance and general contract law. Again, in a departure from the general position, it is also of note that the burden will rest on the insured to show the absence of such connection.

The Law Commissions are considering going a step further and embracing an unfair terms approach to warranties. This could draw a distinction between standard term and individually negotiated contracts, an approach preferable to strict adherence to the consumer/business distinction that raises difficulties defining the boundaries.

Many of the proposals seek views from the industry in advance of the first Consultation Paper on these topics which is expected next summer. It is widely recognised that these mischiefs require reform and the proposals are welcome.