Carriage Insurance

Insurance Obligations On Sale of Goods

In an export transaction, the sale of goods contract should provide that the costsof and duty to effect insurance during transit shall be paid for and undertaken by either the seller or buyer, as the case may be. The INCOTERMS may define who is to effect and pay the cost of insurance.

If goods are sold on CIF terms, it is the duty of the seller to take out the policy of the insurance and pay the costs. In the case of FOB terms, the cost is borne by the buyer, although the seller may arrange it on his behalf.

The main insurance policies or insurance certificate should form part of the shipping documents. The policy should cover the customary risks. The insured risks may be specific to the trade or to the goods.

The insurance of goods carried by sea is undertaken by marine insurance companies or Lloyds underwriting members.  The latter conduct underwriting through an underwriting agent. Every member of the syndicate is liable for a proportion or fraction of the risk.


Role of Broker

An insurance broker is usually instructed to effect insurance. The instructions are usually in a form supplied by the broker which gives the requisite particulars.  A broker is usually authorised to place insurance within certain limits and certain rates.  Historically, the broker prepared a slip, setting out particulars of the cover required.  The presentation of a slip by a broker to an underwriter constitutes an offer, and the initialling comprises acceptance, with an immediate binding contract.

The broker notifies the insured of the terms of insurance and forwards the cover note. He should do so promptly. A closed cover note provides full particulars of the shipment and the insurance. An open cover note may issue for a floating or open policy or where further details defining the goods or the voyage are required.

The standard trading conditions of the Irish International Freight Association provide that freight forwarders are not obliged to arrange insurance unless expressly instructed to do so by the shipper / exporter.  When so instructed act, they act as agents of the shipper.

A broker is presumed to be liable to the insurer for payment of the premium. This statutory presumption can be displaced by clear words in the relevant contract indicating the parties’ intent to change the position. The broker has a lien on the policy for unpaid premiums and charges.


Forming the Insurance Contract

The broker will typically advise and / or decide on the details of the proposed cover. He traditionally prepares a slip memorandum which sets out details of the insurable interest, the voyage, the period of time for which cover is to be provided, a valuation and an indication of the standard policy form needed and particulars of any additional standard form clauses to be incorporated.

The broker presents the slip to insurers / underwriters. Their acceptance, traditionally by initialling, is acceptance of the proposal and forms a contract of insurance / policy. The slip is followed by the formal issue of a policy of marine insurance.  The contract is incorporated in the policy. The slip takes precedence over the policy in the event of inconsistency, unless the insurer reserves the right to make changes.


Evidence of Cover

Certificates of insurance acknowledge the existence of insurance. They do not comprise an insurance policy.  Certificates of insurance entitle the holder to demand the issue of policy in the terms of the certificates and to claim for losses.   In open cover, the certificate may have two parts; one with the general terms and one with the particulars declared for the transit of goods concerned.

The certificate of insurance may be issued by the broker. They are evidence of the right to demand a policy. They usually will be sufficient to allow a claim to be made. However, a formal policy is required as proof in court. In a standard sale contract with shipping, the policy of insurance is presumed to be required, unless it is provided that the certificate of insurance is deemed sufficient.

Brokers cover notes are simply notes sent by the brokers to the client informing him that insurance has been obtained.  Their legal status and practical value are less than that of certificates of insurance.


Utmost Good Faith

A marine insurance policy carries a duty of utmost good faith on the part of the insured. Every matter stated by the insured must be true or else the policy may be avoided.   A material representation is one which would influence the judgement of a prudent insurer in setting the premium.

Where goods are unusual or particularly dangerous, a greater duty of disclosure exists. Where the goods or any matter concerning them is unusual or requires further information and inquiry, this must be disclosed.

Where a broker or agent is involved the agent must disclose material circumstances known to him or which should be known to him in addition to material circumstances disclosed by the insured.  A policy effected by an agent in ignorance of material facts known to the insured cannot be avoided where the facts have come too late to the knowledge of the insured to be communicated to the agent.


Matters Which need to be Disclosed

The Marine Insurance Act provides that in the absence of enquiry the following circumstances need not be disclosed

  • circumstances which diminish the risk;
  • circumstances which are known or presumed to be known by the insurer;
  • information waived by the insurer;
  • superfluous information

Where the goods are of an ordinary and lawful nature, the exporter need not disclose further details or description.  Where there is doubt whether a reasonable person would regard them as such, the particulars should be disclosed.


Avoiding the Policy

The insurer may avoid liability unless the insured has disclosed every material circumstance which in the ordinary course of business is known or ought to be known by him. The duty covers every matter which might influence the judgement of the insurer in fixing a premium or determining whether he takes the risks.

If there is non-disclosure, the insurer may waive the required disclosure or avoid the insurance policy. It may settle the matter on an ex-gratia without accepting legal liability. If the policy is avoided, the premium is repaid unless there is fraud.


Describing the Goods

Goods must be described accurately and fully under the wording of the commonly used relevant clauses.  A material misdescription will enable the insured to avoid on the grounds of misrepresentation.  A “held covered clause”, where it applies, may hold   cover, even if there is an innocent misdescription.

The held cover clause usually obliges the insured to pay an additional premium if necessary. The insured must act in the utmost good faith. Where, for example, there is a change during the course of the voyage or in transit, the insured must promptly notify the insurer and pay the additional premium.

It is a basic principle of insurance law that an insured may only insure goods or other assets in which he has an insurable interest (i.e. in which he has an ownership interest or could suffer an economic loss.  Under the Marine Insurance Act, every person who has an interested in the “marine adventure” or the goods has an insurable interest.  A purported contract where there is no insurable interest is void as under the Gaming Act.


Insurable Interest

The terms of the sale contract will determine which of the seller or the buyer has an insurable interest at any given time.  This depends on the particular contract term and the point in time in the course on the carriage. The default Sale of Goods Act or specific contract provisions may determine the position. There are several default presumptions which depend on the circumstances. A commonly applicable default position is that the property (title) in ascertained goods passes when the contract for the sale of the goods is made.

The point at which the property passes transfers the principal or only interest in the goods. However, the seller will usually continue to have an insurable interest notwithstanding that the property has passed. There are grounds which may apply (principally non-payment) which unwind the contract and revest the property in the goods in the seller.

The insurable interest need not coincide with the proprietary interest. The contact may provide that seller is to bear the risk of loss and / or insure.  It is accepted that the party who bears the risk of loss has a sufficient interest even if the property has already passed.

The standard Incoterm phrases incorporate various obligations in contracts for sale which require that carriage of the goods by sea. See the article on the obligations which the various INCOTERMS incorporate and apply.


Premium and Insured Amount

The premium is the fee payable to the insurer when he issues a policy.  Where an insured has over-insured in the case of an unvalued policy, a proportion may be repayable.  There are exceptions where the over-insurance was knowingly done or where an earlier policy bore the entire risk.

A valued policy values the goods at the outset. A unvalued policy provides a maximum value and allows for the subsequent ascertainment of insurable value of the goods. The insurable value under a valued policy is conclusive in the absence of fraud. The insurable value under a unvalued policy is the direct cost plus the cost of carriage and insurance.

Valued policies are more common than unvalued policies.  Anticipated profit may be added. Even with floating and open policies, the value is commonly permitted to be declared in advance for this purpose. In contrast, with unvalued policies, anticipated profits cannot be included in the insurable value.

Common form policies allow for options for clauses to cover the increase in the value of the goods while in transit, prior to loss or damage.


Policy Types I

Floating and open policies require the declaration of specific transits in order for insurance to attach. A blanket policy provides that the insured need not advise of individual shipments. A single premium instead of a series of premium collected at several rates will cover several shipments.

Policies may be voyage,  time or mixed policies.  A voyage policy covers the relevant goods in transit from one place to another.  A time policy covers the relevant goods for a fixed period. A mixed policy covers a particular voyage in a fixed period of time.

In voyage policies, there is an implied warranty (promise) under the default statutory positions that the vessel which carries the goods will be seaworthy upon commencement of the voyage. The warranty is made by the insured to the insurer so that cover is dependent on this being so.

The duration of the insurance may be set by the transit clause. There are a number of standard clauses.   Cover is usually provided from warehouse to warehouse so that the transit clause applies the insurance to risks on land which are incidental to the sea voyage.


Policies Types II

A time policy gives insurance cover for a particular period. There may be a clause which provides for its continuation if the voyage is not completed at the time of expiry. There is no warranty of seaworthiness under the default statutory position. However, the insurer is not liable if the ship was unseaworthy with the “privity” of the insured.

A floating policy provides general conditions of insurance but not the particulars of individual shipments. It is a standing statement of the terms of insurance which cover individual consignments made under it. Floating policies are less common than was formerly the case.  Open cover is now more common.

The premium is based on the specific categories of goods. There may be a “held covered” provision which allows the insured to bring other goods within the cover. The particulars must be promptly notified. When the clause applies, the insurer must afford the additional cover at market rates for the risk.

The ship is not specified under the default provisions. The insurer will require the insured to warrant that the ship is within a defined range of standard classifications.


Floating Cover

Floating cover automatically covers shipments made under its terms.  The insured must promptly declare individual shipments to the insurer.  It might cover shipments to stated places within a certain period, with cover to the aggregate of a stated amount. Shipments / risks within its scope must be accepted by the insurer.

A floating policy is a collection of voyage policies. They are declared as each voyage is made. The declaration of shipment must be made as soon as possible.  If a declaration is not made at the earliest moment, the policy may not cover it. However, an omission or incorrect declaration made in good faith may be corrected, even after the loss has occurred.

A floating policy will usually provide a maximum amount of cover per ship.   There may also be a location clause by which the insurer fixes the maximum insured amount for covered risks in one place. This limitation typically deals with landside risks incidental to the voyage, which are covered under the general warehouse to warehouse scope of the policy.


Open Cover

Open cover has become a common and popular means of insurance in carriage by sea. It is similar to a floating policy. The open cover is an undertaking by the insurer to issue specific future policies within the scope of the defined terms of cover. As such, and in contrast to a floating policy, it is not an insurance policy in itself.

Open cover allows general cover for a series of shipments, the particulars of which are not yet known at the commencement of insurance. In the same way as a floating policy, all individual shipments must be declared unless the policy states otherwise.

Open cover may be for a period of time or may be indefinite. It may usually be terminated by either party by giving a period of notice.Open cover usually provides a maximum limit of liability per ship and location in the same way as a floating policy. It may be provided that the value declared in advance is binding.

The main terms of open cover are usually found in certificates of insurance, which are issued on foot of the declarations of individual shipments made under it. If the cover contains unusual conditions (such that consignee who succeeds to the insurance might not be expected to be included), they should be printed specifically on the certificate.


Assignment of Cover to Buyer

Where insured goods are sold, the insurance policy does not automatically pass to the buyer. The policy must be assigned.

The marine insurance policy contract is invariably assignable. The contract for the sale of goods may contain an express or implied condition that the seller shall assign the insurance to the buyer.

The assignment is commonly done by endorsing the policy in blank and delivering it to the buyer.  The assignee may then sue and enforce the policy in his own name.


Warranties

There are certain common promises or warranties given by the insured. In the marine insurance context, breach usually gives the insurer the right to avoid cover. Common warranties include, for example, that the packing is proper and that the trade is lawful. Many other matters may be warranted by the policy terms.

Exceptive warranties excuse the insurer from liability under the circumstances defined in the particular clauses.  For example, the cover might be warranted free of loss caused by strikers lockout, strike, civil commotion etc.  Accordingly, the insurer will not be liable for losses thereby caused.


Commonly Used Policies

The Lloyd’s S.G. policy (ships and goods) has a long history.  It dates from the 18th Century, and it is the model referenced in the Marine Insurance Act 1906, which codified the law on marine insurance.

A new form known as Lloyds Marine Policy was introduced in the 1980s. There are optional cargo clauses, described as Institute Cargo Clauses A, B and C.  The Institute Cargo Clauses list the cover they provide and the exclusions. Clause A is considered as the “all risks” cover. Clauses B and C cover listed specific risks. Clause C is the narrowest, covering only major risks and casualties.


Point to Point Cover

The transit clauses in Clauses A, B and C, apply unless deleted. They extend cover to pre-shipment and post-shipment, typically land side risks.  They may apply to cover loss incurred between two named places.

Under the additional Termination of Contract of Carriage clauses, the goods are covered from the time when they leave the warehouse at   the place named in the policy at commencement until they reach the warehouse at the named place of destination. There is an overriding time limit of 60 days after completion of the discharge of the goods from the vessel at the final port of discharge.

The cover may cease if the goods have not yet reached the warehouse and the 60-day period has expired.  This could be relevant if they are detained in customs. The cover also ceases if the goods are sent to a warehouse other than that named.


Common Exclusions I

There are a number of general exclusions clauses which apply under Clauses A, B or C. The following are amongst the risks thereby excluded

  • loss attributable to the willful misconduct of the assured;
  • ordinary leakage, loss of weight, wear and tear;
  • loss and damage caused by insufficient or unsuitable packing or preparation;
  • loss caused by inherent defects in the goods, e.g. spontaneous combustion;
  • loss caused by delay even though the delay is caused by an insured risk;
  • loss arising from the insolvency or default of the owners, managers, charters or operators of the vessel;
  • loss due to deliberate damage or destruction, e.g. sabotage, arson etc.;
  • loss arising from nuclear weapons

By the statutory default provisions, the unseaworthiness or unfitness of the ship usually excludes liability notwithstanding that this is something over which the insured will rarely have control.  By the Cargo clauses, this position is varied unless the insured is privy to the unseaworthiness or unfitness.  Therefore, where the insured has no knowledge of unseaworthiness, the exclusion does not apply.


Common Exclusions II

The war exclusion clause excludes war risks and applies under Clauses A, B and C. If war risks are to be insured, the clause must be varied.

Strike risks are excluded under Clauses A, B and C, in so far as they are within the scope of cover; They can be covered under Clause A only by deletion of the exclusion, but they are not within the scope of Clauses B and C.

Loss and damage caused by terrorists and persons acting for political motives are excluded.

As is the general position, the insured must mitigate and minimise his losses, when an insured loss occurs. The insured party must act reasonably in the circumstances. The insurer is not liable for loss which could have been thereby avoided.


General Average I

The principle of general average may arise where a number of parties have a common interest in a financial venture. It also arises in many cases of marine carriage. During the sea voyage, the owner of the ship and the various owners of the cargo are subject to many of the same risks.

It may be necessary to make a sacrifice or incur extraordinary expense in circumstances of peril in other to preserve the property imperilled, e.g. by jettisoning cargo to save the ship or by incurring extraordinary expenditure to save the ship.

Such sacrifice or expenditure may be for the benefit of all concerned in the venture, and it is presumed fair and reasonable that the owners of all interests saved by the deliberates sacrifice should contribute proportionately to the loss suffered.


General Average II

Where there is loss subject to general average, the party on whom it falls is entitled, subject to the conditions imposed by maritime law, to a rateable contribution from the other parties interested. Such contribution is called a general average contribution.

Subject to any express provision in the policy, where the assured has incurred a general average expenditure, he may recover from the insurer in respect of the proportion of the loss which falls upon him; and, in the case of a general average sacrifice, he may recover from the insurer in respect of the whole loss without having enforced his right of contribution from the other parties liable to contribute.

Subject to any express provision in the policy, where the assured has paid or is liable to pay, a general average contribution in respect of the subject insured, he may recover therefor from the insurer.

In the absence of express stipulation, the insurer is not liable for any general average loss or contribution where the loss was not incurred for the purpose of avoiding, or in connexion with the avoidance of, a peril insured against.

Where ship, freight, and cargo, or any two of those interests, are owned by the same assured, the liability of the insurer in respect of general average losses or contributions is to be determined as if those subjects were owned by different persons.


Claims

In order to make a claim, it is necessary that the risk is within the scope of the policy of insurance and is not subject to any exclusions.The burden is on the claimant to show that his loss and damage falls within the risk covered and that it caused the loss.

Under standard Clause A, the risk covered must be the proximate or effective cause of the loss. Where Clause B or C applies, it is necessary to show that the loss and damage is reasonably attributable to the insured risks.

The proximate cause is not necessarily the last or closest one.  A common-sense approach is taken. Where there are two dominant causes of damage one covered and one not covered, the insurers can rely on the exclusion.  If there is no exclusion, the insurers must indemnify the insured.


Making a Claim

If the insured discovers that the goods may be lost or damaged, general law and the policy invariable require that he should immediately notify the insurer, usually through insurance brokers. Brokers are usually instructed to settle claims.

The policy, invoice, bill of lading and survey report is required to make a claim. Additional documents may be required. The insurer’s agent at the port will usually survey the goods and issue a survey report.

A distinction is made between total and partial loss. A partial loss arises when part of the consignment is damaged, e.g. by sea water or is lost.  The total loss may be an actual or deemed loss.  Total loss implies that the insured matter is destroyed or the insured has been irretrievably deprived of it, or it has been so damaged that it has lost its commercial identity.

Constructive or deemed total loss arises where the cost of repairing the damage or forwarding the goods to the destination exceeds their value on arrival.  Where a loss is total, notice of abandonment is not necessary.  In the case of constructive total loss, the insured must  give notice of abandonment in order to indicate which course he elects to take.


Recovery Subrogation and Salvage

The insured is entitled to recover the sum fixed by a valued policy. He is entitled to recover the insurable value of the goods under an unvalued policy, subject to the limit of coverage.

Once the insurer pays the insurance money, it is entitled to be subrogated to all rights and remedies of the insured in respect of the matter covered.  Subrogation prevents the insured from recovering more than once. If the insured has already recovered damages from a third party, the insurer can claim the monies received.

The insurer is subrogated to all rights which the insured had against the carrier and others.  For example, the insurer may be entitled to sue the carrier on foot of the negligence that has caused the loss.

The insurer stands in the shoes of the insured in the case of both total or partial loss. In the case of total loss, he may become the owner of whatever interest remains, including the interest in the salvage. Where the insurer pays for a partial loss, the title remains with the insured and any benefits derived from salvage may be retained by him.

The insurer may take over the insured subject matter on abandonment.  This arises where there is a total constructive loss. In abandonment the property of the subject matter passes but the right to recover against third persons does not pass.


References and Sources

Consumer Law  Long      2004

Commercial Law White  2nd ed    2012

Commercial & Economic Law in Ireland  White    2011

Commercial Law Forde  3rd ed    2005

Irish Commercial Precedents (Looseleaf)                               2004

Modern law of personal property in England and Ireland Bell 1989

Commercial & Consumer Law: Annotated Statutes O’Reilly           2000

UK Texts

Schmitthoff: The Law and Practice of International Trade 13th ed Carole Murray, David Holloway, Daren Timson-Hunt, Schmitthoffs 2018

Damages Under the Convention of Contracts for the International Sale of Goods 3rd ed Bruno Zeller 2018

International Economic Law 4th ed Asif Qureshi, Andreas Ziegler 2018

Law of International Trade: Cross Border Commercial Transactions 6th ed Jason C.T. Chuah 2018

World Trade Law: Text, Materials and Commentary 3rd ed 2018

The International Sale of Goods 4th ed Michael Bridge 2017

International Trade Law 6th ed Indira Carr, Peter Stone 2017

International Institute for the Unification of Private Law 2nd ed (UNIDROIT) 2017

Understanding the CISG Understanding the CISG 5th (Worldwide) ed 2017

The Law and Policy of the World Trade Organization: Text, Cases and Materials  2017

International Trade Law and Regulation:: Michael Blakeney, Aline Doussin, John Clarke, Mark Clough, 2017

International Sale of Goods: A Private International Law Comparative Edited by: Nicolas Nord, Gustavo Cerqueira 2017

International Sales Law Edited by: Franco Ferrari, Clayton P. Gillette 2017

The CISG Advisory Council Opinions Edited by: Ingeborg Schwenzer 2017

World Competition: Law and Economics Review – Editor in Chief: Jose Rivas 2017

Making Money with Incoterms 2010:  Strategic Use of Incoterms Rules in Purchases and Sales Arthur O’Meara 2017

World Trade Organization: Law, Practice and Policy World Trade Organization: Law, Practice and Policy 3rd ed Mitsuo Matsushita, Thomas J. Schoenbaum, Petros C. Mavroidis, Michael Hahn 2017

Bills of Lading in Export Trade 4th ed Charles Debattista 2018

Arnould’s Law of Marine Insurance and Average 19th ed  Jonathan Gilman, Robert Merkin, Claire Blanchard, Mark Templeman 2018

O’May on Marine Insurance 2nd Ed Julian Hill 2018

Shipping Law 3rd ed  Sweet & Maxwell Ltd 2018

The UN Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea 2nd ed Michael Sturley, Tomotaka Fujita, Gertjan van der Ziel 2018

Commercial Maritime Law Edited by: Melis Ozdel 2018

Springer-VerlagScrutton on Charterparties and Bills of Lading 23rd ed: 1st Supplement

Bernard Eder, Howard Bennett, Steven Berry, David Foxton, Christopher Smith 2017

Scrutton on Charterparties and Bills of Lading 23rd ed: 1st Supplement (Book & eBook Pack) Scrutton on Charterparties and Bills of Lading 23rd ed: 1st Supplement (Book & eBook Pack)

Bernard Eder, Howard Bennett, Steven Berry, David Foxton, Christopher Smith 2017

The Bill of Lading: Holder Rights and Liabilities The Bill of Lading: Holder Rights and Liabilities

Frank Stevens 2017

Charterparties: Law, Practice and Emerging Legal Issues Edited by: Baris Soyer, Andrew Tettenborn 2017

Shipping and Trade Law 2017

Multimodal Transport Law Michiel Spanjaart 2017

Introduction to Air Law Introduction to Air Law 10th ed Pablo Mendes de Leon 2017

Maritime Law 4th ed Edited by: Yvonne Baatz 2017

CMR Contracts for the International Carriage of Goods by Road CMR Contracts for the International Carriage of Goods by Road 4th ed Andrew Messent, David A. Glass 2017

Multimodal Transport Law Michiel Spanjaart 2017

The Obligations of the Carrier Regarding the Cargo: The Hague-Visby Rules Ilian Djadjev 2017


 

Marine Insurance Act

CHAPTER XLI.

An Act to codify the Law relating to Marine Insurance. [21st December 1906.]

Be it enacted by the King’s most Excellent Majesty, by and with the advice and consent of the Lords Spiritual and Temporal, and Commons, in this present Parliament assembled, and by the authority of the same, as follows:

Marine Insurance.

Marine insurance defined.

1. A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the assured, in manner and to the extent thereby agreed, against marine losses, that is to say, the losses incident to marine adventure.

Mixed sea and land risks.

2.—(1) A contract of marine insurance may, by its express terms, or by usage of trade, be extended so as to protect the assured against losses on inland waters or on any land risk which may be incidental to any sea voyage.

(2) Where a ship in course of building, or the launch of a ship, or any adventure analogous to a marine adventure, is covered by a policy in the form of a marine policy, the provisions of this Act, in so far as applicable, shall apply thereto; but, except as by this section provided, nothing in this Act shall alter or affect any rule of law applicable to any contract of insurance other than a contract of marine insurance as by this Act defined.

Marine adventure and maritime perils defined.

3.—(1) Subject to the provisions of this Act, every lawful marine adventure may be the subject of a contract of marine insurance.

(2) In particular there is a marine adventure where—

(a) Any ship goods or other moveables are exposed to maritime perils. Such property is in this Act referred to as “insurable property”;

(b) The earning or acquisition of any freight passage money, commission, profit, or other pecuniary benefit, or the security for any advances, loan, or disbursements, is endangered by the exposure of insurable property to maritime perils;

(c) Any liability to a third party may be incurred by the owner of, or other person interested in or responsible for, insurable property, by reason of maritime perils.

“Maritime perils” means the perils consequent on, or incidental to, the navigation of the sea, that is to say, perils of the seas, fire, war perils, pirates, rovers, thieves, captures, seisures, restraints, and detainments of princes and peoples, jettisons, barratry, and any other perils, either of the like kind or which may be designated by the policy.


Insurable Interest.

Avoidance of wagering or gaming contracts.

4.—(1) Every contract of marine insurance by way of gaming or wagering is void.

(2) A contract of marine insurance is deemed to be a gaming or wagering contract—

(a) Where the assured has not an insurable interest as defined by this Act, and the contract is entered into with no expectation of acquiring such an interest; or

(b) Where the policy is made “interest or no interest,” or “without further proof of interest than the policy itself,” or “without benefit of salvage to the insurer,” or subject to any other like term:

Provided that, where there is no possibility of salvage, a policy may be effected without benefit of salvage to the insurer.

Insurable interest defined.

5.—(1) Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure.

(2) In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.

When interest must attach.

6.—(1) The assured must be interested in the subject-matter insured at the time of the loss though he need not be interested when the insurance is effected:

Provided that where the subject-matter is insured “lost or not lost,” the assured may recover although he may not have acquired his interest until after the loss, unless at the time of effecting the contract of insurance the assured was aware of the loss, and the insurer was not.

(2) Where the assured has no interest at the time of the loss, he cannot acquire interest by any act or election after he is aware of the loss.

Defeasible or contingent interest.

7.—(1) A defeasible interest is insurable, as also is a contingent interest.

(2) In particular, where the buyer of goods has insured them, he has an insurable interest, notwithstanding that he might, at his election, have rejected the goods, or have treated them as at the seller’s risk, by reason of the latter’s delay in making delivery or otherwise.

Partial interest.

8. A partial interest of any nature is insurable.

Re-insurance.

9.—(1) The insurer under a contract of marine insurance has an insurable interest in his risk, and may re-insure in respect of it.

(2) Unless the policy otherwise provides, the original assured has no right or interest in respect of such re-insurance.

Bottomry.

10. The lender of money on bottomry or respondentia has an insurable interest in respect of the loan.

Master’s and seamen’s wages.

11. The master or any member of the crew of a ship has an insurable interest in respect of his wages.

Advance freight.

12. In the case of advance freight, the person advancing the freight has an insurable interest, in so far as such freight is not repayable in case of loss.

Charges of insurance.

13. The assured has an insurable interest in the charges of any insurance which he may effect.

Quantum of interest.

14.—(1) Where the subject-matter insured is mortgaged, the mortgagor has an insurable interest in the full value thereof, and the mortgagee has an insurable interest in respect of any sum due or to become due under the mortgage.

(2) A mortgagee, consignee, or other person having an interest in the subject-matter insured may insure on behalf and for the benefit of other persons interested as well as for his own benefit.

(3) The owner of insurable property has an insurable interest in respect of the full value thereof, notwithstanding that some third person may have agreed, or be liable, to indemnify him in case of loss.

Assignment of interest.

15. Where the assured assigns or otherwise parts with his interest in the subject-matter insured, he does not thereby transfer to the assignee his rights under the contract of insurance, unless there be an express or implied agreement with the assignee to that effect.

But the provisions of this section do not affect a transmission of interest by operation of law.


Insurable Value.

Measure of insurable value.

16. Subject to any express provision or valuation in the policy, the insurable value of the subject-matter insured must be ascertained as follows:—

(1) In insurance on ship, the insurable value is the value, at the commencement of the risk, of the ship, including her outfit, provisions and stores for the officers and crew, money advanced for seamen’s wages, and other disbursements (if any) incurred to make the ship fit for the voyage or adventure contemplated by the policy, plus the charges of insurance upon the whole:

The insurable value, in the case of a steamship, includes also the machinery, boilers, and coals and engine stores if owned by the assured, and, in the case of a ship engaged in a special trade, the ordinary fittings requisite for that trade:

(2) In insurance on freight, whether paid in advance or otherwise, the insurable value is the gross amount of the freight at the risk of the assured, plus the charges of insurance:

(3) In insurance on goods or merchandise, the insurable value is the prime cost of the property insured, plus the expenses of and incidental to shipping and the charges of insurance upon the whole:

(4) In insurance on any other subject-matter, the insurable value is the amount at the risk of the assured when the policy attaches, plus the charges of insurance.


Disclosure and Representations.

Insurance is uberrimae fidei.

17. A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party.

Disclosure by assured.

18.—(1) Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract.

(2) Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.

(3) In the absence of inquiry the following circumstances need not be disclosed, namely:—

(a) Any circumstance which diminishes the risk;

(b) Any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know;

(c) Any circumstance as to which information is waived by the insurer;

(d) Any circumstance which it is superfluous to disclose by reason of any express or implied warranty.

(4) Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact.

(5) The term “circumstance” includes any communication made to, or information received by, the assured.

Disclosure by agent effecting insurance.

19. Subject to the provisions of the preceding section as to circumstances which need not be disclosed, where an insurance is effected for the assured by an agent, the agent must disclose to the insurer—

(a) Every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to, him; and

(b) Every material circumstance which the assured is bound to disclose, unless it come to his knowledge too late to communicate it to the agent.

Representations pending negotiation of contract.

20.—(1) Every material representation made by the assured or his agent to the insurer during the negotiations for the contract, and before the contract is concluded, must be true. If it be untrue the insurer may avoid the contract.

(2) A representation is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.

(3) A representation may be either a representation as to a matter of fact, or as to a matter of expectation or belief.

(4) A representation as to a matter of fact is true, if it be substantially correct, that is to say, if the difference between what is represented and what is actually correct would not be considered material by a prudent insurer.

(5) A representation as to a matter of expectation or belief is true if it be made in good faith.

(6) A representation may be withdrawn or corrected before the contract is concluded.

(7) Whether a particular representation be material or not is, in each case, a question of fact.

When contract is deemed to be concluded.

21. A contract of marine insurance is deemed to be concluded when the proposal of the assured is accepted by the insurer, whether the policy be then issued or not; and, for the purpose of showing when the proposal was accepted, reference may be made to the slip or covering note or other customary memorandum of the contract, although it be unstamped.


The Policy.

Contract must be embodied in policy.

22. Subject to the provisions of any statute, a contract of marine insurance is inadmissible in evidence unless it is embodied in a marine policy in accordance with this Act. The policy may be executed and issued either at the time when the contract is concluded, or afterwards.

What policy must specify.

23. A marine policy must specify—

(1) The name of the assured, or of some person who effects the insurance on his behalf:

(2) The subject-matter insured and the risk insured against:

(3) The voyage, or period of time, or both, as the case may be, covered by the insurance:

(4) The sum or sums insured:

(5) The name or names of the insurers.

Signature of insurer.

24.—(1) A marine policy must be signed by or on behalf of the insurer, provided that in the case of a corporation the corporate seal may be sufficient, but nothing in this section shall be construed as requiring the subscription of a corporation to be under seal.

(2) Where a policy is subscribed by or on behalf of two or more insurers, each subscription, unless the contrary be expressed, constitutes a distinct contract with the assured.

Voyage and time policies.

1 Edw. 7. c. 7.

25.—(1) Where the contract is to insure the subject-matter “at and from,” or from one place to another or others, the policy is called a “voyage policy,” and where the contract is to insure the subject-matter for a definite period of time the policy is called a “time policy.” A contract for both voyage and time may be included in the same policy.

(2) Subject to the provisions of section eleven of the Finance Act, 1901, a time policy which is made for any time exceeding twelve months is invalid.

Designation of subject-matter

26.—(1) The subject-matter insured must be designated in a marine policy with reasonable certainty.

(2) The nature and extent of the interest of the assured in the subject-matter insured need not be specified in the policy.

(3) Where the policy designates the subject-matter insured in general terms, it shall be construed to apply to the interest intended by the assured to be covered.

(4) In the application of this section regard shall be had to any usage regulating the designation of the subject-matter insured.

Valued policy.

27.—(1) A policy may be either valued or unvalued.

(2) A valued policy is a policy which specifies the agreed value of the subject-matter insured.

(3) Subject to the provisions of this Act, and in the absence of fraud, the value fixed by the policy is, as between the insurer and assured, conclusive of the insurable value of the subject intended to be insured, whether the loss be total or partial.

(4) Unless the policy otherwise provides, the value fixed by the policy is not conclusive for the purpose of determining whether there has been a constructive total loss.

Unvalued policy.

28. An unvalued policy is a policy which does not specify the value of the subject-matter insured, but, subject to the limit of the sum insured, leaves the insurable value to be subsequently ascertained, in the manner herein-before specified.

Floating policy by ship or ships.

29.—(1) A floating policy is a policy which describes the insurance in general terms, and leaves the name of the ship or ships and other particulars to be defined by subsequent declaration.

(2) The subsequent declaration or declarations may be made by indorsement on the policy, or in other customary manner.

(3) Unless the policy otherwise provides, the declarations must be made in the order of dispatch or shipment. They must, in the case of goods, comprise all consignments within the terms of the policy, and the value of the goods or other property must be honestly stated, but an omission or erroneous declaration may be rectified even after loss or arrival, provided the omission or declaration was made in good faith.

(4) Unless the policy otherwise provides, where a declaration of value is not made until after notice of loss or arrival, the policy must be treated as an unvalued policy as regards the subject-matter of that declaration.

Construction of terms in policy.

30.—(1) A policy may be in the form in the First Schedule to this Act.

(2) Subject to the provisions of this Act, and unless the context of the policy otherwise requires, the terms and expressions mentioned in the First Schedule to this Act shall be construed as having the scope and meaning in that schedule assigned to them.

Premium to be arranged.

31.—(1) Where an insurance is effected at a premium to be arranged, and no arrangement is made, a reasonable premium is payable.

(2) Where an insurance is effected on the terms that an additional premium is to be arranged in a given event, and that event happens but no arrangement is made, then a reasonable additional premium is payable.


Double Insurance.

Double insurance.

32.—(1) Where two or more policies are effected by or on behalf of the assured on the same adventure and interest or any part thereof, and the sums insured exceed the indemnity allowed by this Act, the assured is said to be over-insured by double insurance.

(2) Where the assured is over-insured by double insurance—

(a) The assured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may think fit, provided that he is not entitled to receive any sum in excess of the indemnity allowed by this Act;

(b) Where the policy under which the assured claims is a valued policy, the assured must give credit as against the valuation for any sum received by him under any other policy without regard to the actual value of the subject-matter insured;

(c) Where the policy under which the assured claims is an unvalued policy he must give credit, as against the full insurable value, for any sum received by him under any other policy;

(d) Where the assured receives any sum in excess of the indemnity allowed by this Act, he is deemed to hold such sum in trust for the insurers, according to their right of contribution among themselves.


Warranties, &c.

Nature of warranty.

33.—(1) A warranty, in the following sections relating to warranties, means a promissory warranty, that is to say, a warranty by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts.

(2) A warranty may be express or implied.

(3) A warranty, as above defined, is a condition which must be exactly complied with, whether it be material to the risk or not. If it be not so complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date.

When breach of warranty excused.

34.—(1) Non-compliance with a warranty is excused when, by reason of a change of circumstances, the warranty ceases to be applicable to the circumstances of the contract, or when compliance with the warranty is rendered unlawful by any subsequent law.

(2) Where a warranty is broken, the assured cannot avail himself of the defence that the breach has been remedied, and the warranty complied with, before loss.

(3) A breach of warranty may be waived by the insurer.

Express warranties.

35.—(1) An express warranty may be in any form of words from which the intention to warrant is to be inferred.

(2) An express warranty must be included in, or written upon, the policy, or must be contained in some document incorporated by reference into the policy.

(3) An express warranty does not exclude an implied warranty, unless it be inconsistent therewith.

Warranty of neutrality.

36.—(1) Where insurable property, whether ship or goods, is expressly warranted neutral, there is an implied condition that the property shall have a neutral character at the commencement of the risk, and that, so far as the assured can control the matter, its neutral character shall be preserved during the risk.

(2) Where a ship is expressly warranted “neutral” there is also an implied condition that, so far as the assured can control the matter, she shall be properly documented, that is to say, that she shall carry the necessary papers to establish her neutrality, and that she shall not falsify or suppress her papers, or use simulated papers. If any loss occurs through breach of this condition, the insurer may avoid the contract.

No implied warranty of nationality.

37. There is no implied warranty as to the nationality of a ship, or that her nationality shall not be changed during the risk.

Warranty of good safety.

38. Where the subject-matter insured is warranted “well” or “in good safety” on a particular day, it is sufficient if it be safe at any time during that day.

Warranty of seaworthiness of ship.

39.—(1) In a voyage policy there is an implied warranty that at the commencement of the voyage the ship shall be seaworthy for the purpose of the particular adventure insured.

(2) Where the policy attaches while the ship is in port, there is also an implied warranty that she shall, at the commencement of the risk, be reasonably fit to encounter the ordinary perils of the port.

(3) Where the policy relates to a voyage which is performed in different stages, during which the ship requires different kinds of or further preparation or equipment, there is an implied warranty that at the commencement of each stage the ship is seaworthy in respect of such preparation or equipment for the purposes of that stage.

(4) A ship is deemed to be seaworthy when she is reasonably fit in all respects to encounter the ordinary perils of the seas of the adventure insured.

(5) In a time policy there is no implied warranty that the ship shall be seaworthy at any stage of the adventure, but where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness.

No implied warranty that goods are seaworthy.

40.—(1) In a policy on goods or other moveables there is no implied warranty that the goods or moveables are seaworthy.

(2) In a voyage policy on goods or other moveables there is an implied warranty that at the commencement of the voyage the ship is not only seaworthy as a ship, but also that she is reasonably fit to carry the goods or other moveables to the destination contemplated by the policy.

Warranty of legality.

41. There is an implied warranty that the adventure insured is a lawful one, and that, so far as the assured can control the matter, the adventure shall be carried out in a lawful manner.


The Voyage.

Implied condition as to commencement of risk.

42.—(1) Where the subject-matter is insured by a voyage policy “at and from” or “from” a particular place, it is not necessary that the ship should be at that place when the contract is concluded, but there is an implied condition that the adventure shall be commenced within a reasonable time, and that if the adventure be not so commenced the insurer may avoid the contract.

(2) The implied condition may be negatived by showing that the delay was caused by circumstances known to the insurer before the contract was concluded, or by showing that he waived the condition.

Alteration of port of departure.

43. Where the place of departure is specified by the policy, and the ship instead of sailing from that place sails from any other place, the risk does not attach.

Sailing for different destination.

44. Where the destination is specified in the policy, and the ship, instead of sailing for that destination, sails for any other destination, the risk does not attach.

Change of voyage.

45.—(1) Where, after the commencement of the risk, the destination of the ship is voluntarily changed from the destination contemplated by the policy, there is said to be a change of voyage.

(2) Unless the policy otherwise provides, where there is a change of voyage, the insurer is discharged from liability as from the time of change, that is to say, as from the time when the determination to change it is manifested; and it is immaterial that the ship may not in fact have left the course of voyage contemplated by the policy when the loss occurs.


Deviation.

46.—(1) Where a ship, without lawful excuse, deviates from the voyage contemplated by the policy, the insurer is discharged from liability as from the time of deviation, and it is immaterial that the ship may have regained her route before any loss occurs.

(2) There is a deviation from the voyage contemplated by the policy—

(a) Where the course of the voyage is specifically designated by the policy, and that course is departed from; or

(b) Where the course of the voyage is not specifically designated by the policy, but the usual and customary course is departed from.

(3) The intention to deviate is immaterial; there must be a deviation in fact to discharge the insurer from his liability under the contract.

Several ports of discharge.

47.—(1) Where several ports of discharge are specified by the policy, the ship may proceed to all or any of them, but, in the absence of any usage or sufficient cause to the contrary, she must proceed to them, or such of them as she goes to, in the order designated by the policy. If she does not there is a deviation.

(2) Where the policy is to “ports of discharge,” within a given area, which are not named, the ship must, in the absence of any usage or sufficient cause to the contrary, proceed to them, or such of them as she goes to, in their geographical order. If she does not there is a deviation.

Delay in voyage.

48. In the case of a voyage policy, the adventure insured must be prosecuted throughout its course with reasonable dispatch, and, if without lawful excuse it is not so prosecuted, the insurer is discharged from liability as from the time when the delay became unreasonable.

Excuses for deviation or delay.

49.—(1) Deviation or delay in prosecuting the voyage contemplated by the policy is excused—

(a) Where authorised by any special term in the policy; or

(b) Where caused by circumstances beyond the control of the master and his employer; or

(c) Where reasonably necessary in order to comply with an express or implied warranty; or

(d) Where reasonably necessary for the safety of the ship or subject-matter insured; or

(e) For the purpose of saving human life, or aiding a ship in distress where human life may be in danger; or

(f) Where reasonably necessary for the purpose of obtaining medical or surgical aid for any person on board the ship; or

(g) Where caused by the barratrous conduct of the master or crew, if barratry be one of the perils insured against.

(2) When the cause excusing the deviation or delay ceases to operate, the ship must resume her course, and prosecute her voyage, with reasonable dispatch.


Assignment of Policy.

When and how policy is assignable.

50.—(1) A marine policy is assignable unless it contains terms expressly prohibiting assignment. It may be assigned either before or after loss.

(2) Where a marine policy has been assigned so as to pass the beneficial interest in such policy, the assignee of the policy is entitled to sue thereon in his own name; and the defendant is entitled to make any defence arising out of the contract which he would have been entitled to make if the action had been brought in the name of the person by or on behalf of whom the policy was effected.

(3) A marine policy may be assigned by indorsement thereon or in other customary manner.

Assured who has no interest cannot assign.

51. Where the assured has parted with or lost his interest in the subject-matter insured, and has not, before or at the time of so doing, expressly or impliedly agreed to assign the policy, any subsequent assignment of the policy is inoperative:

Provided that nothing in this section affects the assignment of a policy after loss.



The Premium.

When premium payable.

52. Unless otherwise agreed, the duty of the assured or his agent to pay the premium, and the duty of the insurer to issue the policy to the assured or his agent, are concurrent conditions, and the insurer is not bound to issue the policy until payment or tender of the premium.

Policy effected through broker.

53.—(1) Unless otherwise agreed, where a marine policy is effected on behalf of the assured by a broker, the broker is directly responsible to the insurer for the premium, and the insurer is directly responsible to the assured for the amount which may be payable in respect of losses, or in respect of returnable premium.

(2) Unless otherwise agreed, the broker has, as against the assured, a lien upon the policy for the amount of the premium and his charges in respect of effecting the policy; and, where he has dealt with the person who employs him as a principal, he has also a lien on the policy in respect of any balance on any insurance account which may be due to him from such person, unless when the debt was incurred he had reason to believe that such person was only an agent.

Effect of receipt on policy.

54. Where a marine policy effected on behalf of the assured by a broker acknowledges the receipt of the premium, such acknowledgment is, in the absence of fraud, conclusive as between the insurer and the assured, but not as between the insurer and broker.


Loss and Abandonment.

Included and excluded losses.

55.—(1) Subject to the provisions of this Act, and unless the policy otherwise provides, the insurer is liable for any loss proximately caused by a peril insured against, but, subject as aforesaid, he is not liable for any loss which is not proximately caused by a peril insured against.

(2) In particular,—

(a) The insurer is not liable for any loss attributable to the wilful misconduct of the assured, but, unless the policy otherwise provides, he is liable for any loss proximately caused by a peril insured against, even though the loss would not have happened but for the misconduct or negligence of the master or crew;

(b) Unless the policy otherwise provides, the insurer on ship or goods is not liable for any loss proximately caused by delay, although the delay be caused by a peril insured against;

(c) Unless the policy otherwise provides, the insurer is not liable for ordinary wear and tear, ordinary leakage and breakage, inherent vice or nature of the subject-matter insured, or for any loss proximately caused by rats or vermin, or for any injury to machinery not proximately caused by maritime perils.

Partial and total loss.

56.—(1) A loss may be either total or partial. Any loss other than a total loss, as hereinafter defined, is a partial loss.

(2) A total loss may be either an actual total loss, or a constructive total loss.

(3) Unless a different intention appears from the terms of the policy, an insurance against total loss includes a constructive, as well as an actual, total loss.

(4) Where the assured brings an action for a total loss and the evidence proves only a partial loss, he may, unless the policy otherwise provides, recover for a partial loss.

(5) Where goods reach their destination in specie, but by reason of obliteration of marks, or otherwise, they are incapable of identification, the loss, if any, is partial, and not total.

Actual total loss.

57.—(1) Where the subject-matter insured is destroyed, or so damaged as to cease to be a thing of the kind insured, or where the assured is irretrievably deprived thereof, there is an actual total loss.

(2) In the case of an actual total loss no notice of abandonment need be given.

Missing ship.

58. Where the ship concerned in the adventure is missing, and after the lapse of a reasonable time no news of her has been received, an actual total loss may be presumed.

Effect of transhipment, &c.

59. Where, by a peril insured against, the voyage is interrupted at an intermediate port or place, under such circumstances as, apart from any special stipulation in the contract of affreightment, to justify the master in landing and re-shipping the goods or other moveables, or in transhipping them, and sending them on to their destination, the liability of the insurer continues, notwithstanding the landing or transhipment.

Constructive total loss defined.

60.—(1) Subject to any express provision in the policy, there is a constructive total loss where the subject-matter insured is reasonably abandoned on account of its actual total loss appearing to be unavoidable, or because it could not be preserved from actual total loss without an expenditure which would exceed its value when the expenditure had been incurred.

(2) In particular, there is a constructive total loss—

(i) Where the assured is deprived of the possession of his ship or goods by a peril insured against, and (a) it is unlikely that he can recover the ship or goods, as the case may be, or (b) the cost of recovering the ship or goods, as the case may be, would exceed their value when recovered; or

(ii) In the case of damage to a ship, where she is so damaged by a peril insured against that the cost of repairing the damage would exceed the value of the ship when repaired.

In estimating the cost of repairs, no deduction is to be made in respect of general average contributions to those repairs payable by other interests, but account is to be taken of the expense of future salvage operations and of any future general average contributions to which the ship would be liable if repaired; or

(iii) In the case of damage to goods, where the cost of repairing the damage and forwarding the goods to their destination would exceed their value on arrival.

Effect of constructive total loss.

61. Where there is a constructive total loss the assured may either treat the loss as a partial loss, or abandon the subject-matter insured to the insurer and treat the loss as if it were an actual total loss.

Notice of abandonment.

62.—(1) Subject to the provisions of this section, where the assured elects to abandon the subject-matter insured to the insurer, he must give notice of abandonment. If he fails to do so the loss can only be treated as a partial loss.

(2) Notice of abandonment may be given in writing, or by word of mouth, or partly in writing and partly by word of mouth, and may be given in any terms which indicate the intention of the assured to abandon his insured interest in the subject-matter insured unconditionally to the insurer.

(3) Notice of abandonment must be given with reasonable diligence after the receipt of reliable information of the loss, but where the information is of a doubtful character the assured is entitled to a reasonable time to make inquiry.

(4) Where notice of abandonment is properly given, the rights of the assured are not prejudiced by the fact that the insurer refuses to accept the abandonment.

(5) The acceptance of an abandonment may be either express or implied from the conduct of the insurer. The mere silence of the insurer after notice is not an acceptance.

(6) Where notice of abandonment is accepted the abandonment is irrevocable. The acceptance of the notice conclusively admits liability for the loss and the sufficiency of the notice.

(7) Notice of abandonment is unnecessary where, at the time when the assured receives information of the loss, there would be no possibility of benefit to the insurer if notice were given to him.

(8) Notice of abandonment may be waived by the insurer.

(9) Where an insurer has re-insured his risk, no notice of abandonment need be given by him.

Effect of abandonment.

63.—(1) Where there is a valid abandonment the insurer is entitled to take over the interest of the assured in whatever may remain of the subject-matter insured, and all proprietary rights incidental thereto.

(2) Upon the abandonment of a ship, the insurer thereof is entitled to any freight in course of being earned, and which is earned by her subsequent to the casualty causing the loss, less the expenses of earning it incurred after the casualty; and, where the ship is carrying the owner’s goods, the insurer is entitled to a reasonable remuneration for the carriage of them subsequent to the casualty causing the loss.


Partial Losses (including Salvage and General Average and Particular Charges).

Particular average loss.

64.—(1) A particular average loss is a partial loss of the subject-matter insured, caused by a peril insured against, and which is not a general average loss.

(2) Expenses incurred by or on behalf of the assured for the safety or preservation of the subject-matter insured, other than general average and salvage charges, are called particular charges. Particular charges are not included in particular average.

Salvage charges.

65.—(1) Subject to any express provision in the policy, salvage charges incurred in preventing a loss by perils insured against may be recovered as a loss by those perils.

(2) “Salvage charges” means the charges recoverable under maritime law by a salvor independently of contract. They do not include the expenses of services in the nature of salvage rendered by the assured or his agents, or any person employed for hire by them, for the purpose of averting a peril insured against. Such expenses, where properly incurred, may be recovered as particular charges or as a general average loss, according to the circumstances under which they were incurred.

General average loss.

66.—(1) A general average loss is a loss caused by or directly consequential on a general average act. It includes a general average expenditure as well as a general average sacrifice.

(2) There is a general average act where any extraordinary sacrifice or expenditure is voluntarily and reasonably made or incurred in time of peril for the purpose of preserving the property imperilled in the common adventure.

(3) Where there is a general average loss, the party on whom it falls is entitled, subject to the conditions imposed by maritime law, to a rateable contribution from the other parties interested, and such contribution is called a general average contribution.

(4) Subject to any express provision in the policy, where the assured has incurred a general average expenditure, he may recover from the insurer in respect of the proportion of the loss which falls upon him; and, in the case of a general average sacrifice, he may recover from the insurer in respect of the whole loss without having enforced his right of contribution from the other parties liable to contribute.

(5) Subject to any express provision in the policy, where the assured has paid, or is liable to pay, a general average contribution in respect of the subject insured, he may recover therefor from the insurer.

(6) In the absence of express stipulation, the insurer is not liable for any general average loss or contribution where the loss was not incurred for the purpose of avoiding, or in connexion with the avoidance of, a peril insured against.

(7) Where ship, freight, and cargo, or any two of those interests, are owned by the same assured, the liability of the insurer in respect of general average losses or contributions is to be determined as if those subjects were owned by different persons.


Measure of Indemnity.

Extent of liability of insurer for loss.

67.—(1) The sum which the assured can recover in respect of a loss on a policy by which he is insured, in the case of an unvalued policy to the full extent of the insurable value, or, in the case of a valued policy to the full extent of the value fixed by the policy, is called the measure of indemnity.

(2) Where there is a loss recoverable under the policy, the insurer, or each insurer if there be more than one, is liable for such proportion of the measure of indemnity as the amount of his subscription bears to the value fixed by the policy in the case of a valued policy, or to the insurable value in the case of an unvalued policy.

Total loss.

68. Subject to the provisions of this Act and to any express provision in the policy, where there is a total loss of the subject-matter insured,—

(1) If the policy be a valued policy, the measure of indemnity is the sum fixed by the policy:

(2) If the policy be an unvalued policy, the measure of indemnity is the insurable value of the subject-matter insured.

Partial loss of ship.

69. Where a ship is damaged, but is not totally lost, the measure of indemnity, subject to any express provision in the policy, is as follows:—

(1) Where the ship has been repaired, the assured is entitled to the reasonable cost of the repairs, less the customary deductions, but not exceeding the sum insured in respect of any one casualty:

(2) Where the ship has been only partially repaired, the assured is entitled to the reasonable cost of such repairs, computed as above, and also to be indemnified for the reasonable depreciation, if any, arising from the unrepaired damage, provided that the aggregate amount shall not exceed the cost of repairing the whole damage, computed as above:

(3) Where the ship has not been repaired, and has not been sold in her damaged state during the risk, the assured is entitled to be indemnified for the reasonable depreciation arising from the unrepaired damage, but not exceeding the reasonable cost of repairing such damage, computed as above.

Partial loss of freight.

70. Subject to any express provision in the policy, where there is a partial loss of freight, the measure of indemnity is such proportion of the sum fixed by the policy in the case of a valued policy, or of the insurable value in the case of an unvalued policy, as the proportion of freight lost by the assured bears to the whole freight at the risk of the assured under the policy.

Partial loss of goods, merchandise, &c.

71. Where there is a partial loss of goods, merchandise, or other moveables, the measure of indemnity, subject to any express provision in the policy, is as follows:—

(1) Where part of the goods, merchandise or other moveables insured by a valued policy is totally lost, the measure of indemnity is such proportion of the sum fixed by the policy as the insurable value of the part lost bears to the insurable value of the whole, ascertained as in the case of an unvalued policy:

(2) Where part of the goods, merchandise, or other moveables insured by an unvalued policy is totally lost, the measure of indemnity is the insurable value of the part lost, ascertained as in case of total loss:

(3) Where the whole or any part of the goods or merchandise insured has been delivered damaged at its destination, the measure of indemnity is such proportion of the sum fixed by the policy in the case of a valued policy, or of the insurable value in the case of an unvalued policy, as the difference between the gross sound and damaged values at the place of arrival bears to the gross sound value:

(4) “Gross value” means the wholesale price or, if there be no such price, the estimated value, with, in either case, freight, landing charges, and duty paid beforehand; provided that, in the case of goods or merchandise customarily sold in bond, the bonded price is deemed to be the gross value. “Gross proceeds” means the actual price obtained at a sale where all charges on sale are paid by the sellers.

Apportionment of valuation.

72.—(1) Where different species of property are insured under a single valuation, the valuation must be apportioned over the different species in proportion to their respective insurable values, as in the case of an unvalued policy. The insured value of any part of a species is such proportion of the total insured value of the same as the insurable value of the part bears to the insurable value of the whole, ascertained in both cases as provided by this Act.

(2) Where a valuation has to be apportioned, and particulars of the prime cost of each separate species, quality, or description of goods cannot be ascertained, the division of the valuation may be made over the net. arrived sound values of the different species, qualities, or descriptions of goods.

General average contributions and salvage charges.

73.—(1) Subject to any express provision in the policy, where the assured has paid, or is liable for, any general average contribution, the measure of indemnity is the full amount of such contribution, if the subject-matter liable to contribution is insured for its full contributory value; but, if such subject-matter be not insured for its full contributory value, or if only part of it be insured, the indemnity payable by the insurer must be reduced in proportion to the under insurance, and where there has been a particular average loss which constitutes a deduction from the contributory value, and for which the insurer is liable, that amount must be deducted from the insured value in order to ascertain what the insurer is liable to contribute.

(2) Where the insurer is liable for salvage charges the extent of his liability must be determined on the like principle.

Liabilities to third parties.

74. Where the assured has effected an insurance in express terms against any liability to a third party, the measure of indemnity, subject to any express provision in the policy, is the amount paid or payable by him to such third party in respect of such liability.

General provisions as to measure of indemnity.

75.—(1) Where there has been a loss in respect of any subject-matter not expressly provided for in the foregoing provisions of this Act, the measure of indemnity shall be ascertained, as nearly as may be, in accordance with those provisions, in so far as applicable to the particular case.

(2) Nothing in the provisions of this Act relating to the measure of indemnity shall affect the rules relating to double insurance, or prohibit the insurer from disproving interest wholly or in part, or from showing that at the time of the loss the whole or any part of the subject-matter insured was not at risk under the policy.

Particular average warranties.

76.—(1) Where the subject-matter insured is warranted free from particular average, the assured cannot recover for a loss of part, other than a loss incurred by a general average sacrifice, unless the contract contained in the policy be apportionable; but, if the contract be apportionable, the assured may recover for a total loss of any apportionable part.

(2) Where the subject-matter insured is warranted free from particular average, either wholly or under a certain percentage, the insurer is nevertheless liable for salvage charges, and for particular charges and other expenses properly incurred pursuant to the provisions of the suing and labouring clause in order to avert a loss insured against.

(3) Unless the policy otherwise provides, where the subject-matter insured is warranted free from particular average under a specified percentage, a general average loss cannot be added to a particular average loss to make up the specified percentage.

(4) For the purpose of ascertaining whether the specified percentage has been reached, regard shall be had only to the actual loss suffered by the subject-matter insured. Particular charges and the expenses of and incidental to ascertaining and proving the loss must be excluded.

Successive losses.

77.—(1) Unless the policy otherwise provides, and subject to the provisions of this Act, the insurer is liable for successive losses, even though the total amount of such losses may exceed the sum insured.

(2) Where, under the same policy, a partial loss, which has not been repaired or otherwise made good, is followed by a total loss, the assured can only recover in respect of the total loss:

Provided that nothing in this section shall affect the liability of the insurer under the suing and labouring clause.

Suing and labouring clause.

78.—(1) Where the policy contains a suing and labouring clause, the engagement thereby entered into is deemed to be supplementary to the contract of insurance, and the assured may recover from the insurer any expenses properly incurred pursuant to the clause, notwithstanding that the insurer may have paid for a total loss, or that the subject-matter may have been warranted free from particular average, either wholly or under a certain percentage.

(2) General average losses and contributions and salvage charges, as defined by this Act, are not recoverable under the suing and labouring clause.

(3) Expenses incurred for the purpose of averting or diminishing any loss not covered by the policy are not recoverable under the suing and labouring clause.

(4) It is the duty of the assured and his agents, in all cases, to take such measures as may be reasonable for the purpose of averting or minimising a loss.


Rights of Insurer on Payment.

Right of subrogation.

79.—(1) Where the insurer pays for a total loss, either of the whole, or in the case of goods of any apportionable part, of the subject-matter insured, he thereupon becomes entitled to take over the interest of the assured in whatever may remain of the subject-matter so paid for, and he is thereby subrogated to all the rights and remedies of the assured in and in respect of that subject-matter as from the time of the casualty causing the loss.

(2) Subject to the foregoing provisions, where the insurer pays for a partial loss, he acquires no title to the subject-matter insured, or such part of it as may remain, but he is thereupon subrogated to all rights and remedies of the assured in and in respect of the subject-matter insured as from the time of the casualty causing the loss, in so far as the assured has been indemnified, according to this Act, by such payment for the loss.

Right of contribution.

80.—(1) Where the assured is over-insured by double insurance, each insurer is bound, as between himself and the other insurers, to contribute rateably to the loss in proportion to the amount for which he is liable under his contract.

(2) If any insurer pays more than his proportion of the loss, he is entitled to maintain an action for contribution against the other insurers, and is entitled to the like remedies as a surety who has paid more than his proportion of the debt.

Effect of under insurance.

81. Where the assured is insured for an amount less than the insurable value or, in the case of a valued policy, for an amount less than the policy valuation, he is deemed to be his own insurer in respect of the uninsured balance.


Return of Premium.

Enforcement of return.

82. Where the premium or a proportionate part thereof is, by this Act, declared to be returnable,—

(a) If already paid, it may be recovered by the assured from the insurer; and

(b) If unpaid, it may be retained by the assured or his agent.

Return by agreement.

83. Where the policy contains a stipulation for the return of the premium, or a proportionate part thereof, on the happening of a certain event, and that event happens, the premium, or, as the case may be, the proportionate part thereof, is thereupon returnable to the assured.

Return for failure of consideration.

84.—(1) Where the consideration for the payment of the premium totally fails, and there has been no fraud or illegality on the part of the assured or his agents, the premium is there-upon returnable to the assured.

(2) Where the consideration for the payment of the premium is apportionable and there is a total failure of any apportionable part of the consideration, a proportionate part of the premium is, under the like conditions, thereupon returnable to the assured.

(3) In particular—

(a) Where the policy is void, or is avoided by the insurer as from the commencement of the risk, the premium is returnable, provided that there has been no fraud or illegality on the part of the assured; but if the risk is not apportionable, and has once attached, the premium is not returnable:

(b) Where the subject-matter insured, or part thereof, has never been imperilled, the premium, or, as the case may be, a proportionate part thereof, is returnable:

Provided that where the subject-matter has been insured “lost or not lost” and has arrived in safety at the time when the contract is concluded, the premium is not returnable unless, at such time, the insurer knew of the safe arrival.

(c) Where the assured has no insurable interest throughout the currency of the risk, the premium is returnable, provided that this rule does not apply to a policy effected by way of gaming or wagering;

(d) Where the assured has a defeasible interest which is terminated during the currency of the risk, the premium is not returnable;

(e) Where the assured has over-insured under an unvalued policy, a proportionate part of the premium is returnable;

(f) Subject to the foregoing provisions, where the assured has over-insured by double insurance, a proportionate part of the several premiums is returnable:

Provided that, if the policies are effected at different times, and any earlier policy has at any time borne the entire risk, or if a claim has been paid on the policy in respect of the full sum insured thereby, no premium is returnable in respect of that policy, and when the double insurance is effected knowingly by the assured no premium is returnable.


Mutual Insurance.

Modification of Act in case of mutual insurance.

85.—(1) Where two or more persons mutually agree to insure each other against marine losses there is said to be a mutual insurance.

(2) The provisions of this Act relating to the premium do not apply to mutual insurance, but a guarantee, or such other arrangement as may be agreed upon, may be substituted for the premium.

(3) The provisions of this Act, in so far as they may be modified by the agreement of the parties, may in the case of mutual insurance be modified by the terms of the policies issued by the association, or by the rules and regulations of the association.

(4) Subject to the exceptions mentioned in this section, the provisions of this Act apply to a mutual insurance.


Supplemental.

Ratification by assured.

86. Where a contract of marine insurance is in good faith effected by one person on behalf of another, the person on whose behalf it is effected may ratify the contract even after he is aware of a loss.

Implied obligations varied by agreement or usage.

87.—(1) Where any right, duty, or liability would arise under a contract of marine insurance by implication of law, it may be negatived or varied by express agreement, or by usage, if the usage be such as to bind both parties to the contract.

(2) The provisions of this section extend to any right, duty, or liability declared by this Act which may be lawfully modified by agreement.

Reasonable time, &c. a question of fact.

88. Where by this Act any reference is made to reasonable time, reasonable premium, or reasonable diligence, the question what is reasonable is a question of fact.

Slip as evidence.

89. Where there is a duly stamped policy, reference may be made, as heretofore, to the slip or covering note, in any legal proceeding.

Interpretation of terms.

90. In this Act, unless the context or subject-matter otherwise requires,—

“Action” includes counter-claim and set off:

“Freight” includes the profit derivable by a shipowner from the employment of his ship to carry his own goods or moveables, as well as freight payable by a third party, but does not include passage money:

“Moveables” means any moveable tangible property, other than the ship, and includes money, valuable securities, and other documents:

“Policy” means a marine policy.

Savings.

54 & 55 Vict. c. 39.

25 & 26 Vict. c. 89.

91.—(1) Nothing in this Act, or in any repeal effected thereby, shall affect—

(a) The provisions of the Stamp Act, 1891, or any enactment for the time being in force relating to the revenue;

(b) The provisions of the Companies Act, 1862, or any enactment amending or substituted for the same;

(c) The provisions of any statute not expressly repealed by this Act.

(2) The rules of the common law including the law merchant, save in so far as they are inconsistent with the express provisions of this Act, shall continue to apply to contracts of marine insurance.

R


FIRST CSHEDULE.

Form of Policy

Section 30 .

Lloyd’s S.G. policy.

Be it known that                                                  as well in                               own name as for and in the name and names of all and every other person or persons to whom the same doth, may, or shall appertain, in part or in all doth make assurance and cause                                                                           and them, and every of them, to be insured lost or not lost, at and from

Upon any kind of goods and merchandises, and also upon the body, tackle, apparel, ordnance, munition, artillery, boat, and other furniture, of and in the good ship or vessel called the                                                                        whereof is master under God, for this present voyage,                                          or whosoever else shall go for master in the said ship, or by whatsoever other name or names the said ship, or the master thereof, is or shall be named or called; beginning the adventure upon the said goods and merchandises from the loading thereof aboard the said ship,

upon the said ship, &c.

and so shall continue and endure, during her abode there, upon the said ship, &c. And further, until the said ship, with all her ordnance, tackle, apparel, &c., and goods and merchandises whatsoever shall be arrived at

upon the said ship, &c., until she hath moored at anchor twenty-four hours in good safety; and upon the goods and merchandises, until the same be there discharged and safely landed. And it shall be lawful for the said ship, &c., in this voyage, to proceed and sail to and touch and stay at any ports or places whatsoever

without prejudice to this insurance. The said ship, &c., goods and merchandises, &c., for so much as concerns the assured by agreement between the assured and assurers in this policy, are and shall be valued at

[Sue and labour clause.]

[Waiver clause.]

Touching the adventures and perils which we the assurers are contented to bear and do take upon us in this voyage: they are of the seas, men of war, fire, enemies, pirates, rovers, thieves, jettisons, letters of mart and countermart, surprisals, takings at sea, arrests, restraints, and detainments of all kings, princes, and people, of what nation, condition, or quality soever, barratry of the master and mariners, and of all other perils, losses, and misfortunes, that have or shall come to the hurt, detriment, or damage of the said goods and merchandises, and ship, &c., or any part thereof. And in case of any loss or misfortune it shall be lawful to the assured, their factors, servants and assigns, to sue, labour, and travel for, in and about the defence, safeguards, and recovery of the said goods and merchandises, and ship, &c., or any part thereof, without prejudice to this insurance; to the charges whereof we, the assurers, will contribute each one according to the rate and quantity of his sum herein assured. And it is especially declared and agreed that no acts of the insurer or insured in recovering, saving, or preserving the property insured shall be considered as a waiver, or acceptance of abandonment. And it is agreed by us, the insurers, that this writing or policy of assurance shall be of as much force and effect as the surest writing or policy of assurance heretofore made in Lombard Street, or in the Royal Exchange, or elsewhere in London. And so we, the assurers, are contented, and do hereby promise and bind ourselves, each one for his own part, our heirs, executors, and goods to the assured, their executors, administrators, and assigns, for the true performance of the premises, confessing ourselves paid the consideration due unto us for this assurance by the assured, at and after the rate of

In Witness whereof we, the assurers, have subscribed our names and sums assured in London.

[Memorandum.]

N.B.—Corn, fish, salt, fruit, flour, and seed are warranted free from average, unless general, or the ship be stranded—sugar, tobacco, hemp, flax, hides and skins are warranted free from average, under five pounds per cent., and all other goods, also the ship and freight, are warranted free from average, under three pounds per cent. unless general, or the ship be stranded.

Rules for Construction of Policy.

The following are the rules referred to by this Act for the construction of a policy in the above or other like form, where the context does not otherwise require:—

Lost or not lost.

1. Where the subject-matter is insured “lost or not lost,” and the loss has occurred before the contract is concluded, the risk attaches unless, at such time the assured was aware of the loss, and the insurer was not.

From.

2. Where the subject-matter is insured “from” a particular place, the risk does not attach until the ship starts on the voyage insured.

At and from. [Ship.]

3.—(a) Where a ship is insured “at and from” a particular place, and she is at that place in good safety when the contract is concluded, the risk attaches immediately.

(b) If she be not at that place when the contract is concluded, the risk attaches as soon as she arrives there in good safety, and, unless the policy otherwise provides, it is immaterial that she is covered by another policy for a specified time after arrival.

[Freight.]

(c) Where chartered freight is insured “at and from” a particular place, and the ship is at that place in good safety when the contract is concluded the risk attaches immediately. If she be not there when the contract is concluded, the risk attaches as soon as she arrives there in good safety.

(d) Where freight, other than chartered freight, is payable without special conditions and is insured “at and from” a particular place, the risk attaches pro rata as the goods or merchandise are shipped; provided that if there be cargo in readiness which belongs to the shipowner, or which some other person has contracted with him to ship, the risk attaches as soon as the ship is ready to receive such cargo.

From the loading thereof.

4. Where goods or other moveables are insured “from the loading thereof,” the risk does not attach until such goods or moveables are actually on board, and the insurer is not liable for them while in transit from the shore to the ship.

Safely landed.

5. Where the risk on goods or other moveables continues until they are “safely landed,” they must be landed in the customary manner and within a reasonable time after arrival at the port of discharge, and if they are not so landed the risk ceases.

Touch and stay.

6. In the absence of any further license or usage, the liberty to touch and stay “at any port or place whatsoever” does not authorise the ship to depart from the course of her voyage from the port of departure to the port of destination.

Perils of the seas.

7. The term “perils of the seas” refers only to fortuitous accidents or casualties of the seas. It does not include the ordinary action of the winds and waves.

Pirates.

8. The term “pirates” includes passengers who mutiny and rioters who attack the ship from the shore.

Thieves.

9. The term “thieves” does not cover clandestine theft or a theft committed by any one of the ship’s company, whether crew or passengers.

Restraint of princes.

10. The term “arrests, &c., of kings, princes, and people” refers to political or executive acts, and does not include a loss caused by riot or by ordinary judicial process.

Barratry.

11. The term “barratry” includes every wrongful act wilfully committed by the master or crew to the prejudice of the owner, or, as the case may be, the charterer.

All other perils.

12. The term “all other perils” includes only perils similar in kind to the perils specifically mentioned in the policy.

Average unless general.

13. The term “average unless general” means a partial loss of the subject-matter insured other than a general average loss, and does not include “particular charges.”

Stranded.

14. Where the ship has stranded, the insurer is liable for the excepted losses, although the loss is not attributable to the stranding, provided that when the stranding takes place the risk has attached and, if the policy be on goods, that the damaged goods are on board.

Ship.

15. The term “ship” includes the hull, materials and outfit, stores and provisions for the officers and crew, and, in the case of vessels engaged in a special trade, the ordinary fittings requisite for the trade, and also, in the case of a steamship, the machinery, boilers, and coals and engine stores, if owned by the assured.

Freight.

16. The term “freight” includes the profit derivable by a shipowner from the employment of his ship to carry his own goods or moveables, as well as freight payable by a third party, but does not include passage money.

Goods.

17. The term “goods” means goods in the nature of merchandise, and does not include personal effects or provisions and stores for use on board.

In the absence of any usage to the contrary, deck cargo and living animals must be insured specifically, and not under the general denomination of goods.

SECOND SCHEDULE.

Enactments Repealed.


 

Cases

Aro Road and Land Vehicle Limited v. Insurance Corporation of Ireland

[1986] IESC 1; [1986] IR 403 

Walsh J.

I have read the judgment about to be delivered by McCarthy J., and I agree with it.

Henchy J.

1. Aro Road and Land Vehicles Ltd. (“the insured company”) carried on business in Rathcoole, Co. Dublin. In July, 1981, it agreed to sell and deliver a quantity of vehicle cabs and engine parts to a firm called L.R. Plant, whose premises were at Maize, Co. Antrim. The insured company’s secretary, Miss Broe, telephoned the road freight section of Córas Iompair Eireann (“C.I.E.”) to arrange with them to transport the goods by road to the purchaser’s premises. She made the arrangement over the telephone with a Mr. Spelman. She told him what the goods were, she gave him the names and addresses of the consignor and consignee, and she estimated the value of the goods at £200,000. Mr. Spelman quoted transport charges at £2.00 per £1 ,000 worth of goods.

2. On 13th July, 1981, the insured company placed a firm order by telephone for the transport of the goods and it was made clear by Mr. Spelman that they would be carried at owner’s risk. Accordingly he suggested that they be insured, and offered to arrange the insurance. He had to hand blank insurance certificates from the Insurance Corporation of Ireland (“the insurers”), and (apparently without disclosing the identity of the insurers), read out over the telephone the extent of the insurance cover that would be provided, namely, “against the risks of fire and theft only, but including physical loss or damage directly resulting from collision or overturning of the carrying conveyance.”

3. Mr. Mansfield, the managing director of and principal shareholder in the insured company, reluctantly agreed to take out the proferred insurance. His reluctance was understandable because C.I.E. had previously carried goods for him by road to Northern Ireland and there had been no trouble.

4. Mr. Spelman, having arranged with the insured company for the payment of the transport charges and having agreed that the goods would be transported in one 40 ft. container and three 40 ft. tilts or flats, arranged with Miss Broe that a trailer would be sent by C.I.E. next day to start collecting the goods. Meanwhile the arrangement of the insurance was passed by Mr. Spelman to a Mr. McAdam, who was a road freight superintendent in C.I.E. He in turn passed the particulars to a firm of insurance brokers, who arranged the insurance with the insurers. The insurance was recorded by the issue of two insurance certificates by C.I.E., one dated 15th July, 1981, for £200,000 and another dated 16th July, 1981, for £50,000. Those certificates were issued and authenticated by the signature of an official in the road freight department of C.I.E. C.I.E. apparently had a master policy with the insurers covering such transport insurance, and the certificates state that the cover was to be subject to “the conditions and terms of the original policy.”

5. C.I.E. seem to have treated the insurance as having been effected on 15th July 1981. Apart from issuing the main certificate of insurance on that date, they also on that date issued an invoice and statement for £1,180 (including £400 in respect of insurance), and on the same date one of their representatives called to the premises of the insured company and collected a cheque for £1,180 to cover the insurance premium of £400 and £780 freight charges. While a further £100 was paid by the insured company on 31st August, 1981, in respect of additional cover, C.I.E. began to collect the goods on or about 15th July, 1981, for the purpose of transporting them to their destination in County Antrim.

6. From the foregoing account of the transactions that took place before C.I.E. began to transport the goods, the following facts appear to emerge:-

1.             The insured company reluctantly took out insurance on the goods and only at the invitation of C.I.E.

2.             Before the goods were transported the only information as to the terms of the insurance that was given to the insured company was as to the extent of the cover.

3.             Before the goods were transported the relevant certificates were completed by C.I.E. as agents for the insurers.

4.             Before the goods were transported the relevant certificates were not issued by C.I.E. to the insured company, nor was even the identity of the insurers made known to the insured company.

5.             C.I.E. had been furnished with blank certificates of insurance by the insurers and apparently were empowered to effect them by countersignature.

6.             C.I.E., with that power to act as agents for the insurers, did not deem it necessary to require any proposal form from the insured company or to make any inquiries save as to the names and addresses of the consignor and consignee and the nature and value of the goods.

7.             C.I.E., as agents for the insurers, made it virtually impossible for the insured company to give the insurers the type of information they now say they were deprived of, for on the 15th July, 1981, as soon as they got the premium agreed by the insurers, they not only completed the main insurance certificate but demanded and were paid the premium payable in respect of that certificate.

7. The contract of insurance in this case must be held to have been concluded (subject to a later addendum) on the 15th July, 1981. It is well established that the duty of disclosure (where such duty applies) ceases to exist as soon as the contract is concluded: see Whitwell v. Autocar Fire and Accident Assurance Co. Ltd. (1927) 27 LI.L.Rep. 418 and Looker v. Law Union lnsurance [1928] 1 KB. 554.

8. The essential question, then, is whether the non-disclosure now relied on could have been made, or was expected to be made, before 15th July,1981.

9. C.I.E. proceeded to deliver by road the four loads of goods as arranged. Three of those loads safely reached their destination, but on 20th July 1981 the container was hijacked by a man with a pistol. It was set on fire and its contents destroyed. The insured company brought proceedings in the High Court claiming indemnity under the policy for the loss. The claim was contested on a variety of grounds, but at the end of the hearing the sole issue was whether the insurers were entitled to repudiate liability on the ground that, before the policy was effected, Mr. Mansfield, the managing director of and main shareholder in the insured company. had not disclosed that in 1962 he had been convicted of ten counts of receiving stolen motor parts and sentenced to twenty-one months imprisonment. It was established that the convictions and sentence took place and that they were not disclosed to the insurers, but it was not shown that Mr. Mansfield had anything to do with the malicious destruction near Newry of the container of goods. This defence was entirely a technical one under the law of insurance. It succeeded in the High Court. The judge, having heard expert evidence and having applied the test for the duty of disclosure laid down by this Court in Chariot Inns v. Assicurazioni Generali [1981] I R 199, held that the insurers were entitled to repudiate the policy on the ground of Mr. Mansfield’s failure to disclose the convictions and imprisonment that had befallen him nineteen years earlier.

10. I accept without question that it is a general principle of the law of insurance that a person seeking insurance, whether acting personally or through a limited company, is bound to disclose every circumstance within his knowledge which would have influenced the judgment of a reasonable and prudent insurer in fixing the premium or in deciding whether to take on the risk. Carroll J., while personally of opinion that Mr. Mansfield’s non-disclosure of his convictions and imprisonment was not material, deferred to the expert opinion given in the High Court (which she accepted and considered to transcend her personal opinion) that a reasonable and prudent underwriter would regard that matter as material and would have regarded its non-disclosure as a good reason for refusing to underwrite the risk. Accordingly, she held that the insurers were entitled to avoid the policies in question and to repudiate liability. On the assumption that full disclosure of all known material facts was obligatory, I consider that the judge’s conclusion could not be interfered with by this Court: see Northern Bank Finance v. Charlton [1979] IR. 149.

11. It emerged, however, in the course of the hearing of this appeal, that a particular aspect of the case was not adverted to, either in the pleadings or in the argument in the High Court. This was whether the circumstances of the case showed it to be an exception to the usual requirement of full disclosure. Normally, a departure in an appeal from the case as pleaded, or as argued in the court of trial, or as circumscribed by the notice of appeal, is not countenanced. However, in view of the trial judge’s expression of her personal opinion as to the effect of the evidence, and having regard to the technical nature of the defence and the general importance of this point in the law of insurance, I consider that this point should be entertained.

12. Generally speaking, contracts of insurance are contracts uberrime fidei, which means that utmost good faith must be shown by the person seeking the insurance. Not alone must that person answer to the best of his knowledge any question put to him in a proposal form, but, even when there is no proposal form, he is bound to divulge all matters within his knowledge which a reasonable and prudent insurer would consider material in deciding whether to underwrite the risk or to underwrite it on special terms.

13. That is the general rule. Like most general legal rules, however, it is subject to exceptions. For instance, the contract itself may expressly or by necessary implication exclude the requirement of full disclosure. It is for the parties to make their own bargain – subject to any relevant statutory requirements – and if the insurer shows himself to be prepared to underwrite the risk without requiring full disclosure, he cannot later avoid the contract and repudiate liability on the ground of non-disclosure.

14. An example of a contract of insurance which excludes full disclosure is where the circumstances are such as to preclude the possibility of full disclosure; or where the requirement of full disclosure would be so difficult, or so impractical, or so unreasonable, that the insurer must be held by his conduct to have ruled it out as a requirement. This is exemplified by many forms of what I may call “over-the-counter insurance”. Because this case is concerned only with fire and theft cover, I am addressing myself only to property insurance. Many concerns, such as airlines, shipping companies and travel agents – acting as agents for an insurance company and usually under the umbrella of a master policy – are prepared to insure travellers or consignors of goods in respect of luggage or of goods consigned, in circumstances in which full disclosure is neither asked for nor could reasonably be given effect to. The time factor, if nothing else, would rule out the requirement of full disclosure in many instances: an air traveller who buys insurance of his luggage in an airport just before boarding an aeroplane could not be expected to have time to make disclosure of all material circumstances. Insurance sold in that way obviously implies a willingness on the part of the insurer to provide the cover asked for without requiring disclosure of all material circumstances. The question in this case is whether this insurance, which the judge has held was entered into by Mr. Mansfield’s company in good faith and without any intention to defraud, was attended by circumstances which show that the insurers are precluded from claiming that full disclosure was a prerequisite of a valid contract of insurance.

15. Consider the relevant circumstances. Mr. Mansfield, through his company, was sold this insurance. He did not look for it. It was suggested by C.I.E. He was reluctant to take it out; he considered it a waste of money. C.I.E. as agents for the insurers arranged the rates and filled in the relevant certificates of insurance. Once that was done, C.I.E. were ready to transport the goods. They sought no further information from Mr. Mansfield and apparently deemed none necessary. Before collecting and transporting the goods, they did not furnish the certificates of insurance to Mr. Mansfield or his company. They did not even inform Mr. Mansfield or his company of the identity of the insurers. It is conceded by counsel for the insurers that if Mr. Mansfield was to make full disclosure he would have to make such inquiries as would bring the identity of the insurers to his knowledge – or alternatively to pass the relevant information to C.I.E. as their agents. C.I.E. as well as being the insurers’ agents, were to be the carriers of the goods insured. Everything points to the conclusion that when, as carriers of the goods, they got the information necessary for their purposes as carriers, and then arranged insurance of the goods during transit, the insurance was for all practical purposes concluded, so that no further information could have thereafter been asked for.

16. The circumstances of this case seem to me to show that C.I.E., acting as agents for the insurers, accepted this insurance without expecting or requiring disclosure of all relevant circumstances. The informal, almost perfunctory, way in which C.I.E. effected this insurance, their readiness to collect the premium and proceed to carry the goods to their destination as soon as they had ascertained the premium, showed a failure or unwillingness to give the insured company an opportunity to make full disclosure before the contract of insurance was concluded. The relevant circumstances indicate an indifference on the part of C.I.E. as agents for the insurers as to matters such as the personal circumstances of the managing director of the insured company.

17. It may well be the law that even in a case such as this certain types of information may not be knowingly withheld by the insured, but this case calls only for an answer to the question whether in the circumstances of the case an innocent non-disclosure of an incident in the past life of the managing director of the insured company entitled the insurers to avoid the policy. In my opinion it did not. Insurers who allow agents such as shippers, carriers, airlines, travel agents and the like to insure on their behalf goods being carried, and to sell that insurance to virtually all and sundry who ask for it, with minimal formality or inquiry, and with no indication that full disclosure is to be made of any matter which the insurers may ex post facto deem to be material, cannot he held to contract subject to a condition that the insured must furnish all material information.

18. I would allow the plaintiff’s appeal and remit the case to the High Court for the assessment of damages.

19. I agree with the judgment of Henchy J.

Hederman J.

20. I agree with the judgment about to be delivered by McCarthy J.

McCarthy J.

21. The documentary evidence of the insurance effected is contained in two certificates which. save for date, insured value and an irrelevant detail, all in manuscript, are identical in form. They certify that the defendant “has insured the goods specified hereunder, under open policy, on behalf of Coras lompair Eireann and/or as agents” against risks, including the event which happened, “subject otherwise to the conditions and terms of the original policy.” The most obvious comment is that the certificate makes no reference to the plaintiff in this action. “The certificate represents and takes the place of the original policy and will, for the purpose of collecting any claims, be accepted as showing that the holder is entitled to the benefit of such policy to the extent set forth herein.” Unlike what I understand to be the ordinary course of the insurance business, there was no proposal form; such forms ordinarily provide that the proposal form shall be the basis of the contract. Here the insurance was arranged by Frank Spelman of C.I.E. who signed the quotation of the 15th July and provided the certificates duly completed from forms pre-signed on behalf of the Insurance Corporation of Ireland Ltd. Frank McAdam, road freight superintendent, arranged the insurance through the brokers, Coyle Hamilton Hamilton Phillips Ltd.; exactly how this was done is not clear. What is clear beyond doubt is that no proposal form was completed, no questions relevant to the risk, save as to value, were ever asked. James Mansfield, managing director and principal shareholder of the plaintiff company, the insured, had, in 1962, been convicted on ten counts of receiving stolen motor parts and sentenced to twenty-one months imprisonment. Not merely was the fact of these convictions not disclosed to the insurers; not merely did it not occur to Mr. Mansfield, a reluctant insured, to disclose them; they never occurred to him at all; they were a part of his past which he understandably preferred to forget. Although a great number of different matters were canvassed in the course of the trial, at the conclusion the sole issue was the right claimed by the insurers to repudiate liability on the ground of non-disclosure of these convictions, which, it is said, was a non-disclosure that a reasonable and prudent underwriter would regard as material and, therefore, on ground of moral hazard, a valid reason for refusing the risk. I think not.

22. Consideration of this appeal is not helped by the fact that the master policy, the open policy, was not produced in evidence. There was no evidence to suggest that between the l5th/l6th July and the 20th July (the day of the hijack) there was any communication passing to the insurers concerning this particular risk. Carroll J. considered that the convictions could not be material, particularly to the type of insurance where the risk only attached while the goods were in the custody of C.I.E. Nonetheless, accepting that Mr. Smart was expressing the view of a reasonable and prudent underwriter, she felt that the defendants had discharged the onus on them to prove a material non-disclosure; she felt obliged, so to speak, to suppress her own view of materiality in favour of that of Mr. Smart, once she assessed him to be a reasonable and prudent underwriter. Notwithstanding that she still held to her view that the convictions were not material, Carroll J. deferred to the view of Mr. Smart; in my judgment, she was incorrect in so doing, being herself the sole and final arbiter.

23. In my view, if the judgment of an insurer is such as to require disclosure of what he thinks is relevant but which a reasonable insured, if he thought of it at all, would not think relevant, then. in the absence of a question directed towards the disclosure of such a fact, the insurer, albeit prudent, cannot properly he held to be acting reasonably. A contract of insurance is a contract of the utmost good faith on both sides; the insured is bound ,to disclose every matter which might reasonably he thought to be material to the risk against which he is seeking indemnity; that test of reasonableness is an objective one not to be determined by the opinion of underwriter, broker or insurance agent, but by, and only by, the tribunal determining the issue. Whilst accepted standards of conduct and practice are of significance in determining issues of alleged professional negligence, they are not to be elevated into being an absolute shield against allegations of malpractice —see O’Donovan v. Cork County Council [1967] I.R. 173 and Roche v. Peilow [1985] I.R. 232. In disputes concerning professional competence, a profession is not to be permitted to be the final arbiter of standards of competence. In the instant case, the insurance profession is not to be permitted to dictate a binding definition of what is reasonable. The learned trial judge depended part of her judgment upon the decision of this Court in Chariot Inns v. Assicurazioni Generali [1981] IR 199. In his judgment, with which Henchy and Griffin JJ. agreed, Kenny J. stated at p. 225:-

“A contract of insurance requires the highest standard of accuracy, good faith, candour and disclosure by the insured when making a proposal for insurance to an insurance company. It has become usual for an insurance company to whom a proposal for insurance is made to ask the proposed insured to answer a number of questions. Any misstatement in the answers given, when they relate to a material matter affecting the insurance, entitles the insurance company to avoid the policy and to repudiate liability if the event insured against happens. But the correct answering of any questions asked is not the entire obligation of the person seeking insurance: he is bound, in addition, to disclose to the insurance company every matter which is material to the risk against which he is seeking indemnity.

What is to be regarded as material to the risk against which the insurance is sought? It is not what the person seeking insurance regards as material, nor is it what the insurance company regards as material. It is a matter or circumstance which would reasonably influence the judgment of a prudent insurer in deciding whether he would take the risk, and, if so, in determining the premium which he would demand. The standard by which materiality is to be determined is objective and not subjective. In the last resort the matter has to be determined by the court: the parties to the litigation may call experts in insurance matters as witnesses to give evidence of what they would have regarded as material, but the question of materiality is not to be determined by such witnesses.”

24. These observations were made in a case in which there was a proposal form, there were questions asked by the insurer and, as this Court held, there was a non-disclosure of a matter material to the risk. In the High Court (in Chariot Inns) Keane J., at p. 209, said:-

“The most widely accepted test of materiality in all forms of insurance on property and goods appears to be that set out in s. 18, sub-s. 2, of the Marine Insurance Act, 1906, which is in the following terms:-

‘Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk.’

25. That test has been frequently stated to be applicable to non-marine insurance as well: see Joel v. Law Union & Crown Insurance Co. and March Cabaret v. London Assurance. Another test has sometimes been proposed, i.e., the test of whether a reasonable man in the position of the assured and with knowledge of the facts in dispute ought to have realised that they were material to the risk. But this test has been confined normally in its application to cases of life, see MacGillivray & Parkington on Insurance Law (6th ed. – paras. 749, 750). It was not suggested by any of the parties as the appropriate test in the present case and, accordingly, I propose to apply the test set out in s. 18, sub—s. 2 of the Act of 1906.”

26. Kenny J. did not expressly advert to this proposition but it reflects the argument advanced by the plaintiff here touching on what the insured might consider relevant or material. Keane J., at p. 207, referred to the judgment of Fletcher Moulton L.J. in Joel v. Law Union & Crown Insurance Co. [1908] 2 K.B. 863 at p. 892. There it was said:-

“Over and above the two documents signed by the applicant, and in my opinion unaffected by them, there remained the common law obligation of disclosure of all knowledge possessed by the applicant material to the risk about to be undertaken by the company, such materiality being a matter to be judged of by the jury and not by the Court.”

27. The same Lord Justice, at p. 885, had some critical comments to make on the practices on the part of insurance offices of requiring that the accuracy of the answers to the proposal form should he the basis of the contract. I point to this so as to emphasise that Joel v. Law Union & Crown Insurance Co. [1908]2 KB. 863 was a case concerned with a proposal form and insurance effected on foot of it as was Chariot Inns [1981] I.R.199. This is not such a case, but the test remains one of the utmost good faith. Yet, how does one depart from such a standard if reasonably and genuinely one does not consider some fact material; how much the less does one depart from such a standard when the failure to disclose is entirely due to a failure of recollection? Where there is no spur to the memory, where there is no proposal form with its presumably relevant questions, how can a failure of recollection lessen the quality of good faith? Good faith is not raised in its standard by being described as the utmost good faith; good faith requires candour and disclosure, not, I think, accuracy in itself, but a genuine effort to achieve the same using all reasonably available sources, a factor well illustrated by Fletcher Moulton L.J.. at p. 885 of Joel. If the duty is one that requires disclosure by the insured of all material facts which are known to him, then it may well require an impossible level of performance. Is it reasonable of an underwriter to say:- “I expect disclosure of what I think is relevant or what I may think is relevant but which a reasonable proposer may not think of at all or, if he does, may not think is relevant?”. The classic authority is the judgment of Lord Mansfield in Carter v. Boehm (1766) 3 Burr. 1905 where, in terms free from exaggeration, he stated at p. 1911:-

“The Reason of the Rule which obliges Parties to disclose, is to prevent Fraud and to encourage good Faith. It is adapted to such Facts as vary the Nature of the Contract; which One privately knows, and The other is ignorant of. and has no Reason to suspect.

The Question therefore must always be “Whether there was, under all the Circumstances at the time the Policy was underwritten, a fair Representation; or a Concealment; fraudulent, if designed; Or, though not designed, varying materially the Object of the Policy, and changing the Risque understood to be run.”

28. If the determination of what is material were to lie with the insurer alone I do not know how the average citizen is to know what goes on in the insurer’s mind, unless the insurer asks him by way of the questions in a proposal form or otherwise. I do not accept that he must seek out the proposed insurer and question him as to his reasonableness, his prudence, and what he considers material. The proposal form will ordinarily contain a wide ranging series of questions followed by an omnibus question as to any other matters that are material. In the instant case, if Mr. Mansfield had ever had the opportunity of completing a proposal form, which, due to the convenient arrangement made between the insurers and C.I.E., he did not, there is no reason to think that he would have recounted petty convictions of about 20 years before the time. For the reasons I have sought to illustrate, in my view, the learned trial judge failed correctly to apply the very stringent test; in my judgment, the insurers failed to discharge the onus of proof that lay on them.

29. There is a second ground upon which, also, in my view the plaintiff is entitled to succeed. Without detracting from what I have said in respect of the general law of insurance, in my judgment, that law is materially affected by over-the-counter insurance such as found in cases of the present kind, in other forms of transit and in personal travel, including holiday insurance. If no questions are asked of the insured, then, in the absence of fraud, the insurer is not entitled to repudiate on grounds of non-disclosure. Fraud might arise in such an instance as where an intending traveller has been told of imminent risk of death and then takes out life insurance in a slot machine at an airport. Otherwise, the insured need but answer correctly the questions asked; these questions must he limited in kind and number; if the insurer were to have the opportunity of denying or loading the insurance one purpose of the transaction would he defeated. Expedition is the hallmark of this form of insurance. Mr. Whelehan suggested that the whole basis of insurance could be seriously damaged if there was any weakening in the rigidity and, I must add, the severity, of the principle he sought to support. The force of such an argument as a proposition of law is matched by the improbability of the event.

30. Mr. Gleeson sought leave of the Court to argue as an alternative proposition that Chariot Inns [1981] IR 199 was wrongly decided in being an elaboration in a particular direction; that the reasonably prudent test is inherently unreasonable, biased and productive of unfairness, producing unjust results and, consequently, is not part of the common law. The issue of arguing this point was postponed until the main grounds of the appeal were determined; having regard to the outcome of the appeal, it is not necessary to elaborate further on the matter.


Global Process Systems Inc & Anor v Berha

[2011] Bus LR 537, 2011 AMC 305, [2011] 1 Lloyd’s Rep 560, [2011] 1 All ER 869, [2011] UKSC 5 LORD MANCE

Introduction

In the Victorian era, the “proximate” cause in marine insurance was readily associated with the last cause in point of time: see eg Thompson v Hopper (1856) 6 E & B 172, 937; Dudgeon v Pembroke (1877) 2 App Cas 284; in the parallel bill of lading context, Thomas Wilson, Sons & Co v Owners of the cargo per the Xantho (The “Xantho”) (1887) 12 App Cas 503, 514, per Lord Bramwell; J J Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The “Miss Jay Jay”) [1987] 1 Lloyds Rep 264, 271 per Mustill J, as well as “Fault and Marine Losses” [1988] LMCLQ 310 (Sir Michael Mustill). The modern focus on the “real efficient cause” was finally established at the highest level after the enactment of the Marine Insurance Act 1906, in Leyland Shipping Co Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350. From that moment, the proximate cause became a matter of judgment and less easy to identify with certainty.

Lord Saville has outlined the facts. On the present appeal, the rival candidates as cause of the loss of the three legs of the oil rig Cendor MOPU are, on the one hand, a fortuitous external accident or casualty falling within the concept of “all risks of loss or damage” in clause 1 of the relevant Institute Cargo Clauses (A) (the respondent insured’s case) and, on the other hand, inherent vice of the rig within clause 4.4 of the Clauses (the appellant insurers’ case). In the alternative, if both can and should be regarded as concurrent causes, insurers submit that the respondents’ claim must fail, because clause 4.4 is a specific exclusion. This point may not have been clearly identified below, but it is essentially one of law, and insurers are in my view entitled to argue it.

By inherent vice, insurers do not mean some characteristic of the rig which was bound to lead to the loss of its legs. Inevitability is not the test of inherent vice, just as lack of inevitability is no proof of a fortuitous external accident or casualty. Inevitability is excluded in this case by Blair J’s finding that the failure and consequent loss of the legs was, although “very probable, …. not inevitable” ([2009] 2 All ER (Comm) 795, paras 89 and 104). So it is unnecessary to discuss whether and to what extent there exists a further principle of insurance law, that loss which is inevitable is irrecoverable. If both parties know that loss is inevitable, there may be no risk or insurance at all, although in endowment insurance the risk lies in the uncertainty when death will occur. If the assured alone knows that the loss is inevitable, one would expect him to fail, if only on grounds of non-disclosure. If neither party knows, then inevitability resulting from inherent characteristics of the goods will, in the absence of express provision, bar recovery on the grounds of inherent vice. Whether inevitability resulting from outside causes will do so seems an open question. Would it be an answer to war risks insurers to prove that an insurance on cargo was placed at a time when the cargo was already on an aircraft in flight with a timed bomb due to go off in ten minutes in its cargo hold? Such questions do not require further examination here.

Putting insurers’ case at its highest, it may be argued that, because the insured rig was unable to withstand all bad weather conditions which it would foreseeably meet during the insured venture, the assured cannot recover in respect of the resulting loss of or damage to the rig legs. If presented as a rule of law or even of evidence, this would make lack of fitness for the insured venture (or lack of “cargoworthiness”) a condition precedent to recovery for loss or damage which would not have been suffered had the goods been fit for the venture. This would be a coherent thesis, but it finds possible support in only one decision, and that recent: Mayban General Insurance Bhd v Alstom Power Plants Ltd [2004] 2 Lloyd’s Rep 609 (Moore-Bick J). Its acceptance would place a stringent limit on the scope of marine insurance cover, which could not infrequently lead to disputes about the fitness of cargo to travel, and leave CIF buyers in doubt about whether to look to their insurers or sellers or both, quite possibly in different fora.

Mindful no doubt of this, Mr Steven Gee QC does not advance any so definite proposition of law. In his submission, unfitness for the foreseeably bad weather conditions on the voyage is no more than a powerful pointer towards a conclusion that loss or damage occurring as a result of such conditions was proximately caused by inherent vice. When Moore-Bick J said in Mayban, at para 21, that, if the conditions encountered by the vessel were no more severe than could reasonably have been expected, then “the conclusion must be that the real cause of the loss was the inherent inability of the goods to withstand the ordinary incidents of the voyage”, he had in context only been stating a commonsense conclusion. In every such case, it was a matter of evidence and judgment whether the loss or damage was due to the peril of the sea or the inherent characteristic or “vice” of the cargo or both. Here, Blair J had taken that approach and had found that, “Taking the evidence as a whole, ….. the proximate cause of the loss was the fact that the legs were not capable of withstanding the normal incidents of the insured voyage …, including the weather reasonably to be expected” (para 111). There was no basis upon which to disturb this assessment of the facts.

The Marine Insurance Act 1906

The statutory background includes provisions dealing directly with the fitness of the vessel in the case of hull insurance (section 39) and of the goods and carrying vessel in the case of cargo insurance (section 40). Section 40(1) provides that that there is no implied warranty that the goods or moveables insured are seaworthy, while section 40(2) provides that there is an implied warranty that the carrying ship is, at the commencement of the voyage, not only seaworthy as a ship, but also reasonably fit to carry the goods or moveables to the contemplated destination. The historical origins and rationale of these differing approaches need not detain us, though, looking at them through modern eyes, one could suggest reasons why they might have been framed in a reverse sense, ie to have provided for a warranty of the goods’ seaworthiness and no warranty of the ship’s seaworthiness.

However that may be, modern cargo clauses very substantially modify section 40(2), providing (in the case of the present Clauses) by clause 5(2) that insurers waive any breach of the implied warranties which section 40(2) contains, unless the assured or their servants “are privy to such [un]seaworthiness or unfitness”, and for good measure also excluding by clause 5(1) any loss or damage arising from unseaworthiness or unfitness of the vessel at the time of loading of the insured goods where the assured or their servants are so privy.

In circumstances where the Act addresses the subject of initial unseaworthiness or unfitness of both the goods and the carrying vessel by express provisions, but leaves the parties free to vary and supplement such provisions as they may wish, it might be thought odd if such unseaworthiness or unfitness could also be a direct test of insurers’ liability for any particular loss or damage under the separate heading of inherent vice, dealt with in section 55(2)(c). The answer advanced by Mr Gee for the insurers is that there is a great difference between a warranty, which, from the moment of its breach, discharges from all liability for any loss or damage whether or not causatively linked (Bank of Nova Scotia v Hellenic Mutual War Risks Underwriting Association (Bermuda) Ltd (The “Good Luck”) [1992] 1 AC 233) and a qualification or exclusion which only affects loss or damage arising from the matters covered by the qualification or exclusion. A historical riposte might then be that the famously and sometimes unfairly stringent principles governing insurance warranties were themselves the product of the Victorian view of causation referred to in para 56 of this judgment. If the only relevant cause is the last cause in time, then a prior breach of a simple contractual obligation regarding fitness could have been regarded as irrelevant. Hence, the development of the concept of a warranty which, if broken, automatically discharged from liability for loss or damage, irrespective of how such loss or damage was in law to be regarded as caused.

Even prior to the 1906 Act, however, it is clear that thinking had developed in at least some areas. In case of deliberate casting away, the law looked behind the immediate cause of loss. Another, more relevant here, instance is crystallised in section 39(5), providing that, in a time policy on a ship, there is no implied warranty of seaworthiness at any stage of the adventure, but that, “where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness”. The Act thus recognised in relation to hull insurance the possibility of excluding liability for what would otherwise have been loss or damage by the immediate cause of a peril of the sea, where the loss or damage could, more remotely, be attributed to unseaworthiness of the vessel to which the assured was privy. When the Act was passed, the language “loss attributable to unseaworthiness” catered for the Victorian reluctance to look behind the last cause in time to any previous cause. How far the word “attributable” now allows regard to be had to causes which would, under modern conceptions, not be regarded as proximate appears undecided, and may in turn depend upon how far modern conceptions of proximity can, in cases of unseaworthiness, lead the eye back beyond the immediate cause to initial unseaworthiness as the real, dominant or effective cause. That is of course the essential issue in this case. However, it can, I think, still be said that the express treatment of the subject of seaworthiness in hull insurance in section 39(5) highlights the absence of any like provision in respect of cargo insurance and so the oddity of treating section 55(2)(c) as, in effect, containing such a provision when it refers to inherent vice. The oddity is further highlighted under the present Clauses, when one considers the careful restriction in clauses 5.1 and 5.2 of the relevance of breaches of the implied warranties of seaworthiness and fitness of the vessel to circumstances where the assured was privy to such breaches.

Under the rules for the construction of an SG policy in the form set out in Schedule 1 to the 1906 Act “or other like form”: “The term ‘perils of the seas’ refers only to fortuitous accidents or casualties of the seas. It does not include the ordinary action of the winds and waves”. The present policy was not in or in like form to the SG policy form, but it covered only fortuitous accidents or casualties, not the ordinary action of the winds and waves or other elements: T M Noten BV v Harding [1990] 2 Lloyd’s Rep 283 (see further paras 62-63 below). The term “inherent vice”, introduced in section 55(2)(c) to define the scope of marine cover, is not statutorily defined, but Mr Gee relies upon the definition advanced by Lord Diplock in Soya GmbH Mainz Kommanditgesellschaft v White [1983] 1 Lloyd’s Rep 122, 126:

“It means the risk of deterioration of the goods shipped as a result of their natural behaviour in the ordinary course of the contemplated voyage without the intervention of any fortuitous external accident or casualty”.

Under this definition, the critical questions are what are meant by the “ordinary course of the contemplated voyage” and the “intervention of any fortuitous external accident or casualty”. Mr Gee submits that the ordinary course of the contemplated voyage includes all foreseeable weather conditions; on this basis, the triggering by foreseeably bad weather of goods’ unfitness for the insured adventure, giving rise to loss or damage of the goods, occurs in the ordinary course of the voyage, and there is nothing that can or should be described as a fortuitous external accident or casualty. Mr Gordon Pollock QC for the assured submits, in contrast, that, if goods are lost by what would otherwise be an insured peril, in particular a peril of the seas, then there is a fortuitous external accident or casualty and, by the same token, an event outside the ordinary course of the contemplated voyage. It is, he submits, no answer to this that the fortuity consisted in weather conditions of a foreseeably unfavourable kind, which the goods were not fit to withstand. It will be observed that, applied to Lord Diplock’s definition: (i) Mr Gee’s submission would effectively reintroduce the idea of a condition precedent of fitness, which (as I have noted in paras 52-53 above) Mr Gee actually disclaims, while (ii) Mr Pollock’s submission effectively means that any intervening fortuitous external accident or casualty will preclude a conclusion that inherent vice was the cause of loss, a submission which does not reconcile with the Court of Appeal authority of J J Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The “Miss Jay Jay”) [1987] 1 Lloyd’s Rep 32. The danger of treating judicial dicta as if they constituted statutory definitions is well-known, and it will be necessary to consider intermediate possibilities between these two positions.

The case-law

It is clear from Lord Diplock’s language (“risk of deterioration”) in Soya v White, [1983] 1 Lloyd’s Rep 122, 126, from the subject-matter of that case and from authority cited to the House in it (identified by Mr Gee’s diligent research from the printed case prepared by Robert Alexander QC and Bernard Rix for insurers) that the focus there was on the simple case of cargo having some inherent tendency on shipment which simply manifested itself under ordinary conditions of carriage, for example a tendency to “effervesce and generate the fire which consumed it” (Boyd v Dubois (1811) 3 Camp 133). In such a case, there is nothing more than the development of the cargo’s inherent characteristic. Such a case was clearly also in the forefront of the court’s mind in Koebel v Saunders (1864) 17 CB (NS) 71, where Willes J said, at p 78, that “in the case of an insurance on goods, it is no answer to say that they were in an unfit condition to be shipped, unless it is shewn that the loss arose from that unfitness”. Byles J, at p 79, described “the more ordinary instances” of loss of goods by some inherent vice or weakness as consisting “of fruit, flour, or rice, which are liable to heat or perish on the voyage”. But he also referred to the less ordinary instances “of tender animals unfit to bear the agitation of the sea, gun-cotton, or the like”.

Mr Gee relies upon Byles J’s reference to tender animals unfit to bear the agitation of the sea as indicating that inherent vice includes unfitness to withstand foreseeably unfavourable weather conditions. This puts too much weight on a passing reference. It is not clear that by “the agitation of the sea”, Byles J had anything in mind beyond “the ordinary action of the wind and waves”. If he did, his dictum stands in contrast with the decisions in Lawrence v Aberdein (1821) 5 B & Ald 107 and Gabay v Lloyd (1825) 3 B & C 793. In both cases, recovery was allowed in respect of death of or injury to animals violently occasioned by storm and consequent agitation of the seas. An exception “warranted free from mortality” was interpreted as excluding only indirect loss from natural causes which could, but for such a warranty, have been treated as produced by perils of the seas, for example being driven off course with consequent exhaustion of the ship’s provisions leading to the animals’ starvation. The court noted that insurers’ contrary suggestion largely undermined the point of taking out any insurance on the animals at all. Not surprisingly, there was no suggestion in either of these cases that the death was due to the animals’ own inability to withstand the voyage.

Each side can draw some possible support for their respective positions from N E Neter & Co Ltd v Licenses and General Insurance Co Ltd [1944] 1 All ER 341. A cargo of casks and bags of china clay out-turned damaged, as a result of the stoving in of the casks on a voyage during which there had been heavy weather. Tucker J dismissed the claim on the ground that the plaintiffs had not proved that the proximate cause of the loss was the rough weather. It appeared to him “equally consistent with defects in the casks, accidents during loading, bad stowage, rough weather, or accidents during or after discharge” (p.343). But he went on to say that, had it been shown to be the heavy weather, he would have held there to have been a loss by perils of the sea, even though there was nothing abnormal or unexpected in the weather on such a voyage in the month in which it occurred. He said:

“Having regard to Thames and Mersey Marine Insurance Co Ltd v Hamilton, Fraser & Co (1887) 12 App Cas 484, the Xantho case (1887) 12 App Cas 503, and Hamilton, Fraser & Co v Pandorf & Co (1887) 12 App Cas 518, and the recent Privy Council decision in Canada Rice Mills, Ltd v Union Marine and General Insurance Co Ltd [1941] AC 55, I think it is clearly erroneous to say that, because the weather was such as might reasonably be anticipated, there can be no peril of the seas. There must, of course, be some element of the fortuitous or unexpected to be found somewhere in the facts and circumstances causing the loss, and I think such an element exists when you find that properly stowed casks, in good condition when loaded, have become stoved in as a result of the straining and labouring of a ship in heavy weather. It is not the weather by itself that is fortuitous; it is the stoving in due to the weather, which is something beyond the ordinary wear and tear, of the voyage. This appears to me to be “something which could not be foreseen as one of the necessary incidents of the adventure”. It was “an accident which might happen, not an event which must happen”, to quote the language of Lord Herschell in the Xantho.”

The general description of perils of the sea assists Mr Pollock, but the dictum that on the facts the stoving in of the casks was due to such a peril, they being “in good condition when loaded” is consistent with Mr Gee’s case for insurers. It may be regarded as a precursor of the reasoning and decision in Mayban [2004] 2 Lloyd’s Rep 609. In contrast, I do not think that Donaldson LJ’s remarks about inherent vice in Soya v White [1982] 1 Lloyd’s Rep 136, 150 on which Mr Gee also relied, bear or assist on the present issue. I agree in this respect with what Lord Clarke says in paras 123-125.

Insurers rely strongly on T M Noten BV v Harding [1990] 2 Lloyd’s Rep 283, a case of all risks insurance on the Institute Cargo Clauses (All Risks). The decision shows that inherent vice can embrace a predisposition to injury by a train of events that is, firstly, not purely internal and, secondly, depends upon a combination of external events that it foreseeable, but by no means certain to occur. Lack of inevitability is, as I have said (para 51 above), no proof that there was in the insurance sense a fortuitous external accident or casualty. The damage to the gloves in Noten occurred because, on loading in their cartons into their container, they had a moisture content reflecting the humidity of the Calcutta atmosphere, and because the container was in Rotterdam discharged into a markedly colder atmosphere, where it cooled, setting up convection currents within the container which carried moist air from the gloves to the container roof where the air condensed, falling back down in droplets onto the cartons of gloves and damaging them. The Court of Appeal held that there was no “untoward or unusual event of any kind”, “no combination of fortuitous events, and the defendant never undertook to insure the plaintiffs against the occurrence of hot and humid weather in Calcutta during the monsoon” (p 289, per Bingham LJ). The same thought was expressed by Roche J in Whiting v New Zealand Insurance Co Ltd (1932) 44 Lloyd’s Rep 179, 180, when he said: “Moist atmosphere is not an accident or incident that is covered. It is more or less a natural test or incident which the goods have to suffer and which the underwriter has not insured against”. That being so, the insurers submit that there was also nothing unusual about the weather conditions or “leg-breaking wave” in this case, and the real cause of the loss of the three legs was their unfitness to withstand weather conditions which were ordinary and foreseeable incidents of the insured voyage.

In Noten v Harding [1990] 2 Lloyd’s Rep 283 the damage occurred in conditions and a way which were both foreseeable and entirely ordinary. The damage was not covered because the conditions under which it occurred were entirely ordinary atmospheric conditions, the gloves essentially damaged themselves under such conditions through their own moisture content, and it was not sensible to describe them as having sustained any fortuitous external accident or casualty at all in the sense required under all risks cover. In the present case, the gradual exhaustion of the legs’ fatigue strength under the ordinary action of wind and waves during the voyage and the consequent development of cracking can be analysed in similar fashion (see further at para 81 below).

In contrast, the sudden breakage of the first leg, followed by that of the other two legs, is much more readily understood as involving a marine accident or casualty. It was neither expected nor contemplated. It only occurred under the influence of a leg breaking wave of a direction and strength catching the first leg at just the right moment, leading to increased stress on and collapse of the other two legs in turn. Each of the three legs was lost in turn overboard to the bottom of the sea. Such a combination of events was, the judge found, “very probable, but it was not inevitable” (para 87). The chain of events has many of the characteristics of a loss by perils of the sea. The questions which remain bearing on the appropriateness of such a classification relate to (i) the evident probability that the rig would meet a leg-breaking wave and (ii) the undoubted fact, on the judge’s findings, that the root problem was the unfitness of the legs for the insured venture, in that they lacked sufficient fatigue strength to withstand the stresses imposed by the ordinary motion of the seas and were thus exposed to the very considerable risk of a leg breaking wave hitting the rig at the right moment. I will return to these questions later in this judgment (paras 81-86 below).

In Thames and Mersey Marine Insurance Co Ltd v Hamilton, Fraser & Co (1887) 12 App Cas 484, 502 Lord Macnaghten noted that: “In marine insurance it is above all things necessary to abide by settled rules and to avoid anything like novel refinements or a new departure”. This rule of conservatism can be carried too far. Nevertheless, the absence of any clear authority for insurers’ approach prior to Mayban [2004] 2 Lloyd’s Rep 609 is striking. It seems unlikely to have been due to unquestioning acceptance, by insurers and assureds alike, of the correctness of that approach. This is, I think, even less likely when one examines the hull insurance and carriage by sea cases, upon which the court received instructive submissions.

The hull insurance and carriage by sea cases

In Dudgeon v Pembroke (1877) 2 App Cas 284, a vessel insured under a time policy from 22 January 1872 sailed on 3 February 1872 from London for Gothenburg, arriving on 7 February but taking on more water than would be expected. She set out again for London with a cargo of oats on 11 February, but started to labour and take on so much water in a heavy rolling sea on 12 February that her fires had to be put out and, when her pumps eventually became clogged with oats, she grounded on the Yorkshire coast and was lost. The defendant underwriter argued that she “went to sea without being fit to encounter the ordinary risks of going to sea, not the extraordinary risks of storms”, that a policy of insurance was “only a contract of indemnity against risks which could not be foreseen, or by ordinary care be provided against” and that there was on this basis no loss by perils of the sea: pp 289-290. Lord Penzance, after recording that in a time policy there is no implied warranty of seaworthiness, turned to the argument that the vessel’s unfitness to encounter the perils of the sea prevented the loss being regarded as one by perils of the sea. Dismissing it, he said, at pp 295-296:

“It will at once occur to your Lordships, upon the raising of such a question, that it applies as much and as fully to a voyage policy as to a time policy. If a loss proximately caused by the sea, but more remotely and substantially brought about by the condition of the ship, is a loss for which the underwriters are not liable, then, quite independently of the warranty of seaworthiness, which applies only to the commencement of the risk (in its several “gradations”, as Erle J in Thompson v Hopper 6 E & B 172, 181 called them), the underwriters would be at liberty, in every case of a voyage policy to raise and litigate the question whether, at the time the loss happened, the vessel was, by reason of any insufficiency at the time of last leaving a port where it might have been repaired, unable to meet the perils of the sea, and was lost by reason of that inability.

If that be the law, my Lords, the underwriters have been signally supine in availing themselves of it. …… The materials for such a defence must have existed in countless instances, and yet there is no trace of it in any case which has been brought to your Lordships’ notice, still less any decision upholding such a doctrine”.

Mr Pollock, understandably, relies on this passage.

In Dudgeon v Pembroke, counsel for the underwriter relied before the House, as Mr Gee does before the Supreme Court, upon Fawcus v Sarsfield (1856) 6 E & B 192. In that case, the vessel, leaking water, put into a port to be repaired in circumstances where she had, on sailing from Liverpool, been unseaworthy and unsound, and “did not encounter any more severe weather than is usual and ordinary on such a voyage or than a ship reasonably fit for the voyage could have encountered without damage or injury: and …. the necessity for her going into port to be repaired arose from the defective state of the ship when she sailed” (p 204). The vessel’s owner sought to recover the expense occasioned by reason of putting into the port for repairs. The Court of Queen’s Bench accepted the defendant underwriter’s plea and dismissed the claim. Mr Gee relies upon this as indicating that unseaworthiness can outweigh in significance the impact of subsequent perils of the seas. That in my view reads too much into the decision. The Court of Queen’s Bench was at pains to emphasise that the arbitrator had found “most explicitly that [the loss] did not arise from any peril insured against, but from the vice of the subject of insurance” and that the only answer attempted by the plaintiff was that “the unseaworthiness might have arisen from some peril in an antecedent voyage …, part of an adventure of which the voyage stated in the declaration and plea was a continuation”. Rejecting this latter suggestion, the court said that it was “quite clear, from the finding of the arbitrator, that the adventure did begin at Liverpool: that this was the first voyage; and that the unseaworthiness arose from the vice of the thing insured, and not from the perils of the sea in any antecedent part of the adventure” (p 205).

Lord Penzance must, as Mr Gee points out, have been familiar with Fawcus v Sarsfield, having been counsel in it for the underwriter in his earlier incarnation as Mr Wilde. In Dudgeon v Pembroke he was exact in his loyalty to the basis on which it was decided. He noted that it was a case of partial loss in which the decision followed from the arbitrator’s finding, and that there was therefore a “total absence …. of all authority” for the proposition advanced by the underwriter in Dudgeon v Pembroke. At first instance in Dudgeon v Pembroke (1874) LR 9 QB 581, 596 Blackburn J had understood underwriter’s plea in Fawcus v Sarsfield as “an allegation that the loss was from wear and tear, aggravated by the original bad state of the vessel” and said that, on that basis, “the plea was no doubt good”. In J J Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The “Miss Jay Jay”) [1985] 1 Lloyd’s Rep 264 (Mustill J) and [1987] 1 Lloyd’s Rep 32 (CA), Fawcus v Sarsfield has been treated as a case of “debility” or “loss … disassociated from any peril of wind or water, even if these form the immediate context of the loss, and constitute the immediate agency (for example, the percolation of water through an existing flaw in the hull) by which the loss takes place” (per Mustill J, p 272); and see per Slade LJ, p 41. But, whether the case is described as wear and tear or inherent vice, the arbitrator’s finding in Fawcus v Sarsfield was treated as the end of the matter, and is explicable on the basis that nothing that occurred during the voyage could be called a peril of the sea, accident or fortuity. The case does not help insurers on the present appeal.

Thomas Wilson, Sons & Co v Owners of the cargo per the Xantho (The “Xantho”) (1887) 12 App Cas 503 involved a claim under a bill of lading for non-delivery of goods lost by reason of a collision between the Xantho as carrying vessel and another vessel. The owners of the Xantho relied upon an exception of perils of the sea. Cargo-owners maintained that “To bring a case within ‘perils of the sea’, there must be some extraordinary violence of the elements, something inevitable or overwhelming” (p 507), so that, even if the only cause of the collision was the negligence of the other vessel, the owners of the Xantho could have no defence. The House emphatically rejected this submission, saying that it was beyond question that “if a vessel strikes upon a sunken rock in fair weather and sinks, this is a loss by perils of the sea” and “that every loss by incursion of the sea, due to a vessel coming accidentally (using that word in its popular sense) into contact with a foreign body, which penetrates it and causes a leak, is a loss by a peril of the sea” (p 509, per Lord Herschell). It said that in this respect the meaning of the phrase was the same in the case of a bill of lading as in a marine policy (p 510), although in the case of a bill of lading fault of the shipowner leading to the vessel succumbing to a peril of the sea may, depending upon the terms of carriage, disentitle the shipowner to the protection of such an exception.

There are statements in the speech of Lord Bramwell which may be taken to suggest that any entry of water in sufficient quantities to sink a vessel is axiomatically a peril of the sea (see eg pp 513-514). These go too far, as illustrated by E H Sassoon & Co v Western Assurance Co [1912] AC 561, where an insurance claim for damage to a cargo of opium failed because the damage was due the percolation of sea water through the rotten hull of a wooden hulk moored in a river and used as a store, as well as, more recently, Rhesa Shipping SA v Edmunds (the Popi M) [1985] 1 WLR 948. A fortuitous external accident or casualty, whether identified or inferred, is necessary, but it need not be associated with extraordinary weather. Lord Buckmaster put the matter as follows in the Privy Council in Grant, Smith and Co v Seattle Construction and Dry Dock Co [1920] AC 162, 171-172:

“It is not desirable to attempt to define too exactly a ‘marine risk” or a ‘peril of the sea’, but it can at least be said that it is some condition of sea or weather or accident of navigation producing a result which but for these conditions would not have occurred. …..

…..

It is just as though a vessel, unfit to carry the cargo with which she was loaded, through her own inherent weakness, and without accident or peril of any kind, sank in still water. In such a case recovery under the ordinary policy of insurance would be impossible. An insurance against ‘the perils of the sea or other perils’ is not a guarantee that a ship will float, and in the same way in the present case had such a policy been effected it would not have covered a loss inevitable in the circumstances due to the unfitness of the structure, and entirely disassociated from any peril by wind or water.”

In Mountain v Whittle [1921] AC 615, the insured vessel, a houseboat, was towed alongside a tug some seven and half miles to Northam. Her topside seams were leaky and defective. The breast wave thrown up by the two vessels caused water to mount up against the seams and enter and sink the houseboat. Some four feet of water entered in 100 minutes towing at a moderate speed. Mountain v Whittle establishes that it is no necessary answer to a claim for loss by perils of the sea that the loss only occurred because the vessel was unseaworthy. Indeed, after negativing the existence of any warranty or defence under section 39(5) of the 1906 Act, Lord Birkenhead LC, with whose speech Viscount Haldane and Viscount Cave agreed, turned without further consideration of unseaworthiness to the question whether the vessel had met with any peril of the sea (p 618-619). On this point, it was noted that the fact that “loss caused by the entrance of sea water is not necessarily a loss by perils of the seas” (p 626, per Viscount Finlay). In the event, the House upheld concurrent decisions of the courts below that the breast wave “amounted to a peril of the seas just as must as if it had been occasioned by a high wind” (p 626), and that sinking by such a wave was “a fortuitous casualty; whether formed by passing steamers or between tug and tow, it was beyond the ordinary action of wind and wave, or the ordinary incidents of such towage” (pp 630-631, per Lord Sumner). But the speeches also describe the breast wave as of “unusual size” (p 619, per Lord Birkenhead), as “wash of an extraordinary character” (pp 626-627, per Viscount Finlay) and as “exceptional” (p 630, per Lord Sumner), and Viscount Finlay delivered a dictum that “There must be some special circumstance such as heavy waves causing the entrance of the sea water to make it a peril of the seas” (p 626).

The extent to which a peril of the sea must involve extraordinary weather was considered in Skandia Insurance Co Ltd v Skoljarev (1979) 142 CLR 375. The High Court of Australia was concerned with a loss which occurred a few hours after leaving port in calm seas and for no apparent reason, after rapid entry of water into the insured vessel’s engine room. The judge had found that there was no latent defect (eg in the pipe-work) and that the vessel was seaworthy on leaving port. The High Court held that, in these circumstances, there was an inference of some unidentified accident or fortuitous event. Since Rhesa Shipping Co SA v Edmunds (The “Popi M”), more attention might have been given, in this jurisdiction at all events, to a finding that no cause had been shown to be more probable than not. Leaving that aside, in a judgment with which all other members of the High Court concurred, Mason J rejected Visc Finlay’s dictum as a statement of principle, saying (p 385):

“The old view that some extraordinary action of the wind and waves is required to constitute a fortuitous external accident or casualty is now quite discredited (The “Xantho” (1887) 12 App Cas, 509). It is true that in Mountain v Whittle [1921] 1 AC 615, 626 Viscount Finlay spoke of the need for the insured to show ‘some special circumstance such as heavy waves causing the entrance of the sea water to make it a peril of the sea’, but his Lordship’s remark was directed to the facts of that case. … Had it not been for the magnitude of the tug’s breast wave, the loss would have been attributed to wear and tear or to the ordinary action of the wind and waves”.

The severity of the weather required for a loss by perils of the sea was further considered, at first instance, in Frangos v Sun Insurance Office Ltd (1934) 49 Ll L Rep 354. A 36-year-old vessel insured under a time policy sank en route from Cardiff to Istanbul. Insurers alleged that unseaworthiness was a, if not the sole, cause, relying on the fact that “really the weather was not very severe” and that “there was a series of happenings with regard to this old ship which were not naturally accounted for by the weather which prevailed” (p 358). Roche J accepted that the vessel may not have been seaworthy in various respects, including in the area of the afterpeak tank and/or No 4 hold (p 368). However, “being satisfied that there was weather prevailing which, although not extraordinary, was nothing like the calm weather of a harbour, or anything of that sort”, he found “that the immediate cause of the springing of the leak was the labouring of the ship”, that water then entered the hold and afterpeak, causing the coal cargo to shift and the vessel to list, and leading to the entry of water into the engine room which sank the vessel. He regarded the case as governed by Dudgeon v Pembroke, “because even though it is doubtful in this case, as in that case, whether the vessel was, in fact, seaworthy or not, yet a loss caused by perils of the sea is within the policy, though it might not have occurred but for the concurrent action of some other cause which is not within the policy, the other cause which is not within the policy being unseaworthiness” (p 359).

Finally, in J J Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (The “Miss Jay Jay”) [1987] 1 Lloyd’s Rep 32, a yacht insured under a time policy suffered damage due to delamination of her hull on a voyage from Deauville to Hamble in sea conditions “markedly worse than average, but not so bad as to be exceptional” (p 270). She had been ill-designed and ill-made (p 272). If properly designed and built according to the manufacturer’s description, she would have made the passage without damage (p 270). It was “hard to look at the facts … without being struck by the idea that the root of all the trouble was the act of [her manufacturers] in putting into circulation a boat which was wholly unfit for its purpose” (p 270). Nevertheless, the owner recovered for the hull damage both before Mustill J and in the Court of Appeal. In a key, but controversial, passage on the law, Mustill J said this, at p 271:

“Second, as to causation. It may be that the doctrine of proximate cause has undergone some reassessment since the days when the most important cases on the present topic were decided. In those days the ultimate cause was more readily identified as the proximate cause than might be the case today. Nevertheless, it is clearly established that a chain of causation running – (i) initial unseaworthiness, (ii) adverse weather; (iii) loss of watertight integrity of the vessel; (iv) damage to the subject-matter insured – is treated as a loss by perils of the seas, not by unseaworthiness: see, for example, Dudgeon v Pembroke …. and Frangos v Sun Insurance Office ….”.

Mustill J went to say that:

“…. the immediate cause was the action of adverse weather conditions on an ill-designed and ill-made hull. The cases show that this is sufficient to bring the loss within the words of a time policy in the standard form” (p 272).

In “Fault and Marine Losses” [1988] LMCLQ 310, 350 footnote 101, Sir Michael Mustill later commented extra-judicially that “A severe critic might wonder whether the trial judge had in mind just what had happened to the doctrine of causation since Dudgeon v Pembroke”. This itself may however be too severe, in view of Mustill J’s express mention of that change in the passage at p 271 cited above. Further, it might be thought relevant that the 1906 Act, crystallising statutorily the concepts of perils of the seas and inherent vice, was enacted against the background of the Victorian authorities, and before the definitive emergence of the modern conception of proximity (see para 49 above).

In the Court of Appeal in the Miss Jay Jay the legal position was, however, analysed in different terms. The court rejected a submission that any prior unseaworthiness could be disregarded as irrelevant, but it interpreted the passage on p 271 in Mustill J’s judgment consistently with that rejection. It understood him as having been concerned simply to identify whether perils of the sea were a proximate cause of the loss, not as suggesting that “unseaworthiness, followed by a loss due to a peril of the seas, can never be relevant”: [1987] 1 Lloyd’s Rep 32, 37, 41 per Lawton and Slade LJJ. The question on this basis was “whether on the evidence the unseaworthiness of the cruiser due to the design defects was such a dominant cause that a loss caused by the adverse sea [conditions] could not fairly and on commonsense principles be considered a proximate cause at all” (p 37, per Lawton LJ). Slade LJ took the same view, regarding it as clear on “a commonsense view of the facts” that “both these two causes were …. equal, or at least nearly equal, in their efficiency in bringing about the damage” (p 40). That being so, the court referred to the general principle of insurance law that, where there are two proximate causes of a loss, one insured under and the other not expressly excluded from the policy, the assured will be able to recover: see p 40, per Slade J. Slade LJ (at p 41) also distinguished cases of debility, where the ordinary action of wind and waves leads to damage, as cases where the action of wind and waves is treated as the sole proximate cause of the damage, citing in this connection Fawcus v Sarsfield 6 E & B 192. Another way of looking at such cases is that there is no accident or fortuity.

Analysis – law

Standing back, it is clear that the hull cases lend no support by analogy to a submission that, where a cargo is unfit for the insured venture, then loss or damage which would have been avoided but for such unfitness, falls to be regarded as a loss due to inherent vice, rather than due to any marine peril which may have triggered and exploited the unfitness. Mr Gee submits that Lord Diplock’s reference [1983] 1 Lloyd’s Rep 122, 126 to “the risk of deterioration of the goods shipped as a result of their natural behaviour in the ordinary course of the contemplated voyage” is wide enough to cover any case where the goods are unfit to withstand any weather conditions which may foreseeably be encountered on the voyage. Only extraordinary weather conditions overwhelming goods fit to withstand all foreseeable vicissitudes would on this basis attract cover. This is clearly not the law in hull insurance, as all the cases show; and, if that is right, then I see no reason why it should be the law in cargo insurance, particularly when the concept of inherent vice is introduced into the 1906 Act by section 55(2)(c) covering both types of marine cover.

Mr Gee’s more developed submission is more difficult to meet, and has support in the Court of Appeal’s approach in the Miss Jay Jay [1987] 1 Lloyd’s Rep 32. It is that it is in any case a matter of “common sense” judgment, whether initial unfitness or the intervention of a subsequent peril or both is or are the proximate cause(s) of loss. Despite Slade LJ’s differentiation of pure debility cases, the Court of Appeal was not presumably suggesting that, where initial unseaworthiness or unfitness and unfavourable weather conditions beyond the ordinary action of wind and waves have both played a role, the court must always treat both as equal or nearly equal proximate causes. That would have been to recognise a rule of law different in formulation, but nonetheless of a type that the court held that Mustill J would have been wrong to introduce. There is high authority for the proposition that the real or dominant cause is to be ascertained by applying the common sense of a business or seafaring man: see eg T M Noten BV v Harding [1990] 2 Lloyd’s Rep 283, 287 per Bingham LJ. In Noten v Harding, common sense was applied to identify the point in a single process, not involving any obvious fortuity, which represented the cause. In circumstances like those in the Miss Jay Jay or the present case, two separate causes may be identified, initial unfitness and a peril of the seas through which it works, and it is unclear how in practice they would be weighed and balanced. This is highlighted by Mustill J’s comment in the Miss Jay Jay [1985] 2 Lloyd’s Rep 264, 270, cited in para 69 above, that it was “hard to look at the facts without being struck by the idea that the root of all the trouble was the act of [her manufacturers] in putting into circulation a boat which was wholly unfit for its purpose”. Yet, in the Miss Jay Jay the finding that the weather was “markedly worse than average but not so bad as to be exceptional” sufficed to make perils of the sea an equal cause: see p 41 [1987] 1 Lloyd’s Rep 32, 41 per Slade J. I am not attracted to a solution which depends upon identifying gradations of adverse weather conditions.

More fundamentally, if Lord Diplock’s formulation in Soya v White [1983] 1 Lloyd’s Rep 122, 126 is correct, then it is difficult to find in it any place for the weighing exercise that is suggested by the Court of Appeal’s approach in the Miss Jay Jay. If inability to withstand foreseeably bad weather conditions does not prevent damage sustained as a result being attributed to perils of the sea, (i) that must be because Lord Diplock’s reference to “the ordinary course of the contemplated voyage” was not intended to embrace the weather conditions foreseeable on such a voyage, but was rather used as a counterpoint to a voyage on which some fortuitous external accident or casualty occurred and (ii) there is no apparent limitation in Lord Diplock’s qualification “without the intervention of any fortuitous external accident or casualty” – in other words, on the face of it, anything that would otherwise count as a fortuitous external accident or casualty will suffice to prevent the loss being attributed to inherent vice. On this interpretation, Lord Diplock was laying down a test which appears to me consistent with the reasoning in Dudgeon v Pembroke 2 App Cas 284, the Xantho 12 App Cas 503, Grant Smith and Co and McDonnell Ltd v Seattle Construction and Dry Dock Co [1990] AC 162 and of Mustill J in the Miss Jay Jay [1985] 2 Lloyd’s Rep 264. It fits with Tucker J’s identification in Neter [1944] All ER 341, 343 of the “stoving in due to the weather, which is something beyond the ordinary wear and tear, of the voyage” as “something which could not be foreseen as one of the necessary incidents of the adventure”. It fits with the definition in the 1906 Act of perils of the seas as not including “the ordinary action of the winds and waves”, a definition which draws attention to the question whether the winds and waves have had some extraordinary effect, rather than whether they were extraordinary in themselves.

On this basis, it would only be if the loss or damage could be said to be due either to uneventful wear and tear (or “debility”) in the prevailing weather conditions or to inherent characteristics of the hull or cargo not involving any fortuitous external accident or casualty that insurers would have a defence. In the scheme of the 1906 Act, that would not appear to me surprising, bearing in mind the case law against the background of which the Act was enacted and the juxtaposition in section 55(2)(c) of “ordinary wear and tear, ordinary leakage and breakage” with “inherent vice or nature of the subject-matter insured” as well as with “any injury to machinery not proximately caused by maritime perils”. While not myself attempting any exact definition, ordinary wear and tear and ordinary leakage and breakage would thus cover loss or damage resulting from the normal vicissitudes of use in the case of a vessel, or of handling and carriage in the case of cargo, while inherent vice would cover inherent characteristics of or defects in a hull or cargo leading to it causing loss or damage to itself – in each case without any fortuitous external accident or casualty. Ultimately, I am persuaded that authority and principle do point to the correctness of Lord Diplock’s definition, and that it bears the meaning indicated by points (i) and (ii) in the preceding paragraph. If this exposes insurers to risks which they are not prepared to accept, they may of course seek to provide otherwise, either by special provision or by amendment of the standard clauses upon which most hull and cargo insurance is now underwritten.

Analysis – the facts

My real concern on the present appeal has been whether the loss claimed did not fall within even the restricted test which I have stated in the previous two paragraphs. The case comes close to the line. It is helpful to start with the position before the first leg fell. Mr Pollock went so far as to submit that, even the cracking of the legs which occurred on passage across the Atlantic and which necessitated repair in South Africa constituted a fortuitous external accident or casualty outside the ordinary course of the contemplated voyage, for which the assured could have sought to recover under the insurance, apart from the deductible of RM 3.8m each and every loss. I would not accept that there could have been any such insurance claim, any more than the Court of Appeal did: see the reference in this connection to normal wear and tear in para 64 of Waller LJ’s judgment. So far as appears, the cracking was the simple product of the exhaustion of the fatigue life of the legs on passage under the influence of the ordinary action of the wind and waves, and did not therefore involve any fortuitous external accident or casualty. It was also a risk that was expected as likely to materialise during the voyage (see paras 85-86 below), and one which it cannot sensibly have been thought that insurers would take on. The critical question is therefore whether the sudden fracturing and loss of the three legs overboard into the Pacific falls into a different category or was no more than a loss due to their inherent vice. Mr Gee is entitled to say that, on this point, considerable respect is due to Blair J’s assessment of the facts, so long as he directed himself by reference to the right test and considerations.

Blair J formed a judgment about the proximate cause, treating the facts as raising two possible candidates. On the one hand, he recorded that once a lot of the fatigue life had been used up and there were cracks everywhere, “then all you need is probably the two, three, four-metre sea states that the Cape waters can provide”, and that the “agreed range of wave heights demonstrates that waves in excess of three metres were in fact regularly experienced during the second stage of the voyage” (para 49). On the other hand, he noted that a developed crack would not itself have been sufficient to cause one of the 300 feet high legs to come off, but that that “required in addition a ‘leg breaking’ or ‘final straw’ stress that finally fractured the weakened steel”. As Mr Colman [insurers’ expert] put it:

“‘…. remember we have a leg which is 12 feet in diameter, a circumference of about 40 feet. So even quite a lot of these little cracks still leave a very large amount of good steel an inch and a half thick. This isn’t light plate; this is very heavy steel, and that’s an enormously strong structure. So you’ve got to catch it just right, if you want to actually make it fail all the way round'” (paras 48 and 87).

Once one leg failed, the circular motions of the others and the stresses to which they were subjected increased, and their failure was accelerated. Blair J also described the weather as being “within the range that could reasonably have been contemplated (albeit the claimants’ expert puts it at the upper end)” (para 110), a description covering all foreseeable weather conditions, including those sufficient to give rise to a loss by perils of the sea. Finally, Blair J chose as the relevant proximate cause the unfitness of the rig for the voyage, because in his view (para 111):

“The real problem lay with the inherent inability of the legs to withstand the normal incidents of the voyage. … As [Mr Colman] put it – ‘I don’t think that these legs were ever going to make it round the Cape’. That in my opinion is the reality of this case”.

Close though these statements come to it, the judge was not actually addressing the question how far the emergence of a leg-breaking wave striking at just the right moment in the first leg’s circular movement and leading to fracture and loss of a leg could be regarded as an entirely normal event, still less how far the resulting loss of any of the legs could be regarded as an equivalent to wear and tear or debility. To my mind, however, the bare recital of what happened is difficult to fit into any normal conception of what Lord Diplock [1983] 1 Lloyd’s Rep 122, 126 described as “deterioration of the goods shipped as a result of their natural behaviour in the ordinary course of the contemplated voyage”. As I noted earlier in this judgment (para 64), the loss had many obvious characteristics which one would associate with a fortuitous marine accident or casualty, and that, in my opinion, is how the loss of the rig’s three legs can and should be seen.

I add this. Although, as Mr Gee urged, the meaning of inherent vice will, at least normally, be the same in principle under all marine policies, its application in any particular case must depend upon the nature and characteristics of the goods being insured and of the insured venture. Here, I note that the assured was asked, before the policy was placed, to state, under the heading Rig History, whether the rig had previously experienced any buckling of its legs, and it disclosed that the port aft leg had indeed experienced buckling during a previous dry tow in 1996 (also in fact off South Africa). Originally, insurers maintained and pleaded that this had not been disclosed, but the plea was abandoned. It appears that insurers’ sight of the relevant email disclosing the information was in fact noted on the placement slip. It was, furthermore, made an express condition of the insurance that

“Survey Clause or Pre Shipment Survey including Loading and Unloading, Tow Out to be supervised by approved and nominated Surveyor. Noble Denton has been nominated and approved”.

Noble Denton duly surveyed the rig for insurers before it sailed on the voyage from Galveston. It was well recognised that stresses would be imposed on the legs by virtue of the motion of the waves, and Noble Denton sought to establish the legs’ remaining fatigue life. In a report on 23 August 2005, Noble Denton concluded that the legs in way of the pinholes might have insufficient fatigue live left to undertake the full tow to Lumut, and required that the legs be re-inspected in South Africa and remedial work be undertaken there as found necessary. Fatigue life is assumed to be expended when a damage ratio of unity (1.0) is achieved. At the time of the 23 August report, the damage ratio was thought to be well below unity. But before the rig arrived in South Africa, experts acting for the assured had completed calculations which led to a spectral analysis dated 21 September 2005, in which the damage ratio was now put at 2.13, well above unity. An unsatisfactory feature of this case, as the judge said (para 28) is that this report never reached Noble Denton, before they concluded that the rig could commence the second stage of its voyage from South Africa. The judge also found that the joint inspection in South Africa did not cover the set of pinholes at the 18 foot level, and that the only repairs were to pinhole corners where a crack had actually initiated (para 78). However, he found that the latter omissions were not relevant, in that, whatever repairs were or could practicably have been carried out in South Africa would have made no difference (para 83).

Whether disclosure of the spectral analysis of 21 September to Noble Denton could and would have made any difference does not appear. No suggestion has in any event been made that this is of any relevance to the scope or validity of the cover. What does appear from the above is that the parties appreciated both the need to put into a South African port for inspection and the likelihood that some cracking would there be found and some repairs would have to be undertaken. That reinforces the conclusion which I have already drawn that the cost of such inspection and repairs could not be covered. But it also appears that the parties’ attention was closely focused on the overall risk of carrying the rig with its three legs protruding over 300 foot into the air in circumstances which could, depending upon a range of uncertainties, lead to the loss of one or more of the legs. In the event, the rig suffered the further loss of all three legs, not just because cracking appears to have developed further or sooner than expected, but ultimately only after the first, and then each other, leg was caught, in just the “right” way, by a leg-breaking wave. To hold that the insurance did not cover such a loss, if it materialised, would seem to deprive it of much of its utility. These considerations support a conclusion that there is no incongruity in treating the loss of the three legs overboard which the rig actually experienced as involving fortuitous external accidents or casualties insured under this all risks insurance, rather than as due to inherent vice. In common with the Court of Appeal, although not entirely for the same reasons, I would therefore reach that conclusion.

Concurrent causes

I add some words with regard to the submission made by insurers to meet the hypothesis, which I have not accepted, that the loss should be attributed to two equal or nearly equal proximate causes, in the form of both inherent vice and perils of the seas. Assuming that to be possible, the question would then have arisen as to the effect of the express exception of inherent vice contained in clause 4.4 of the Institute Cargo Clauses (A). It was said in the Miss Jay Jay [1987] 1 Lloyd’s Rep 32, 40 that, if there were two causes, one of which was expressly excluded, then the assured would fail; and reference was made in this connection to dicta in P Samuel & Co Ltd v Dumas [1924] AC 431, 467 per Lord Sumner and to Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corpn Ltd [1974] QB 57, 75. I would wish to leave open the applicability of this approach in the present context. First, clause 4.4 on the face of it simply makes clear the continuing relevance in the context of all risks cover of the limitation on cover against perils of the sea provided by section 55(2)(c). There seems to me some oddity in treating clause 4.4 as leading to a fundamentally different result from that which would have applied had section 55(2)(c) alone been in question. Second, the focus of the cases cited in the Miss Jay Jay and of the more recent case of Midland Mainline Ltd v Eagle Star Insurance Co Ltd [2004] 2 Lloyd’s Rep 604 was upon true exceptions which took out of cover against an insured risk a specific type of situation giving rise to such risk. The present hypothesis is of two concurrent risks arising independently but combining to cause a loss. While it may be that the same principle applies (as the Court of Appeal’s dicta in the Miss Jay Jay suggest), I would at least wish to hear argument on that. I need not go further into this aspect, upon which I have formed no concluded views.

Conclusion

For the reasons I have given, I would also dismiss this appeal.

LORD COLLINS

I agree that the appeal should be dismissed for the reasons given by Lords Saville, Mance and Clarke. The policy covered “all risks of loss or damage to the subject matter insured except as provided in clauses 4, 5, 6 and 7…” The exclusion from cover in clause 4.4 was “loss, damage or expense caused by inherent vice or nature of the subject matter insured.” Section 55(1) of the Marine Insurance Act 1906 provides:

“Subject to the provisions of this Act, and unless the policy otherwise provides, the


Brit Syndicates Ltd & Ors v Italaudit SPA & Anor

[2006] EWHC 341 (Comm) (03 March 2006)

URL: http://www.bailii.org/ew/cases/EWHC/Comm/2006/341.html

Cite as: [2006] Lloyd’s Rep IR 487, [2006] EWHC 341 (Comm)The Hon. Mr Justice Langley :

The Application

The second-named Defendant (GTI) seeks a summary judgment dismissing the claim by the Claimant insurers (“Brit”). Brit seeks a summary judgment against GTI for a declaration. The issues arise under a Professional Indemnity Policy for the period 15 December 2003 to 14 December 2004 (“the Policy”). GTI claims that the Policy entitles it to an indemnity in respect of a claim brought against GTI; Brit claims that it does not. The point is one of construction. In particular, the construction of “Extension 3” to the Policy.

The Policy

GTI is a not for profit corporation incorporated in Illinois, USA. It is the “umbrella” corporation which manages and maintains a worldwide organisation of member firms which practice under the Grant Thornton name. GTI has no practice or clients of its own. The first-named Defendant was, until 8 January 2004, when it was expelled, a member firm under the name, Grant Thornton S.p.A. I shall refer to it as “GT Italy”.

GT Italy was, along with 93 others, a named member firm in a schedule to the Policy and so an “Assured Firm” as defined in the Policy. The insuring clause (clause 1) provided professional indemnity cover for two interests:

i)             “to indemnify an Assured Firm against any claim or claims solely in respect of International Work” (“International Work” was defined but can sufficiently be described as work done by one member firm for, or for a client of, another member firm);

ii)            “to indemnify an Assured Firm should an Assured Firm by reason of its membership in Grant Thornton International be held legally liable for any negligent act, error, omission, breach of duty, whenever or wherever the same was or may have been committed or alleged to have been committed on the part of another member firm of Grant Thornton International … in or about the conduct of any Professional Services conducted by or on behalf of such other firms”.

GTI itself is not listed in the schedule of member firms to the Policy. Section III, clause 3 of the Policy (“Extension 3”) provided that:

“Grant Thornton International is included as an Assured Firm but solely in respect of claims made against Grant Thornton International arising from claims made against a member firm of Grant Thornton International insured by the terms and conditions of this policy.”

It is the words I have emphasised, and in particular the last nine words, which give rise to the issues.

The claims under the Policy

At the end of March 2004, GTI gave notice to Brit of third party claims brought against GTI and GT Italy in the USA arising out of the audit by GT Italy of a subsidiary of Parmalat Finanziaria, S.p.A. (“Parmalat”). The claims were class action suits at the instance of investors complaining of violations of United States securities laws. GTI’s liability was alleged to arise as an entity said to be in control of GT Italy. As Mr Guy Philipps QC, for GTI, put it it was “precisely the type of claim against GTI to which the second limb of the insuring clause … and [Extension 3] are directed.”

Avoidance

By letter dated 1 August 2005, Brit’s solicitors wrote to GTI’s General Counsel advising him of “the avoidance … of the insurance of … GT Italy” by a letter to GT Italy of the same date, which was enclosed. The letter to GT Italy referred to matters which had not but should have been disclosed prior to the inception of the Policy and the falsity of information provided by GT Italy in a Questionnaire which was agreed to “form the basis” of the Policy and continued:

“Accordingly, and in view of GT Italy’s failure to disclose such material information to insurers prior to 15th December 2003, insurers hereby give notice of their avoidance of the Policy ab initio, and tender the return to you of the relevant insurance premium in the sum of USD 3,731.35.

Alternatively, and without prejudice to insurers’ claim to have validly avoided the Policy, the declaration that was contained in the Questionnaire and that was signed by Mr Penca, consisted of an absolute and unqualified declaration by him that the statements and particulars given in the Questionnaire were true and that no material facts had been misstated or suppressed. The declaration, by virtue of the “basis of contract” provision contained within the declaration, constituted a warranty by Mr Penca on behalf of GT Italy as to the matters stated by him in the declaration.

In the circumstances, and alternatively to insurers’ claim to have validly avoided the Policy, the failure by GT Italy to disclose that one or more of its partners or principals knew of matters which “they [felt] could give rise to a claim(s)” against GT Italy, constituted a breach of warranty on the part of GT Italy, with the result that insurers are automatically discharged from any further obligations to GT Italy from the date of the breach, which was 15th December 2003, the date on which the declaration acquired contractual effect by virtue of the inception of the Policy.”

The letter to GTI itself stated:

“We write to you, not simply as a courtesy, but also to advise you that since the insurance of GT Italy has been avoided ab initio, there is correspondingly no cover available to GT International under the Insurance. This is because the ab initio avoidance of GT Italy’s insurance means that GT Italy is to be treated as never having been an Assured or Member Firm under the insurance.

Since GT International is only “included as an Assured Firm … in respect of claims made against [it] arising from claims made against a member firm of Grant Thornton International insured by the terms and conditions of [the] policy”, it follows that the ab initio avoidance of GT Italy’s insurance has the consequence that GT International is not to be “included as an Assured Firm” under the Insurance, since the claims made against GT Italy have not been made against “a member firm of Grant Thornton International insured by the terms and conditions of [the] policy”.

There is thus no insurance cover available to GT International under the Insurance.”

This letter states the issue, and Brit’s case.

The Proceedings

Brit issued the present proceedings on 1 August 2005. The claim was for declarations that Brit had validly avoided the insurance of GT Italy by the Policy on the grounds of misrepresentation and/or non-disclosure by GT Italy, alternatively that Brit was discharged as from the date of the insurance or its inception from any obligation to GT Italy under the Policy by reason of breach of warranty by GT Italy, and that by reason of the avoidance and/or breach of warranty GTI “is not, pursuant to Extensions Condition 3 of the Insurance, included as an Assured Firm … in respect of claims made against [it] arising from claims made against [GT Italy] and that [GT Italy], by reason of the matters aforesaid, is not a member firm of [GTI] insured by the terms and conditions of [the Insurance] – and is thus not entitled to be indemnified by [Brit] in respect of the claims that have been brought against [GT Italy]”.

The Particulars of Claim, whilst acknowledging (paragraph 2) that GT Italy was an Assured Firm under the Policy at its inception, alleged (paragraph 13) that the consequence of the avoidance or “pre-inception breach of warranty” was that GT Italy “was not, at any time, a member firm of [GTI] insured by the terms and conditions of the Policy.”

The Applications

GTI issued its Application for summary judgment on 21 November 2005. The Application recorded that it was common ground that the claims in respect of which GTI sought an indemnity arose from claims made against GT Italy and averred that GT Italy was stated in the Policy to be a member firm of GTI insured by the Policy. It is Mr Philipps’ submission that those two matters of fact are sufficient of themselves to entitle GTI to an indemnity.

Brit issued its application for summary judgment on 18 January 2006. It asserted that the effect of avoidance was that, as a matter of law, GT Italy was to be treated as never having been an insured under the Policy. The Application made no reference to the alternative claim of breach of warranty. Mr Edelman QC, for Brit, said that was a mistake. Mr Philipps did not oppose the matter being argued and adjudicated, albeit he submitted it was unsustainable.

The Default Judgment

On 21 February 2006, Brit entered judgment against GT Italy in default of any acknowledgement of service or defence being filed by GT Italy. The judgment was for a declaration that Brit had validly avoided the Policy for misrepresentation and/or non-disclosure “and/or that [Brit was] discharged, as from the date of the making of the contract of insurance, alternatively as from the date of its inception … from any obligation to [GT Italy] under the insurance” by reason of breach of warranty.

Mr Philipps submitted, and I agree, that the two declarations are inconsistent. A breach of warranty, even one said to bite at the date of the Policy, presupposes a contract in which the warranty is to be found. Non-disclosure, as is frequently stated and forms the basis of Brit’s case, avoids a policy “ab initio”.

The Submissions

The issue can be stated shortly and is apparent from the circumstances I have already set out.

Mr Philipps submits that Extension 3 is descriptive in stating the criteria upon which the cover for GTI is dependent. If (as it is) GTI is sued on a claim which arises from a claim made against a member firm named as such in the Schedule to the Policy then GTI is insured for the claim made against it.

Mr Edelman submits that the cover for GTI provided for by Extension 3 is only parasitic on effective cover for the claim made against the member firm.

What is not in issue

For the purposes of the present Application it is not in issue that:

i)             The claims made against GTI arise from claims made against GTItaly;

ii)            GTItaly was stated in the Schedule to the Policy to be a member firm of GTI;

iii)           Brit has validly avoided the cover of GTItaly; or GTItaly was in breach of warranty;

iv)           The Policy was a “composite” policy in the sense used in New Hampshire Insurance Co v MGN Ltd [1997] LRLR 24, namely that each member firm was an assured and insured separately, and thus avoidance against one insured does not discharge the insurer from liability to another innocent insurer. It is in issue whether or not GTI itself was separately insured in this sense;

v)            Not all member firms of GTI were insured by the Policy. No firm (other than GTI itself) based in the USA or the UK was covered: Exclusions 11. Mr Philipps pointed to that as a good reason why Exclusion 3 used the words “insured by the terms and conditions of this policy”. Although Mr Edelman questioned this, and submitted by reference to other provisions of the Policy that the chosen criterion reflected a requirement for liability to the “insured” member, I hope he will forgive me for saying that after discussion I think there was no substance to the point he sought to make.

Discussion

It is readily understandable that GTI, as an American corporation, would require cover for claims made against it arising from claims made against member firms. Extension 3 is the chosen mechanism of the parties to achieve that. In the event that such cover was lost to GTI as well as to the member firm through avoidance against the latter, Mr Edelman was able to suggest only very limited circumstances in which “double cover” for both GTI and the member would serve any commercial purpose. His suggestions were legal costs and possible exposure to double damages or the like. If Mr Philipps is right, the cover would be both “composite” and commercial. I agree with Mr Philipps that the fact that Extension 3 provides for GTI to be “included as an Assured Firm” in respect of the claims referred to points to GTI itself, like each member firm, being a separate assured in the New Hampshire sense in respect of such claims.

The authorities which emphasise the effect of avoidance to be that the policy is avoided from the outset give rise to or at least reflect the well-established law that when a policy is avoided the remedies are restitutionary. Mr Edelman referred the court to a number of authorities in which the courts have expressed the principle forcibly in those terms: see, for example, Lord Atkinson in Abram Steamship v Westville Shipping [1923] AC 773 at 781; Cornhill Insurance v Assenheim [1937] 58 Lloyd’s LR 27 per Mackinnon J at page 31; and Lord Hobhouse in Manifest Shipping v Uni-Polaris Insurance Co (the “Star Sea”) [2003] 1 AC 469 where Lord Hobhouse distinguished pre-contract from post-contract want of good faith stating (at paragraph 51) in respect of the former where it gave rise to a right to avoid:

“It applies retrospectively. It enables the aggrieved party to rescind the contract ab initio. Thus he totally nullifies the contract. Everything done under the contract is liable to be undone.”

Mr Philipps countered by referring to Mackender v Feldia [1967] 2QB 590. The context was whether or not a Belgian jurisdiction clause in an insurance policy applied notwithstanding allegations of non-disclosure. The Court of Appeal held that it did. Lord Denning, at page 598, said non-disclosure made a contract voidable not void;”the contract is not avoided from the beginning but only from the moment of avoidance”. Diplock LJ, at pages 601 to 604 drew the same distinction between a void contract (“not a contract at all”) and a voidable contract. In the latter case, when the contract is avoided “that does not mean that the contract never existed but that it ceases to exist from the moment of avoidance, and that upon it ceasing to exist there may arise consequential rights in respect of things done in performance of it while it did exist which may have the effect of undoing those things as far as practicable”. In McGillivray on Insurance Law, 10th Edn, para 17-31, these statements are questioned and the suggestion made that they can best be explained by the autonomy of the jurisdiction clause. In the same way an arbitration clause as a “collateral contract” is to be construed as such and so may apply notwithstanding allegations that the contract which contains it is illegal: Harbour Assurance v Kansa General International Insurance [1993] QB 701. Mr Edelman, understandably, relied upon this distinction.

For my part, I do not derive any real assistance in deciding the issue in this case from these authorities. Their application must depend on the question being asked. The question here is what does Extension 3 mean. If the words “insured by the terms and conditions of this policy” are descriptive of the member firms in the Schedule it is nothing to the point that the Policy has been avoided. If, on the other hand, they mean “entitled to an indemnity” or “validly insured” then there is no issue that such was not the case. What I do derive from the authorities, as might be expected, is that the court is not required to ignore reality, namely that, until it was avoided, GT Italy was not only a member firm but one which was in fact and in normal language “insured” under the Policy.

As Giles CJ succinctly put it in the Commercial Division of New South Wales, in FAI General Insurance v Ocean Marine Mutual [1998] LRIR 24 at page 28, addressing the use of words to the effect that a contract avoided ab initio is taken never to have existed:

“The words are sufficient for most purposes, but they should not be taken literally. Neither rescission by a party nor a judges say so can turn the clock back to have that literal effect, and a contract avoided ab initio is not, in Newspeak, an uncontract.”

The submissions in relation to breach of warranty can be addressed shortly. A warranty predicates a contract; in this case a contract of insurance, the Policy. The basis of the warranty, the letter of avoidance, paragraph 12 of the Particulars of Claim, and the wording of the default judgment each acknowledge as much. Nor do I think, despite Mr Edelman’s submissions, that it makes any difference that the warranty in question bites at the time of the contract rather than during its term. The leading authority is Bank of Nova Scotia v Hellenic Mutual (the “Good Luck”) [1992] 1 AC 233. Lord Goff, at pages 262-3, stated that:

“subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach of warranty …. for the simple reason that fulfilment of the warranty is a condition precedent to the liability of the insurer …. Here, where we are concerned with a promissory warranty, i.e. a promissory condition precedent, contained in an existing contract of insurance, non-fulfilment of the condition does not prevent the contract from coming into existence. What it does … is to discharge the insurer from liability as from the date of the breach. Certainly it does not have the effect of avoiding the contract ab initio.”

In my judgment, for this reason, Brit’s case must be made on the principles of non-disclosure, if it is to be made at all.

Conclusion

I think the terms of Extension 3 are descriptive, as Mr Philipps submits, and not to be read as referable to liability to indemnify GTItaly, as Mr Edelman submits.

My reasons are:

i)             The conclusion gives substance to the provision rather than the very limited effect for which Brit contends;

ii)            I see no reason why the composite nature of the insurance should not extend to GTI as an “Assured Firm” when it fulfils the stated criteria. That is the language used. On principle, GTI should not then be affected by the conduct of other assureds, relative to their insurance, of which GTI was ignorant;

iii)           The conclusion avoids the uncertainty which would arise if cover for GTI was dependent on the conduct of a member firm and whether the Policy responded to that member firm, which might, and often would, be in issue.

iv)           I see no good reason to apply the principles of avoidance to a question of the construction of ordinary words and to the exclusion of the real factual position.

v)            I do not think it material, despite Mr Edelman’s submission, whether or not the word “insured” qualifies only the “member firm” or the “claims made against a member firm” or both. The question is whether or not, in any of those cases, they are merely descriptive of the type of claim or firm to which the criterion applies.

It follows that GTI is entitled to the judgment it seeks and the Application of Brit must be dismissed.

I will hear the parties on ancillary matters, if they cannot be agreed, when this judgment is handed down.


Garnat Trading & Shipping (Singapore) Pte Ltd & Anor v Baominh Insurance Corporation

[2010] EWHC 2578 (Comm) (19 October 2010)

URL: http://www.bailii.org/ew/cases/EWHC/Comm/2010/2578.html

Cite as: [2011] 1 Lloyd’s Rep 589, [2010] EWHC 2578 (Comm), [2011] 1 All ER (Comm) 573 Clarke J

Legal Principles in respect of disclosure

There was no real dispute as to the applicable legal principles.

Non disclosure

The starting point is s.18 of the Marine Insurance Act 1906 (“the MIA”), which provides:

“18. — Disclosure by assured.

(1) Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him. If the assured fails to make such disclosure, the insurer may avoid the contract.

(2)          Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.

(3)          In the absence of inquiry the following circumstances need not be disclosed, namely:—

(a)          Any circumstance which diminishes the risk;

(b)          Any circumstance which is known or presumed to be known to the insurer. The insurer is presumed to know matters of common notoriety or knowledge, and matters which an insurer in the ordinary course of his business, as such, ought to know;

(c)           Any circumstance as to which information is waived by the insurer;

(d)          Any circumstance which it is superfluous to disclose by reason of any express or implied warranty.

(4)          Whether any particular circumstance, which is not disclosed, be material or not is, in each case, a question of fact.

(5)          The term “circumstance” includes any communication made to, or information received by, the assured.”

Mr Ashcroft distilled a series of propositions which I am content to adopt as accurate general statements of the law. They were as follows:

(a)          Non-disclosure is the failure to communicate a material fact within the knowledge of the assured which the insurer has not the means of knowing or is not presumed to know[9].

(b)          The burden of proof in relation to any allegation that a fact or matter has not been disclosed is upon the insurer[10].

(c)           In general terms, a fact or matter is material if it would have been taken into account by a hypothetical prudent insurer when assessing the risk[11].

(d)          But, a minute disclosure of every material circumstance is not required. The assured complies with the duty if he discloses sufficient to call the attention of the underwriter to the relevant facts and matters in such a way that, if the latter desires further information, he can ask for it. A fair and accurate presentation of a summary of the material facts is sufficient if it would enable a prudent insurer to form a proper judgment, either on the presentation alone, or by asking questions if he was sufficiently put upon enquiry and wanted to know further details, whether to accept the proposal, and, if so, on what terms.[12]

(e)          Underwriters should listen carefully to what they are being told; they cannot complain if they do not grasp the detail or the implications of it[13].

(f)           In accordance with s.18(3)(b) of the MIA, in the absence of inquiry, there is no need to disclose a fact or matter that the insurer already knows, or is presumed to know; there is therefore no duty to disclose matters of common notoriety or matters that the insurers should, in the ordinary course of business, know[14]. In the context, the test is objective. One asks what a reasonable insurer, writing the particular type or class of business concerned, would, or should, know[15]. A reasonable underwriter is presumed to know matters which he should have known from the facts in his possession or matters which he had means of learning from the sources available to him[16]. A reasonable underwriter is presumed to know the ordinary incidents or attributes of any peculiar or specialist risk he undertakes: every underwriter is presumed to be acquainted with the practice of the trade he insures; if he does not know, then he ought to inform himself[17]. Because of these aspects, and absent inquiry by the insurer, only unusual elements affecting the risk have to be disclosed by the proposer[18].

(g)          As regards s.18 (3) (c) of the MIA, waiver in insurance law bears a wider meaning than it does in other areas of the law. There is no need for an intentional act with full knowledge of the facts[19]. If the facts and matters disclosed give a fair presentation of the risk, the underwriter must ask if he wishes to have more information; further, even if the initial presentation was unfair, waiver might arise if the information disclosed was such as to prompt a reasonably careful insurer to make further inquiries[20]. In short, if the insurers receive information, which taken on its own, or in conjunction with other information known to them or presumed to be known to them, would naturally prompt a reasonably careful insurer to make further inquiries, then, if they omit to do so, they waive disclosure of the material facts and matters which such an inquiry would have revealed[21]. A particular case in which insurers may be put upon inquiry is one where the character of the ship to be insured puts them on notice that specific preparations are or may be required before it puts to sea[22]. Finally, an assured is entitled to assume that the insurers are waiving disclosure of matters concerning which they appear to be indifferent or disinterested[23].

(h)          As regards s.18 (3)(d) of the MIA, absent inquiry, there is no duty to disclose facts and matters that are superfluous to disclose by reason of an express or implied warranty that will cover the same ground. The assured is entitled to proceed on the basis that the insurer does not require disclosure of facts and matters that fall within the scope of the warranty to be included in the insurance[24].

(i)            Even where there is non-disclosure of a material fact, if this does not in fact influence the judgment of the actual underwriter, avoidance is not justified[25]. So, for instance, in Flinn v. Headlam 1829 9 & Cr 693, the insurers were not entitled to avoid where they in fact relied upon a certificate that the ship was seaworthy, rather than upon the assured’s representation that only a small quantity of rock-salt had been, or would be, loaded[26]. To justify avoidance, the non-disclosure must be a real and substantial cause affecting the decision of the insurer to enter into the contract, or to do so on the terms agreed, the insurer bearing the onus of proving inducement on the balance of probabilities[27]. No presumption of fact applies where the underwriter is called to give evidence[28].

Application of the principles

The claimants accept, as the expert evidence and common sense indicates, that the information contained in the Assessment specifying a maximum permissible wave scale of 5, with a wave height up to 3.5m was material to the risk and should, in principle, have been disclosed.

Whether or not there was non-disclosure must be determined in the light of my factual findings.

In the light of those findings I am not satisfied that the risk was unfairly presented to Baominh or that there has been non-disclosure. On the contrary it seems to me that that there was disclosure of the information which Baominh complains was not told to them. Whether Baominh paid any attention to it is a different question.

That which was disclosed to Baominh included the following:

(a)          The existence of the Towage Plan.

This was apparent from the Towage Contract and draft MOA provided on 16th May 2006. It was discussed and its nature explained at the meeting of 18th May. It was the subject of a warranty in all of Baominh’s drafts of the policy (save for its temporary accidental omission for 80 minutes on 9th June) until it was removed at the last moment on the basis that the Plan had been approved.

(b)          The title pages of the list of design documents, of the Assessment, the Explanatory Note, and of both sets of Instructions, together with the last page of the Assessment and the seventh page of the Explanatory Note, all of which were handed over by Mr Sashkin on 19th May.

The last page of the Assessment contained its conclusion and the specific details about wave height limitations. The seventh page of the Explanatory Note also contained these details.

(c)           Ms Mai’s presentation of Vung Tau’s version of the Towage Plan at the meeting of 31st May referring to the Assessment, the Explanatory Note, and the Instruction, and explaining what they were in Vietnamese. Mr Sashkin and Mr Hai offered to provide any translation required.

(d)          The documents enclosed with the fax of 10th June which included the Instructions. Mr Dang took copies of those instructions on 12th June and asked for a Vietnamese translation which Mr Hai said he would provide and which he did provide on 12th June in an e-mail of that date.

The Instructions to the Tugboat Master, which are only 2 or 2 ½ pages long set out (see para 3.2) the wave height limitation. The Instructions to the Dock Master referred (see para 3.4) to the Assessment under the description “Calculation of strength and stability during towage”.

The disclosure made constituted, in my judgment, a fair presentation of the risk, and included the wave height limit, upon the alleged non-disclosure of which Baominh relies.

In the light of those findings of actual disclosure, I do not propose to deal at any length with the submissions made to me that there was no duty to disclose the wave limitation provisions contained in the Assessment, Instructions and Exploratory Note to the Towage Plan, and as to waiver on Baominh’s part, because these considerations become primarily relevant only upon the assumption of a set of factual findings which differs from those which I have made; and there is a degree of artificiality in addressing them otherwise than by reference to that different set.

It is apparent that Baominh was made aware that there was a detailed towage plan: which they required to be approved by GMB, and that that plan contained information relevant to the towage. Mr Dang’s evidence was that, quite apart from what he was told by the claimants, he knew from his experience and that of Mr Minh that there would be a towage plan (but not the details). Mr Minh’s evidence was that his general understanding was that there would be a towage plan which would be very detailed technically and very complicated setting out standards and characteristics that must be followed but that, at the time, not having any specific experience regarding the towage of a floating Dock across the sea, he could not “estimate what a towage plan should be”. He was, however, aware at the time that the towage plan was “a very important document that can provide me with the utmost importance information that will guide me through underwriting the policy or not”.

A reasonable underwriter, in the business of insuring the ocean towage of a floating dock, would (regardless of whether he had seen the Assessment) realise that there would be some general limitations, which a towage plan would be likely to contain, upon the circumstances in which such a vessel could be towed across the ocean, and that such limitations would include a limitation as to wave height. That was the tenor of the evidence of Mr Scott, Baominh’s expert, who also accepted that if an underwriter forms the view that there is a document which is likely to be material, he is put on inquiry as to the contents of that document (whether it has been produced to him by the insured or not). An underwriter would not, however, know what the limitation was for any given dock. Every floating dock is different; there are no usual conditions. But it is not, and cannot, be said that the limitations in the present case were extraordinary or markedly unusual so that they fell outwith the sort of condition that could be expected to be there.

It is apparent to me from the evidence that Baominh was prepared to insure the Dock without themselves scrutinising the Towage Plan, provided that a Class Society, being (in the event) GMB, approved it, and that it was prepared to do so because neither Mr Dang nor Mr Minh was familiar with the technical aspects of ocean towage of floating docks. Mr Dang agreed that he was “entirely content to rely upon an IACS classification society[29] to inspect and approve the towage plan, including any technical standards or limitations contained in it”, although, as he added, he was not the underwriter.

Mr Minh’s evidence contained the following passage:

“Q. Mr Minh, the reason that you were prepared to proceed on this basis was because you were relying upon an independent classification society to inspect and approve the towage plan on your behalf?

A. My Lord, there’s something very understandable, that in our business we have to seek the expert advice when we need it. And in this case, I think all of you can agree that the IACS…is one of the highest classifications societies in the world, which is including the most famous expert and the highest standard for sea classification. So if the towage plan had been ratified and approved by them, then we see no reason why we should not accept.

Q             Exactly,

THE WITNESS: No, No

A To be more correct, we want to use the expert views from the experts of the IACS to help us find out what is the true proposal that we can go forward. And after that, we can discuss on that proposal in further stages.

So I mean, by asking them to grant the inspection and approval from IACS, for their towage plan, we want to make sure that the towage plan had been designed to a high standard and is acceptable”. “

In my view Mr Minh’s first answer more accurately reflected Baominh’s position which was that it would insure the Dock if, but not unless, GMB approved the plan, which they were not concerned themselves to scrutinise. So it was that, so soon as the plan was approved, the warranty was removed from the draft and the insurance was written. Baominh did not use GMB to find out what the true proposal was or enter into further discussion on, or consideration of, the proposal.

That that is so derives support from the following:

(a)          Baominh’s first quotation of 18th May 2006, which ended “We hope that this quotation will meet your requirement and looking forward to receiving from (sic) your agreement”, contemplated that, if the quotation was acceptable to the claimants, the insurance would be written without more on the terms set out, which included the warranty. Mr Minh suggested that those words were nothing more than a “well-wishing sentence”; that the quotation was no more than a notice of premium rate; and that further documents would be required; but that is not what the words of the quotation signify;

(b)          Mr Dang’s e-mail of 9.31 on 9th June, which was written with Mr Minh’s authority and reads “Please check this draft policy and debit note of the said floating Dock as our agreement and confirm by return. Then the original Insurance Policy will be issued accordingly”, shows that Baominh was prepared to insure without seeing the Towage Plan;

(c)           Baominh did issue the policy without requiring to see any more of the Towage Plan than they in fact saw before insuring;

(d)          The towage plan warranty was in the final draft and was then deleted without either Mr Dang or Mr Minh informing the claimants that they were doing so.

I do not accept the suggestion made by Mr Minh for the first time in his oral evidence that when he signed the insurance he still wished to see the plan but was persuaded to issue the policy without it because he was under pressure of time from his clients. Garnat was, indeed, keen to get the policy issued in order to complete the purchase of the vessel on 13th or 14th June. But no documentary evidence supports the suggestion that the policy was issued reluctantly or against Baominh’s inclination; nor is there any such evidence of Baominh making any requests for the plan after 12th/13th June. Mr Dang’s evidence was that he would make a note on any quotation which he sent to clients if Baominh was waiting for further documentation before finalising their risk assessment. There is no such notation on any quotation.

Nor do I accept that Baominh was making repeated requests before (or after) the issue of the policy for a copy of the Towage Plan which were not answered. Again no documentary evidence supports this. I note that Mr Dang’s evidence was that when he prepared the draft quotation of 18th May for Mr Minh he had not been asked by Mr Minh to get any further information and that, when he discussed the draft with Mr Minh, Mr Minh did not suggest that he needed more documents.

Mr Minh suggested that if, after issuing the policy, he saw the Towage Plan and saw in it something which he did not like, he would “withdraw and cancel” the policy. That would have been unlawful and commercially unacceptable unless a case of non-disclosure was made out. It seems to me inherently unlikely that Baominh was prepared to issue a policy without seeing the Towage Plan upon the footing that, if and when they did see it and did not like it, they could avoid it.

Waiver

If, contrary to my finding, the claimants did not in fact disclose the particular wave height restrictions that applied, it seems to me that Baominh waived the provision of such information. The fact that the Towage Plan would in all probability contain such a restriction is something of which Baominh may be presumed to have had knowledge. Baominh was, in my judgment, put on inquiry as to the contents of the plan, at any rate so far as any wave height restriction was concerned. It failed to make any inquiry as to what such restriction might be when a reasonably careful insurer would have asked, if it was a matter which concerned him.

Superfluity

Further it seems to me that disclosure of the details of the Towage Plan was superfluous in the light of the towage plan warranty that was in every draft of the policy (save for its temporary accidental omission on 9th June) until the very last moment. If the draft warranty had remained in the policy as issued, section 18 (3) (d) of the MIA would have been applicable. The circumstances would have been closely analogous to those in Kirkaldy & Sons Ltd v Walker [1999] CLC 722 where a policy covering port risks in respect of a dry dock (which was towed from Sweden to Portland where it sank at its moorings) required a towage approval survey and a condition survey to be performed by a named surveyor and all recommendations to be complied with prior to sailing. Longmore, J, as he then was, decided, obiter, that this made it unnecessary to disclose that the dry dock leaked since the underwriters:

“were obviously not relying on what the insured did or did not disclose to them in this respect because they required both a towage approval survey and condition survey ….the warranty of the condition survey rendered it superfluous to disclose matters which would be found and, if necessary dealt with by way of recommendation”.

So here, a warranty that the Towage Plan was to be inspected and approved by GMB would have rendered it superfluous to disclose matters which would be found on such an inspection and, if necessary, dealt with by a recommendation as to whether towage was appropriate.

But, as Baominh points out, the draft warranty was not included in the insurance issued for the simple reason that it had been fulfilled. That has the effect, in my judgment, that section 18 (3) (d) is not applicable. The section does not apply to draft warranties which are not incorporated in the policy.

Mr Ashcroft for the claimants submitted that it could not be correct that a duty of disclosure sprang up in the short period of time between the deletion of the warranty and the issuance of the policy. (The period is, for practical purposes, non-existent since the policy was presented with the warranty removed upon its issue). As to that, it could be said that all that the draft warranty does is to provide the prospect that, if incorporated into the policy, it will render disclosure superfluous, and that the duty of disclosure remains constant rather than popping up at the last moment.

To my mind, the better way to look at the matter is that the draft warranty rendered disclosure superfluous because it indicated that Baominh was not relying on the insured to make disclosure to it of the content of the Towage Plan. The disclosure of such information remained superfluous even though the draft warranty was deleted because the reason why it was deleted was that Baominh was satisfied that GMB’s approval of the Towage Plan had been given. An underwriter who, in effect, indicates that he does not require information from the insured about a towage plan because he wants the information vetted to the satisfaction of someone else, is not, when such satisfaction is expressed, then entitled to turn round and say that the insured now owes him a duty to provide the information. It is information as to which he has waived disclosure.

Inducement

There remains the question whether, if there was, Baominh has established that it induced the contract in the sense that, if disclosure had taken place, it would not have entered into the insurance or would not have done so on the terms that it did. I have not been persuaded that this is so. In my judgement the likelihood is that, if (as they did) GMB approved the towage plan, then Baominh would have insured on the terms on which it in fact insured. At the lowest I do not regard it as established that it would not.

I reach that conclusion in the light of my other factual findings. Neither Mr Dang nor Mr Minh had the technical experience which they regarded as appropriate to assess the suitability of the towage plan for the voyage envisaged. They were prepared to insure if GMB approved the plan and not otherwise. When GMB approved the plan they did not seek any further information, nor enter into any further negotiation or discussion or consideration. I am not persuaded that the provision to Baominh of the wave height limitation (if they had not already seen it) would have caused them to take a different view.

In the course of his final submission Mr Isaacs placed some reliance on the importance which Mr Minh attached to the towage route. I do not regard it as open to Baominh on the pleadings to complain (if that is what they seek to do) about non-disclosure of the route. In any event it is apparent from the Towcon contract, with which Baominh was supplied, what the route was to be.

In my judgment the defence of non-disclosure fails.

Unseaworthiness

Legal Principles Seaworthiness

There was no substantial dispute as to the following applicable legal principles:

1.            Pursuant to s.39(1) of the Marine Insurance Act (“the MIA”), there was an implied warranty that at the commencement of the voyage the Dock would be seaworthy for the purpose of the contemplated voyage;

2.            Section 39 (3) provides:

“Where the policy relates to a voyage which is performed in different stages, during which the ship requires different kinds of or further preparation or equipment, there is an implied warranty that at the commencement of each stage the ship is seaworthy in respect of such preparation or equipment for the purposes of that stage”.

3.            Pursuant to s 39 (4) of the Act, a ship is deemed to be seaworthy if she is reasonably fit in all respects to encounter the ordinary perils of the seas of the adventure insured.

4.            Thus, a ship will be deemed seaworthy if she is in a reasonably fit state as to repairs, equipment, crew and all other respects to encounter the ordinary perils of the voyage insured at the time of sailing on it[30].

5.            The inclusion of classification clauses in insurance policies is generally seen as a move towards ensuring improved standards of seaworthiness[31]. Thus, it should follow that the fact that a vessel was in Class at the time of sailing on the voyage is of significant weight (albeit, of course, not determinative) when considering whether she was seaworthy, particularly where the vessel has been surveyed and approved by Class shortly before sailing.

6.            By reason of the ‘doctrine of stages’ it is sufficient if the ship is seaworthy for some definite, well recognised and separate stage of the voyage,even though some work, or change, to the vessel, her equipment, supplies or crew is required before she is fit for a second or later stage of the voyage HREF=’#note32′>[32]. Different parts of a sea voyage can be separated into distinct stages[33]. Indeed, in many cases the circumstances of the voyage are such that it will be necessary to introduce an intermediate stage before the commencement of the open sea voyage HREF=’#note34′>[34].

7.            Seaworthiness is “relative to the nature of the ship”[35]. The ship should be “in a condition to encounter whatever perils of the sea a ship of that kind and laden in that way may be fairly expected to encounter”[36]. When it is known that a particular ship is not capable of being made as fit to encounter the perils of a voyage as an ordinary vessel, the most that the warranty of seaworthiness requires is that the particular ship, given its limitations, is made as fit for the voyage as practicable[37]. Thus, seaworthiness is to be judged flexibly and by reference to the adventure insured; and the assured does not warrant the prudence of the adventure, which is for the insurers to judge when deciding whether to accept the risk and the level of premium[38].

8.            One, often applied, test of seaworthiness is to ask whether a reasonably prudent owner would have required that a particular defect, if he had known of it, must be made good before sending the ship to sea[39]. In that context, a reasonably prudent owner should take into account the probable circumstances of the voyage and the weather and sea conditions likely to be encountered on it[40].

9.            Bad stowage can render a vessel unseaworthy, but only where it renders the vessel unfit for the insured adventure[41].

10.          Temporary matters, which can be quickly remedied, do not render a vessel unseaworthy. Thus, a defect which can be easily remedied at sea does not render the ship unseaworthy[42].

11.          The burden is upon the insurers to prove unseaworthiness. There is no presumption of fact that a ship is unseaworthy where she founders in a violent storm[43].

The allegations of seaworthiness, as summarised by Baominh, are as follows:

(1)          The pontoon stowed at the forward end of the Dock was inadequately secured;

(2)          The Dock’s fire and ballast pumping systems were in a poor state of repair and could only operate at a significantly reduced capacity;

(3)          The watertight subdivision between the ballast tanks was compromised. In particular, the connecting elements in the port side ballast tanks and starboard side towers were corroded and valves intended to isolate the various compartments from each other were leaking;

(4)          The manhole covers on the Dock’s deck and the deck itself were leaking in several places;

(5)          Instead of departing Vladivostok with an even keel draft of 2.79m as stipulated in paragraph 6.2.2 of the Assessment, the Dock’s even keel draft on departure was 4.4m and (if relevant) was never reduced to 2.79m. As a result of the reduced freeboard, shipping seas on deck were a problem throughout the tow and neither the bow breakwater nor the securing arrangements were sufficient to prevent waves from making the pontoon buoyant, thereby breaking the cargo sea fastenings.

The factual evidence

The claimants relied on the factual evidence of Mr Kalmykov and Captain Rada, and a written statement of Captain Parshintsev of a limited nature, together with the documentary evidence including what were or purported to be contemporaneous explanatory notes and records of interviews.

Baominh observe that there are some 15 witnesses who are referred to in the statements of Mr Kalmykov and Captain Rada who were not called, and invites the Court to draw the inference that their evidence would not have been helpful to the claimants. Those witnesses were:

(1) Andrey Murav’ev, the Chief Engineer of the Dock, who inspected the ballast system and conducted tests, and inspected the watertight subdivisions;

(2) Mr Pivovarov, the Chief Designer of Design Bureau Daljzavod, who oversaw the development of the towage plan;

(3) Mr Naguevsky, the chief inspector of GMB, who supervised the repair works on the Dock and compliance with the towage place;

(4) Ms Lyudmila Kljueva, an engineering expert involved in discussion regarding the details of the repair and conversion works;

(5) Mr Pustovoy, the General Director of Daltramp, Mr Kalmykov’s superior;

(6) the Deputy Harbour Master who is said to have recommended that the Dock’s draft be increased to 4.4m within Golden Horn Bay;

(7) Mr Kislov, the senior government controller of PSC Vladivostok, who was a member of the Commission which checked the technical condition and readiness for towage of the Dock “in accordance with the rules and regulations in force for marine transport in Russia and as per the requirements of the approved Towage Plan”, and who together with Captain Rada and Captain Parshintsev declared the Dock ready for towage;

(8)          Inspectors of the Port Authority who are said to have carried out checks on the technical condition of the Dock between 10th and 23rdJune;

(9) the Dock’s electrical officer, who tested various items in relation to the pumping system;

(10)        the Chief Mate who is said to have confirmed that the ballast tanks were completely empty along with Mr Murav’ev;

(11) the previous Dock Master and crew with whom Captain Rada is said to have had discussions while undertaking his initial inspection of the Dock;

(12)        Other crew members who examined equipment and machinery on the transfer of the Dock from the crew of the shipyard;

(13)        the master of the Department of Technical Control of the Shipyard;

(14)        representatives of RMRS;

(15)        representatives of Vinashin who checked the equipment and technical condition of the Dock.

Baominh also relies on the absence of adequate documentation evidencing the inspections said to have been carried out.

I decline to draw the inference that these witnesses, if called, would have given evidence unhelpful to the claimants, particularly in cases where documentary evidence which is either signed by them or is the fruit of their labours is helpful; or that they were not called on that account. I have no means of knowing with what ease (or the lack of it) these witnesses could have been called or their evidence adduced in documentary form, and in some cases e.g. witnesses (4), (5), (8), (9), (11), (12) and (13) I have doubts about the utility of doing so.

Captain Parshintsev as the commander of the expedition and Master of the TOPAZ played an important role in the events with which this case was concerned. The claimants adduced from him a short witness statement dated 15th January 2010. It does no more than purport to prove the authenticity of the Explanatory Note of 18th August 2006 to which I refer in paragraph 223 below. The statement was filed in response to a notice to prove served by Baominh on 21st December 2009. It transpired during the course of the trial that on 5th March, 2010 when he spoke to him, Mr Sashkin learnt that Captain Parshintsev was on board the tug “IAGOS PELAGOS” in the Bay of Biscay, towing a Ministry of Defence missile barge bound for either Falmouth or Bristol. In the event he was not called

Preparation for the tow.

The claimants submit that the suggestion that the Dock was unseaworthy is implausible. They refer, first, to the extensive preparations for the tow which took place as from March 2006. In particular they rely on the following:

i.              RMRS conducted a survey of the Dock in February 2006, including the hull, arrangements, equipment, outfit and machinery, and made various repair recommendations;

ii.             Garnat appointed Daltramp to supervise all conversion and repair works. Mr Kalmykov’s evidence was that he properly supervised all of the works on behalf of Garnat, and this is borne out by the documents, which show a definite thoroughness of approach[44].

iii.            The Protocol dated 3rd April 2006 between Garnat, DalRemSnab (the repair contractor), RMRS and GMB shows the comprehensive approach that was taken towards making the Dock ready for the voyage. It was agreed that the repair contract would be worked out in accordance with the requirements of the Towage Plan in accordance with the rules of RMRS. All repair works were to be done under the supervision of Class (RMRS in relation to the repair works started but not yet completed by PSRY; GMB in relation to the preparation of the Dock and Workshop for towing. The recommendations of RMRS and GMB that had to be satisfied during the preparation of the Dock included checks/repairs/tests in relation to the ballast system (item 10) and the repair/examination of all hatches (item 11).

iv.           A work scope for the repairs to the structure of the Dock was signed by RMRS on 10th April 2006. The requirements included examination of ballast tanks by “pouring water into the tanks up to safety deck after completion of repair works” (item 5.1).

v.            The repair contract was agreed with DalRemSnab on 12th April. It included a detailed repair specification. Repairs were to be supervised by the GMB surveyor (clause 4.2). Enclosure 2 to the contract records the substantial work in fact done, at a total cost of US$880,762[45]. Items 1.12, 1.13, 1.14, 1.17, 2.8 and 2.9 relate to the ballast tanks, hull structures, lashing of pontoons, and repairs to ballast and fire pumps.

vi.           All manhole covers and hatches were tested and accepted by Mr Kalmykov and RMRS in the period through to May 2006, before any cargo was placed on board which might restrict access[46].

vii.          The Dock was inspected by a delegation from Vung Tau, including a specialist in relation to floating Docks, during 11-13th May 2006 with subsequent reports noting the good condition of the Dock and Workshop[47].

viii.         On 24th May 2006 RMRS completed their annual survey and endorsed the Class and Seaworthiness Certificates without any recommendations. According to Mr Kalmykov, the RMRS recommendations for necessary repair works were followed to the letter, and RMRS surveyed the works and “the Inspector confirmed …that all the requirements of the register were fulfilled”.

ix.           On 30th May 2006 Daltramp, the Shipyard and GMB signed a document confirming that all repairs to be done by the shipyard and its sub-contractor had been performed in accordance with the requirements of RMRS.

x.            From 30th May to 10th June 2006 the Dock and Workshop underwent further inspections as part of the process of reclassification from RMRS to GMB. GMB issued Provisional Class Certificates on 6 June 2006, Interim Seaworthiness Certificates on 6th and 10th June 2006[48] and a Seaworthiness Survey Report dated 10th June 2006.

xi.           Although GMB may to some extent have had limited access to certain parts of the Dock as from 30th May 2006[49], there is no reason to think that they did not check and satisfy themselves in relation to all those parts of the Dock, its machinery and equipment that they could access and inspect. Those limited parts that could not be accessed had already been checked and approved by RMRS and Kalmykov.

xii.          On 10th June 2006, GMB issued Statements of Compliance confirming that all towing arrangements were in “good and efficient condition to tow from Vladivostok to Vung Tau”.

xiii.         Thereafter, on Mr Kalmykov’s evidence, port authority inspectors checked the technical condition of the Dock, its equipment and machinery[50] and the claimants inspected the Dock: see the minutes of inspection of 19th June 2006.

xiv.         The Dock was also subject to checks by her crew, including Captain Rada and the chief engineer. There is no reason to think that these were not reasonable and adequate checks.

xv.          On 23rd June 2006, there was a final inspection and approval of the Dock as ready for towage by, amongst others, a senior government controller of Port State Control, Captain Rada and Captain Parshintsev.

In relation to item xiv above Baominh points out that, on his evidence, Captain Rada only learned of the Dock Master’s job in early June 2006 after which he visited the Dock every day, but only started what he described as a “very deep investigation” of all the Dock’s systems and mechanisms when he had signed an employment contract on 16th June 2006, after which he moved to live on the Dock. They also point out that Captain Rada could not have relied on the advice of Chief Engineer Murav’ev, as he said he did, until late because Mr Murav’ev, according to the record of his interview on 21stJune 2006 went on the Dock for the first time on 15th June and only accepted the job as Chief Engineer and started working on the Dock on 21st June. Captain Rada thought the Chief Engineer was wrong on this and put the latter’s confusion down to the trauma of the shipwreck. In that, I think, he was mistaken.

The claimants submit that there is no evidence to suggest, nor reason to suppose, that the preparations referred to in para 166 above were not correctly performed and that it would be surprising if the defects now alleged existed after two successful Class surveys and an inspection by Port State Control. It is inherently unlikely that any significant defects remained. It is significant that neither Mr Omelyanenko of DPS, nor the Russian Ministry of Transport’s Investigation Commission, nor the Expert Evaluation issued by the Far Eastern Marine Research Institute expressed or supported the view that the Dock was unseaworthy.

Baominh submits that this catalogue of events does not establish that there were extensive and satisfactory preparations for the tow. The Class surveys, the acceptance document of 30th May 2006 and the Class certificates do not, it submits, relate to the Dock’s seaworthiness for the towed voyage. Some of the material referred to is of a general nature e.g. Mr Kalmykov’s lists of remarks, the protocol of 3rd April, and the report of Vung Tau’s inspection. The production of a work scope for repairs does not show that they were carried out. There is no documentation dealing with the inspections by port authorities. The reality, it submits, is that the requisite repair work to make the ship seaworthy was either not carried out or was carried out inadequately.

Whilst there is some force in these points, the general picture evidenced by the material referred to is that all the relevant personnel were, within the sphere of their respective responsibilities, endeavouring to secure that the Dock was fully classed and fit for the contemplated towage. The fact that some of the matters described related to Class requirements does not mean that they were irrelevant to towage. A vessel whose ballast system is in part inoperative or whose tanks were not watertight would not comply with Class requirements. In my view it is legitimate to infer from the material referred to, the absence of sufficient evidence to the contrary, the final approvals given on 10th and 23rd June 2006 to the effect that the Dock was fit for towage, and the evidence of Mr Kalmykov that the work needed was properly carried out and that no significant defects remained. I do not accept, as was submitted, that the GMB Statements of Compliance of 10th June relate only to the tugs. They state that “the above and below vessels” were “in good and efficient condition to tow”. The “below vessel” is the Dock.

The expert evidence

Mr Barker and Mr Case submitted several lengthy reports. Mr Barker’s views appeared to me reasonable and supported where necessary by appropriate analysis. Some of what Mr Case said appeared to me to lack detachment and to assume facts which were far from established: e.g. his first report which proceeded on the basis that the draft was never reduced to 2.8 m as opposed to the 3.3 m referred to in the TOPAZ log book entry, when the evidence of Mr Dudinov who made the entry and Captain Rada, who ordered the reduction, was to a different effect. He appeared to be prepared to rely upon contemporaneous reports by crew members when consistent with the case he was making but to dismiss them when they were not: see e.g. paras 2.11 and 7.3 of his fourth report compared with his dismissal as incredible of the three explanatory notes relating to the Topaz log entry that refers to the Dock having a 3.3m draft. He expressed views on the inferences which could be drawn from the fact that only 3 ballast pumps were used on 13th/14th July which is not in fact a technical issue, as he accepted. The view expressed in his second report that failure of the pontoon securing arrangements was inevitable in all but flat calm conditions seemed to me difficult to sustain in the light of the way in which the Dock withstood typhoon Ewiniar[51] .

Pontoon securing arrangements

Mr Case made clear that he did not suggest that the failure of the lashings on 13th July during the extreme weather conditions which then prevailed, as a result of which the pontoon eventually became free in the late afternoon, was itself evidence of unseaworthiness. His view that the vessel was unseaworthy related to the departure condition of the vessel and was based on the fact, as he described it, that the securing arrangements failed in conditions less severe than those for which they were supposedly designed.

In order to determine the question of unseaworthiness it is necessary to consider (a) what the securing arrangements were; and (b) whatever they were, whether they were sufficient in sea conditions of up to h3% = 2.0 – 3.5 m.

A considerable amount of evidence was adduced as to the former. The claimants contend that the arrangements were as follows:

(a) 4 steel stanchions attaching the forward part of the pontoon to the breakwater at the fore end (referred to as the “manger board”);

(a)          10 steel ropes, 5 on either side of the pontoon, which fastened

the pontoon to the side of the Dock.

Baominh contends that there were only six lashings securing the pontoon from the time that the Dock left Vladivostok until she encountered typhoon Ewiniar on 9th July and that the diameter of the lashings was 19 mm.

A drawing dated 17th May 2006 (“Scheme of equipment fastening at the shipway deck 1760-926-311CB”) indicates 3 wires per side, the foremost wire being fastened to a spot a little way aft of the corner of the pontoon. The list of equipment of the same date (“Allocation and lashing of equipment on the ship-way deck in the area 4 ….. 26 frames”) gives a specification for the lashings of a 29 mm diameter wire with a typical break load of about 51 tonnes. The turnbuckle and the connecting eyebolt have a permissible working load of 8 tonnes.

Mr Kalmykov’s oral evidence was that 4 additional rope lashings were added prior to the departure of the Dock at the 4 corners of the pontoon. They were added because he persuaded the designer to add them. He did so because his view was that the original design (based on a maximum wave height of 3.5m) might not be sufficient if wave heights exceeded 3.5m. The lashings which he asked for were fitted. Both he and the GMB Inspector checked them, the latter having required the additional lashings to be shown to him.

That evidence is corroborated by a revised “Specification of the materials for the fore pontoon strengthening on the ship-way Dock of Floating Dock in the area of 4 ….16.5 frames” dated 7th June 2006[52]. That document shows that the steel ropes were 29 mm in diameter and the turnbuckle break load had been uplifted to 12.5 tonnes.

Baominh challenged the authenticity of this document but I am satisfied that it is genuine in the light of:

(a)          the unlikelihood of it having been invented; particularly in the light of its detailed content and the documents in (c), (d) and (e) below whose authenticity was not disputed;

(b) Mr Kalmykov’s evidence;

(c)           a letter sent by Mr Chepchugov (a director of the ship repair Company Vladivostok Sea Port Pervomaiskiy) to Mr A. Naguevskiy, GMB’s Chief Inspector, dated 7 June 2006 which forwarded for consideration and approval documentation:

“of the additional rope or cable fastening .. of the bow pontoon (additional to the Project of delivery of floating Dock No 7 approved by you) which is developed by designers by …[Dal’zavod] in accordance with the requirements of representatives of buyer and towing company”.

The letter referred expressly to an additional 4 lashings which were intended to provide a margin of safety and fulfil the requirements of the buyer and the towage company. The GMB Surveyor stamped the words “Approved” on the letter.

(d)          Captain Parshintsev’s list of remarks to Mr Pustovoy, general director of Daltramp, dated 6 June 2006, in which he requested “additional lashing of the bow pontoon”; he also refers to his requirement for additional lashing in his report of 24th August 2006 (“my requirement to provide additional lashing of pontoon compared to Towage Project was fulfilled”).

(e)          In January 2010 Mr Shubin, the towage plan designer, recalculated the lashing strength of the bow platoon upon the basis of 10 steel lashings, 2 in or at each of the four corners and 1 at the middle of the side. The calculation is described as “a testing of the existent fasteners of the transitional fore pontoon on the ship-way deck [of the Dock] which were mounted in May and June 2006 before departure for towage..” It is difficult to see why he should have done so on a factually erroneous premise. The document refers in para 1.3.1 to some of the items in the 7th June 2006 specification.

Set against that is the fact that in his original written statement Captain Rada said that on departure the forward pontoon was “secured by means of a series of 6 19mm steel wire cables” and that after the Dock passed through Ewiniar, “we added four additional steel cables to the bow break of the vessel to further increase the lashing of the pontoon”. When he came to give his oral evidence he said that, when he was giving evidence (sc. his written statement) he could not remember how many steel cables were brought on board but he was sure that there were more than 6 of them. He said that there were no less than 10.

The claimants relied on the photograph which appears at F1/118 (with a better copy attached to Mr Case’s report at E 9/363) which shows a lashing wire at the extreme forward corner of the pontoon on the starboard side, which is not a position shown for any lashing on the original drawing. Against that the claimants point out that it does not show any other lashing at the corner. None of the photographs which Captain Rada said he considered before his oral evidence show that there were more than six lashings either. Further that which Captain Rada suggested at one stage in his evidence was a lashing extending forward from the fore part of the pontoon (which appears on F1/118 and F1/93 & 96) is in fact some form of wire going through a pulley.

In my judgment the likelihood is that the Dock sailed with 10, and not the originally intended 6, lashings to the pontoon of 29 mm – as the contemporaneous documentary evidence to which I have referred and the evidence of Mr Kalmykov indicates. There are only a limited number of possibilities. The first is that the Dock sailed with only 6 lashings to the pontoon; the revised specification providing for 10 lashings is an elaborate falsehood; both Mr Kalmykov and Captain Rada are not telling the truth; and Mr Shubin has also participated in the deception or, which seems implausible, he never saw the lashing arrangements on departure and was, later, deliberately misinformed as to what they were. The second is that a revised specification was drawn up but never implemented, in which case the revised specification is not, itself, a falsity but the position is otherwise the same. The third is that the revised specification was drawn up at the date it bears, and was implemented, and Mr Shubin was then asked to make calculations which he did by reference to what had been the actual position. On this hypothesis the lashings were attached in a manner different to that shown in the diagram in Mr Shubin’s paper and different to that shown in the original drawing; and, save as to one, are not visible in the photographs which we have. That seems to me the most likely explanation. I accept Mr Kalmykov’s evidence. There is no plausible reason why he should have made it up and none was suggested to him.

The sufficiency of the securing arrangements.

Prior to 30th June the weather conditions were favourable with seas generally in the 0.5 to 1.0 m range. From 30th June the conditions began to deteriorate with reported wave heights in the 2-2.5 range on 1st July with rough seas and Beaufort Force 5 winds. Conditions improved slightly on 3rdJuly. On 4th July stormy conditions with rough seas of up to about 3.0 m were noted with further deterioration on 5th July and seas of up to 3.5m reported. At 12:00 on that day both tugs were ordered to switch to one main engine so as to allow typhoon “EWINIAR” to pass. Throughout the period 30th June to 5th July 2006 the securing arrangements survived without reported incidents or any apparent problem.

On 6th July the sea conditions improved to 1 – 1.5m wave height. At 08.30 the Dock Master reported that “additionally fastened/enforced the property stowed on the dock pontoon-deck, no any remarks arose”. This does not appear to relate to the pontoon itself; and it is unclear whether “the property” referred to had shifted, whether that was as a result of the rough weather, and what exactly was done. On 7th July the conditions were much the same. Late on 8th July the weather again deteriorated.

During the morning of 9th July seas of up to 3 m were noted. At 12:05 on that date the Dock Master reported that “fastening of pontoon located in Dock’s fore part broken”: see the TOPAZ log. That was, in my view, a reference to the four stanchions: see para 187-8 below. The convoy altered course to reduce the effect of shipping seas on the Dock. The sea surface wave height was reported as up to 6 m later in the day. In his explanatory note of 17th August 2006 Captain Rada said that “actually this day the height of waves from 1200 a.m. till 2000 pm increased from 3.5 up to 5.0 – 6.0 metres and force of wind reached 22-25 knots. The storm has started to cease only in the morning on July 10th”

On 10th July the conditions improved and repairs and improvements were effected to the fastenings. I consider below what that amounted to.

It is not clear precisely what securing arrangements other than the 4 steel stanchions attached to the breakwater parted on 9th July.

In Captain Rada’s evidence to the Russian authorities on 31st July 2006 he refers to sea waves on 9th July tearing out the “pontoon fastening lines fixed on the dock’s manger board” and that:

“the pontoon shifted to port side by 5 cm and in direction of stern by 5-7 cm, but that time the pontoon was fixed by side guy lines. We reported about that to our flagship and they, in their turn, reported to towage headquarters. On July 10 we received recommendations from our headquarters to rig additional guy-lines, By that time we had already rigged 4 additional guy-lines, they were fastened to hawses and deck eyebolts in order to reduce the angel and press the pontoon on the deck. That time our welder repaired fastening line fixed to manger board….”

At trial the interpreter, who was plainly competent, translated the first phrase as “the lashing of the pontoon attached to the breakwater was torn off” and explained that the Russian word he had translated as “lashing” signified something that was attached to the breakwater and was holding it in place but did not specify the type of attachment. This seems to me likely to refer to the stanchions (Mr Sashkin had interpolated the translation “braces” before the interpreter’s translation), which were then refixed with angle bars.

The Chief Mate of the Dock’s report of 19th July reads:

“On 9.07.06 during stormy weather a sea wave overflowed the dry- dock pontoon –deck and torn out fastening of forward platoon in way of breakwater (four stanchions) and forward head guy lines[53]. The pontoon shifted by approx. 5 cm in aft direction and by approx. 10 cm to port side. When on 10.7.06 the stormy weather abated, in accordance with the Master’s order the crew under my guidance and with my participation mounted four guy-lines onto the pontoon (steel line of 19mm thickness), welded angle bars on stanchions, and re-tightened the remaining guy lines with loads on the pontoon deck”.

The interpreter translated this as :

“On 9th July 2006, during the storm, the wave which hit the ship-way dock tore off the reinforcement of the bow pontoon which attached it to the breakwater (four braces). The bow or forward longitudinal rope lashings were torn off”[54].

The Russian word he translated as “reinforcement” is the same word he had translated as “lashing” (see para 188 above).

The record of interview of the boatswain, Mr Melekhov Ivanovich, dated 27th July 2006 contains the following:

“Q In other words, did you consider fastening as insufficient?

A             No, I don’t think so. We decided to be overcautious. However, when we were passing the first typhoon, 2 side and 2 bow steel guy-lines were broken. And after that we rigged another 4 guy-lines (2 from the stern and 2 from the bow)”.

A report from Captain Parshintsev of 24th July 2006 reads):

“On 9 July our tow passed via typhoon “EWENIAR” …As a result of the action of north-eastern wind and roughness about 3.5 m where broken some cross-arms of pontoon lashing on the dock. The crew of the dock No 7 restored lashing and installed 4 additional steel rope guy on the bow part of the pontoon”

In his witness statement Captain Rada refers to adding “four additional steel cables to the bow break of the vessel”.

The picture derived from that testimony is that on 9th July the four stanchions parted; the pontoon shifted to a small extent but it was restrained by side lashings (guy-lines). Some lashings gave way, variously described as “forward head guy lines” (number unspecified), “bow or forward longitudinal rope lashings” and “2 side and 2 bow steel guy-lines” and “some cross-arms of pontoon lashing”. Then another four guy-lines were rigged. This evidence is both unclear and inconclusive as to (i) how many lashings/guy-lines there were in total in the first place; (ii) how many broke (although the boatswain says four); and (iii) whether the 4 new guy-lines were rigged 2 from the stern and 2 from the bow part of the pontoon or 4 from the bow. The reference to “bow or forward longitudinal guy-lines” may be (but is not necessarily) a description of lashings at the side securing the pontoon (as appears in the original drawing). If that is what is referred to, and if 4 broke (as the boatswain’s report suggest) and the remaining lashings held the pontoon secure and almost in the same place, that suggests that there were more than six in total originally.

The claimants pray in aid the events of 9th and 10th July as tending to show the adequacy of the securing arrangements, whether there were 6 lashings or 10. It is not, they submit, safe to assume that when the securing arrangements parted on 9th July the wave heights had not exceeded 3.5m. The logbook records the wave heights every 4 hours. That is, as Mr Case agreed, probably an average over a four hour period. But sea conditions are constantly changing. The figure recorded every four hours (e.g. 3.0 m at 12.00) is not necessarily the maximum wave height experienced during the period (or at 12:05 on 9th July). The comparable figure for 16.00 is 3.5 – 4.5.

It is also necessary, the claimants submit, to look at the totality of events on 9th and 10th July. During that time the Dock encountered typhoon EWINIAR with wave heights of up to 6m, i.e. substantially above the design limits. Even then sufficient of the securing arrangements held to prevent significant or dangerous movement of the pontoon – it moved only a few centimetres. That is a good indication that the Dock was not unseaworthy.

I regard this approach as well founded. The fact that the Dock survived the typhoon does not necessarily mean that it was seaworthy on departure. The fact that lashings give way to some extent in heavy weather does not necessarily mean that the Dock was unseaworthy on departure. What is the correct inference to draw will depend on (a) the conditions in which they do so; (b) the extent of their failure and its consequences, in particular whether and to what extent the cargo shifted; and (c) the ability of the vessel’s crew to repair, restore or improve the arrangements (although , as Mr Case put it, if the securing arrangements at the commencement of the voyage were inadequate, the existence of a competent crew and an inventory of spare parts would not make the vessel seaworthy).

In the present case I do not regard it as established that the lashings gave way with wave heights below 3.5m. Seas of up to 3.5m had been reported on 5th July and may well have been reached again when or before the stanchions gave way on 9th July. Further, the extent to which the cargo shifted, even with wave heights well above 3.5 m, before 10th July was minimal and the crew were able to make repairs on 10th July. In those circumstances I am not persuaded that the Dock was unseaworthy on sailing on account of the insecurity of the lashings, which, until even worse weather conditions, fulfilled their function of securing the pontoon and not allowing it to come loose in such a way as to be a source of danger.

I am fortified in reaching that conclusion by the fact that Mr Case’s contrary view differs from what was, or must have been, the views of several other experts: Mr Kalmykov, Dalzavod, GMB and Mr Barker together with Marinex (although the latter made little analysis of the securing arrangements), the Far East Marine Research, Design & Technology Institute and the Russian Investigation Commission. There is no magic in numbers (and I bear in mind that only Mr Case and Mr Barker have given expert evidence on seaworthiness in this trial) but it would be surprising if all the first three had allowed the Dock to sail with inadequate securing arrangements for the circumstances in which she was designed to operate.

Mr Barker supported his view by reference to standard Noble Denton[55] transportation barge criteria, applicable whatever the weather conditions (i.e. not restricted to a wave height of up to 3.5m). The calculation assumes that the Dock rolls to an angle of 20 degrees in a 10 second period around a roll centre at the waterline (which is more than the original project criteria). Pitch is assumed to be twelve and a half degrees in ten seconds around amidships. His calculations showed that, when adopting these conservative transport criteria, intended for transport barges operating without any 2 -3.5 m wave height restrictions, the securing arrangements of the barge were not overloaded whether there were 6 or 10 lashings. Those calculations were carried out on the assumption that the permissible load of the turnbuckle (the weakest link whether the lashings were 29 or 19 mm) was 8 tonnes, whereas it appears to have been 12.5 (see para 177 above).

Baominh submitted that these calculations were carried out on the most favourable basis for the claimants and without (as is so) consideration of the inevitable wave impact and buoyancy forces; but put forward no calculations of its own (nor any more specific critique of Mr Barker’s calculations). Whilst I do not regard Mr Barker’s calculations as conclusive (because, as he said, the Noble Denton criteria are “very broad” and “an engineering calculation is an engineering calculation and not real life”) they seem to me to provide some support for his conclusion.

Fire and ballast pumping systems

The Explanatory Note records that the Dock was equipped with 6 ballast pumps that are “dually interconnected by pipelines with disconnecting sluice valves that guarantee [the] ability to pump out ballast from any ballast compartments”. The system is illustrated on drawing 1760-075-168, which shows the six pumps each located within one of six valve chests, and how, by opening the necessary cross-over valves between valve chests, any one pump can evacuate any of the 20 ballast tanks. The 6 pipes are designed to be operated on 20 tanks with each pump serving 3-4 tanks simultaneously in normal operation.

Baominh contends that the vessel had on board only 3 operational ballast pumps at the beginning of the voyage and that the vessel was unseaworthy on that account. The claimants say that there were 6 operational pumps and the vessel was seaworthy even if there were only 3.

Mr Kalmykov’s evidence was that all 6 pumps were in good working order (after repair), as also were the emergency pumps; and that if they had not been it would not have been possible to obtain the Class and Seaworthiness documents which were in fact obtained, nor would the Harbour Master have allowed the vessel to sail. This seems to me inherently likely to be so. The efficient working of all 6 pumps is necessary in order for the Dock to fulfil its primary function of lifting vessels in and out of the water speedily[56]. Both RMRS and GMB should have checked the proper working of the pumps before issuing Class and Seaworthiness certificates. That would not have been a difficult exercise. There is no reason to think that both or either of them failed to do so. As Mr Case accepted, it would be astonishing if the vessel had passed Class, Seaworthiness, and Port State inspections with a fire and ballast pumping system in a defective state.

Captain Rada’s clear and repeated evidence was that there were 6 operational pumps on board, that they were checked on his instructions before departure; and after the encounter with the typhoon: see para 222 below. I note, also, the evidence in a record of interview of 27th July 2006 of Mr Muryaev the Chief Engineer of the Dock, that on 21st June the crew checked that all the diesel engines, six ballast pumps, and 3 fire pumps were in order and that during the voyage they inspected a number of ballast tanks to determine whether the sounding results corresponded to the actual situation. The condition of the inspected tanks was good. He also stated that the ballast pipes were in good condition and the ballast systems caused no concern. During the course of the voyage water was pumped out of the ballast tanks in insignificant quantities which had got there as part of the natural leakage of the system.

There is no evidence relating to events prior to departure that some of the pumps were not working.

When the Dock got into trouble on 13th/14th July only 3 ballast pumps, and one of the fire pumps, were used. This caused Mr Case to believe that only 3 ballast pumps were operational. Captain Rada said that there was no sense in using all six pumps because it would not have increased the rate at which the water could be pumped out of the 5 tanks (Nos 1, 2, 3, 4 and 9) into which water was flooding. This was because the capacity of the pipeline was lower than the capacity of the pumping output of the pumps. Mr Kalymkov’s evidence was to the same effect.

It was common ground between Mr Case and Mr Barker that the pumping capacity of the Dock was restricted by the 350 mm diameter of the pipes in the system and by the layout of the pipes.

Mr Case accepted in his oral evidence that he was not in a position to quantify the actual restrictions on the piping system (nor was Mr Barker) or to gainsay Captain Rada’s evidence that it was not technically possible to use more than 3 pumps usefully. In those circumstances there is no sound technical basis for concluding that Captain Rada must have been wrong when he said that the application of further pumps would serve no useful purpose, much less that he did not believe that to be so.

Mr Case’s view was that it would not have been futile to start additional pumps, which he thought would have increased the overall pumping rate; and that it was incongruous that no attempt was made to start an additional pump because it could not have made anything worse. As a result he inferred that the other 3 pumps did not work.

Mr Barker’s evidence was that what Captain Rada had said was plausible and could not be said to be wrong. In his view the opening of a crossover valvebetween valve chests when other pumps were running would not increase the rate of flow down the 350mm branch pipes entering adjacent valve chests. There was a high likelihood that if two or more pumps were interconnected through the crossover line between their valve chests one pump would seek to take water from the suction of another thus “starving” the pumps and reducing their efficiency – a process which would increase the more pumps were used. He would not have expected it to be beneficial to use more than 3 pumps in the circumstances pertaining on 13-14th July 2006, since an additional pump could not have been connected directly to the ballast tanks that were flooding. [Day 7/31, 34, 51].

In the light of the matters to which I have referred it seems to me that the likelihood is that all six pumps were operational. I see no reason why Mr Kalmykov, who was a superintendent and marine engineer, or Captain Rada, whose son was with him and who had every incentive to use as many pumps as he thought would be useful, should have told me what they must have known to be untrue. The possibility that the two of them have done so and that RMRS, GMB and the Port Authority have all been incompetent seems to me unrealistic. The fact that 3 pumps were used does not establish that only 3 could be used. There are 3 possibilities (a) that 6 were operational and 3 were used because there was no point in using more; (b) that 6 were operational and 3 were used because Captain Rada thought there was no point in using any more; (c) that only 3 could be used. The third possibility seems to me the least likely. I also do not accept that there was anything wrong with any of the fire pumps.

In those circumstances it is unnecessary to determine whether the Dock would have been unseaworthy if only 3 pumps were operational. I have, however, come to the conclusion that it would not have been.

The question is whether the Dock was seaworthy for the purpose of the towed voyage to Vietnam in which there would be no need for the vessel to submerge and emerge for the purpose of taking another vessel on board. The 6 ballast pumps had a massive pumping capacity in order that they might take on and discharge ballast into or out of all 20 tanks as quickly as possible. Such ability was not needed in order to deal with emergency flooding. That was Mr Barker’s view, which I prefer to that of Mr Case. He drew an analogy, which does not appear to me wholly inapposite, with the Noble Denton guidelines on pumping rates for flat top barges. The pumping capacity of the Dock with only 3 pumps was many multiples of those rates. The pumping capacity of only one pump on the Dock was approximately equivalent to that of a single ballast pump on Cape size bulk carriers which are normally fitted with two such pumps.

Manhole covers and watertight subdivisions

Baominh’s case under this heading relies on the content of two e-mails.

In the first, sent at 7:02 on July 10th 2006,Captain Parshintsev e-mailed to Daltramp a report sent “according to report of Dock-master [i.e. Captain Rada], after storm”, which included the following (in translation) among 21 reported items:

“1 All 4 stanchions of fore pontoon fastening torn

2 Pontoon shifted from its place

4              Pontoon leaks in 7 places, cause of leakages – corrosion wear

15           2 holes in drain pipes of main ballast repaired

16           3 glands packed into main ballast pump

17           We suspect overflow between main ballast systems

18           Gate valve port side closes not fully”

I have omitted items which are not material for present purposes. Those highlighted in black were subsequently disowned in whole or in part by Captain Parshintsev: see para 223 below.

The second, which was sent by Captain Parshintsev on 12th July 2006, was in response to an e-mail from Daltramp of 11th July asking various questions about the report of 10th July. It contained the following (in translation):

“1 Additional fastenings of fore pontoon welded. 2 longitudinal wires additionally rigged and fastened to manger board.

2 Pontoon shifted to port side by 15cm and to stern by 10cm with skew to port side

6.            Item 18 – ingress of sea water into ballast compartments Nos 3,4,18. Cause of ingress – weak slide valves of de-watering and ballast pumps. Perform continuous check of water level and pumping out as necessary

7.            Stormy weather conditions, sea water on pontoon deck, leakage of seawater into ballast compartment Nos 9.10. Probably through manholes of ballast compartments located under floating Workshop

8.            In engine room: repair of holes periodically appearing in fire main, scuppers of pontoon deck, renewal of sealing glands of ME cooling pumps, compressors, gate valves and pumps of ballast system.

9.            Concreting of dents of pontoon deck.”

Again the items in bold were subsequently disowned by Captain Parshintsev.

It appears to have been the view of Mr Omelyanenko of Marinex, the first expert instructed by BM, who had access to the crew, that these e-mails explained the damage suffered by the encounter with typhoon EWINIAR and the work carried out to fix that damage. His evidence was written and, not having heard him, I am in some doubt as to whether that was his view in relation to all the matters and whether, in any event, it is right. Some of them look like items which may have been revealed in the inspection after the storm but not caused by, it e.g. 15, 16 and 18 on the 10th July list and 6 and 8 on that of 12th July.

The joint memorandum

In paragraph 11 of the joint memorandum Mr Case expressed the view that the defects described in the e-mails of 10th and 12th July which are set out below presented an overall picture of a dock in a generally poor, unseaworthy condition:

11 (a)    3 glands packed into the main ballast pump: item 16 on the 10th July list;

11 (b)    Suspected overflow between main ballast systems: item 17on the 10th July list which Mr Case linked with item 6 on the July 12th list as indicating a leakage across watertight boundaries;

11 (c)     Gate valve on the port side not fully closed: item 18 on the 10th July list;

11 (d)    Weak slide valves of dewatering and ballast pumps: item 6 on the 12th July list;

11 (e)    Repairs in the engine room described at item 8 on 12th July list;

11 (f) Manhole covers: item 7 on 12th July.

In relation to some of the specific items in para 11 Mr Case’s evidence was as follows:

(i) Items 11 a, c, d and e could in isolation, but not together, be taken as items of routine maintenance: together they were indicative of a poor state of overall repair; there was no evidence that they had been quickly remedied;

(ii)           Item 11 a: it was not clear what was meant by “the main ballast pump” but he understood that the item could be quite a minor repair to undertake;

(iii)          Item 11 b: it was not clear to Mr Case (nor Mr Barker), nor is it clear to me, to what Captain Parshintsev was referring by the expression “overflow between main ballast systems”. Mr Case thought this could refer to leakage between the 3 buoyancy compartments, where the pumps were, through the gate valves which connected them (although this seems unlikely if it is to be taken as meaning leaking from one of the identified tanks to another given the separation between the identified tanks) or from the overboard discharge valves into the suction chests;

(iv)         Item 11c: where this valve was (other than on the port side) is unknown;

(v) Item 11d: Mr Case thought this could refer to a leakage between the buoyancy compartments referred to in (iii), or to the non return valves between the pumps and the outboard discharge or to a further valve outboard of that one.

In the same memorandum Mr Barker expressed the view that it was not possible to attach any real significance to the reference to a leakage through manhole covers because if they were in place, then, even if they were not in good condition, any leak would not be significant because of their physical construction as a piece of steel closely bolted down onto a rubber gasket. Any leak would, as Mr Kalmykov put it be a drop in the ocean. I share that view.

Mr Barker further took the view, which I also share, that there was no indication in the e-mails as to the seriousness of the matters listed or, in at least one case, whether they existed (e.g. the reference to a suspected overflow in item 17 on the 10th July list) and some items appeared to be matters of routine maintenance or matters that would comprise normal checks following a storm or even as a matter of daily routine. Thus item 15 on the 10th July list gives no details of size or location of the holes; item 16 does not indicate the nature of the defect, which may be a weeping pump gland. Item 18 does not indicate the amount of leakage, which appears to be in a single valve in circumstances where the ballast compartments are all separated by between two and seven valves. Item 8 on the 12th July list gives no indication of the seriousness or otherwise of the problem.

The August 2006 Explanatory Notes

17th August       Captain Rada

In an explanatory note of 17th August to the Russian Commission of Investigation into the wreck Captain Rada reported that:

“1            …..Early in the morning on July 10th 2006 I have actually reported to the Chief of Expedition that the divergence with a typhoon EVENIAR has passed as a whole safely, and the small damages received as a result of a storm will be eliminated. The permanent monitoring of water in the tanks through sounding pipes and trial test pumping out of water from the tanks by bilge pumps during July 9-10 have shown that ingress of seawater in ballast tanks and dry compartments were not occurred. Ballast pumps during this period were not used at all.

Moreover it could not be any discussion of the flow of water in tanks 10-12 July when the weather was normal and the crew safely removes the consequences of storm on July 9 (paragraph 6 of the telex of Mr Parshintsev dated 12.07.2006). But I really had been stated to the Chief of expedition about my suspicion for small leaks through glands of the sluice valves of the ballast system or bulkhead glands, and also intentions to check up all suspicions after the storm. Duties of crew include check of a condition of all systems of the dock after a storm.

2.            Between 10-11 July dock crew had completed work on the restoration of the bow pontoon’s fastening which were damaged by waves, additional cable brace of the pontoon has been provided on the recommendation of the Chief of the expedition, other damages or defects identified after the storm were eliminated. It was removed several flaws in the fire main[57], scuppers were cleaned, we have started checking of the glands of sluice valves and bulkhead glands in the tanks[58] that to remove the suspicion of possible leakage of water through these glands. The gland’s nuts and studs were pressed out where it is need.

At the same time I declare that no any sealing glands[59] of the ballast pumps, cooling pumps of diesel generator and compressors were not replaced, as specified in the telex of the chief of expedition Mr Parshintsev on the 12.07.2006. All pumps were in good condition, any flaws in scuppers of the ship-way deck have been not eliminating also. I have reported to the Chief of expedition by radio in the evening on July 11 about the executed works and that next day on July 12 we shall continue checking of some elements of ballast bilge system of the dock and carry out repair and maintenance works as required.

According to the instruction of the ship-owner, provided before departure dock from Vladivostok, the crew continued the concreting of dents on the surface of ship-way deck that were made at the time of the dock’s repair in Vladivostok or during of its previous operation. ….

3              During the 12 July crew dock surveyed several tanks and sluice valves of the ballast system and the piping of ballast-bilge system, glands of the sluice valves and bulkhead valves were pressed out, flange couplings of piping were tightened. No serious damages have been detected.

We have carried out test of the ballast-bilge system once again with taking up of the ballast into the tanks and pumping it out, tank’s stripping – all equipment worked in normal mode. Any cross-flows or leaking of water in the sluice valves and bulkhead glands were not found. Results of the tests were reported to the Chief of Expedition on evening of July 13. The necessary records about all operations and actions of the crew were made in the ship; log of the dock.

4              As to reports and the information of the Chief of Expedition, basically they correspond to the taken place facts during the specified period on July 9-12 2006 but in view of my amendments and remarks made in this note.”

Bold added

18th August       Captain Parshintsev

On 18th August Captain Parshintsev, who had seen Captain Rada’s note of the previous day, wrote a note of his own addressed to the Investigation Board with a copy to DV Basu i.e. the Federal State Unitary Enterprise, which was the owner of the tugs, in which he confirmed Captain Rada’s note. In it he said that when he drew up his reports on 10th and 12th July to the headquarters of the towing company he had intentionally distorted some facts for the purpose of overestimating actual volume of work performed by the Dock’s crew that could affect future “awards for the result of the operation”. He confirmed that items 1-3, 5-14, 19-21 of the e-mail of 10th July were items of damage which he had correctly identified on the basis of Captain Rada’s report. As to point 4 he said that Captain Rada had reported after the storm that they had discovered some holes in 4 places in the fore part of the hull of the pontoon which arose were the four broken stanchions which were attached to the wave breaker were welded to the pontoon’s hull. When the stanchions were restored the crew welded up all the holes using plate steel.

In relation to the e-mail of 12th July he stated that points 1-5, and 9 were as Captain Rada reported but that the “damages specified by me in points 6-8 ..actually did not take place on the Dock” adding “the distorted information made by me in reports date 10th and 12th July could not affect … towing operation or safety of the Dock and her crew”.

Baominh disputes the authenticity of this note. It was suggested that it had been fabricated after 30th October 2009 to explain away the defects relied on in Mr Case’s reports.

Captain Parshintsev says in his statement that on 18th August he made three copies of the note. He handed one to the Investigation Board (although later in his statement he refers to handing them the original); a second to the Director of DV Basu; and he kept a third copy for himself which he delivered to Garnat in December 2009 after he had resigned from DV Basu.

Reliance is placed by Baominh on the nature of the two different copies in the papers before the court. One has the stamp of Pacifictramp, the company that concluded the Towcon contract, against the words “Received from DV Basu 03 December 2009”. In manuscript at the top are a signature, the date of 22nd August 2006, and the words, apparently addressed to the Personnel Department, “Please draw up an order”. This would appear to be the copy Captain Parshintsev handed to DV Basu. The other copy does not have that manuscript. The content appears to be the same but the alignment of the words on the page differs in some respects (e.g. the first two sentences of the third paragraph) and the signature, although appearing to be from the same hand is slightly different. That is said to be the copy obtained by Garnat direct.

Captain Rada’s second statement

In his second statement Captain Rada dealt with the e-mails of 10th and 12th July. In relation to the former he confirmed that he did report items 1-3, 5-14, and 19-21 i.e. the items which, on 18th August 2006 Captain Parshintsev had himself confirmed. In relation to item 4 he said that he did report it but clarified what he meant by “cause of leakages – corrosion”. After the storm he had noticed some cracks in the bow pontoon in 4 places where the pontoon was welded to the steel stanchions, which were secured to the wave break. The cracks appeared to him to have appeared where the structure of the pontoon has been subject to some corrosion and the metal was less strong than in other parts of the pontoon. The cracks only appeared after the Dock had passed through the typhoon. Between July 10th and 12th the cracks were closed using welded steel plates.

With regard to the e-mail of 12th July he confirmed that he reported items 1-5. He did not remember reporting item 6 and on reading the contents for the purposes of the statement he felt that it was quite impossible that he did. He did not recall reporting item 7 or items 8 and 9, but these latter two were routine works for which they were being paid extra. He thought that they had not done either of these immediately after the storm and that none of them related to the storm but they would have done these things as part of routine.

Was Captain Parshintsev’s note of 18th August 2006 fabricated?

I regard the proposition that Captain Parshintsev note of 18th August was fabricated after 30th October 2009 to deal with Mr Case’s evidence (or at any other time) as highly implausible. It appears to me far more likely that it was produced as part of the investigation by the Russian Commission in order to address what was said in Captain Rada’s note of 17th August; that Captain Parshintsev overegged the pudding and, when challenged, backtracked. That he might have done so gains some support from Mr Sashkin’s evidence which was that the tugboat crews were paid very little (Captain Rada, for instance, was paid at least twice as much as Captain Parshintsev) and that, before departure he had told Captain Parshintsev that, if there were additional difficulties or problems as a result of which there was additional work, they would be paid extra. According to his evidence extra work by the Dock’s crew could attract extra payment for the crew because so much depended on the work of the Captain of the tugs and his crew. I find it difficult to follow why extra work for the crew of the Dock should mean extra payment for the crew of the tug[s]. But it may well have been to his advantage to overstate any actual or potential problems. The production of two non-conforming copies of the note of 18th August would be a very curious and convoluted fabrication. I do not know what the explanation is for the different form of the two copies but the difference does not lead me to suppose that both are fakes.

Mr Case accepted that, if what Captain Rada said in his Explanatory Note was correct, none of the matters referred to in para 218 (a) – (e) above were serious or evidence of unseaworthiness at the commencement of the voyage, although adding the caveat that he was not sure how some of the work could have been carried out because of access restrictions. I see no reason to disbelieve Captain Rada or his August 2006 report, particularly in the light of Captain Parshintsev’s note of the next day, or to believe that it was deficient. I do not regard what is described in that note, which seems to me likely to constitute the most accurate account available of what was found, suspected or done, as evidence of unseaworthiness at the start of the voyage but of relatively minor matters discovered after and to some extent caused by an encounter with a typhoon and swiftly seen to without difficulty.

The position would be the same even if the entirety of the 10th and 12th July e-mails was accurate. The content of the e-mails is obscure both as to what they mean and as to the seriousness of any defect. I do not regard them as establishing, even if taken at face value, that the Dock was unseaworthy and would not have been sent to sea by a prudent shipowner.

In short it has not been established that there were at the commencement of the voyage such defects in the Dock as rendered it unseaworthy. If there had been such defects it would be very surprising if they had not been picked up by RMRS, GMB or Mr Kalmykov. None of the alleged defects were difficult to identify.

So far as leaking manhole covers are concerned Mr Kalmykov, whose somewhat belligerent evidence I accept, made clear on more than one occasion that during the course of the work on the Dock the covers were repaired and checked on a continuing basis for tightness, and all this was done before any cargo was placed on board the vessel. This had to be done then because it was necessary for the Dock to be submerged[60] before any objects could be put on board. Mr Kalmykov personally checked all the ballast tanks by descending into them before cargo was placed on board[61]; the subdivisions of the tanks were subjected to hydrostatic and pressure tests[62]. Captain Rada tested that there was no overflow between the tanks by opening and closing valves and sounding the tanks from the deck. If there were any significant leaks they would surely have been detected. He was also party to a visual inspection prior to departure of such manhole covers of the ballast tanks as were accessible for visual inspection after the cargo was loaded. In addition the tanks were checked regularly for water level and no additional water was found to be coming in.

The departure draft

It is common ground between the experts that it was theoretically possible to reduce the draft to 2.8m. The Statement on the Right of Departure No 1672″, signed by the Master and the Assistant Harbour Master records a draft, fore and aft of 2.8m. It describes the “time and date of drawing up departure” as 14.15 on 23rd June 2006. The departure is said to have been “adjusted” by the Controller of the Port State Control Mr Kislov, who signed the document, as did Captain Rada. There is another document signed by Mr Kislov with the same time and date containing the same information. I infer from this that there was a physical inspection in the early afternoon of 23rd June.

I regard it as unlikely that the draft was wrongly recorded, or that the Dock would have secured clean Class certificates from RMRS and GMB, and been certified as seaworthy by both of them and as fit for towage by GMB, if the design draft of 2.8 m was in fact incapable of achievement. It would have been necessary for the GMB surveyor to be satisfied that that draft could be achieved, probably by seeing that it had actually been achieved. I accept the evidence of Mr Kalmykov and Captain Rada that a 2.8 m draft could be and was achieved before departure. Photographs are, as I have said, an insecure guide but the photograph [E/3/122] taken on 26th June appears consistent with such a draft.

The “Statement” records that there were 286 mt of ballast on board. However, the Assessment records that it is necessary to take water ballast to tanks 2 and 19 in the quantity of 286 and 363 tonnes in order to decrease the bending moment at midships in still water, and it appears to be the position that those quantities are the quantities needed in order to secure the recommended draft of 2.79m.

The two statements are not compatible. In this regard there are a number of possibilities:

(i)            a draft of 2.8 m was achieved when only 286 mt ballast was used;

(ii)           the compiler of the Statement failed to include the contents of tank 19, as did Captain Rada in his letter of explanation of 4th August;

(iii)          there was only 286 mt of ballast and the Dock did not have an even draft of 2.8m when the Statement was made up;

(iv)         there never was a draft of 2.8m.

Of these the fourth seems to me the least likely, being inconsistent with the Statement, the Explanatory Note and Captain Rada’s evidence. The third seems almost equally unlikely, being inconsistent with the explicit measurements in the Statement that the Dock had a 2.8 m draft fore and aft.

As to the first possibility, Captain Rada’s letter of explanation of 4th August 2006 (see paragraph 23 above) which refers to the Dock achieving, on 26th June 2006, a moulded draft of 2.8 m when about 260-280 mt remained in the (unspecified) tanks is consistent with the reference in the Statement to 286 mt as being the ballast on board when the Dock had a draft of 2.8 m on 23rd June. But if all the calculations in the Assessment were accurately made and the 286 mt was all in tank 2 (which the Statement does not vouch) it implies that there had been an increase in weight over that contemplated by the data used in the Assessment of some 363 tonnes with the same longitudinal centre of gravity as tank 19, or a redistribution of weight having the same effect.

The second possibility is open to the objection that you would expect that, if two tanks were ballasted, both quantities would be noted.

It is not, I think, necessary to choose between the first two possibilities. It seems to me

more likely that the vessel carried 286 mt of ballast, but not all in tank 2, so as to reach a draft of 2.8 m. Alternatively, the 363 tonnes was mistakenly omitted from the Statement and the figure of around 260-280 mt remembered by Captain Rada in consequence.

I also accept that, as Captain Rada said, the draft was increased to 4.4 m as recommended by the Port Authority in order to reduce windage during the towage out of Vladivostok through Golden Horn Bay: see para 16 above. I can see no reason why he should have made this up particularly when the Assessment itself states that the draft of the Dock must be increased to 3.2 metres in order to decrease windage during anchorage.

I do not accept that the Dock was unseaworthy or unsafe because it sailed from Vladivostok with a draft of 4.4m. I reach that view for the following reasons.

The draft was increased at the suggestion of the Deputy Harbour Master and with the agreement of Captains Parshintsev and Rada so as to reduce windage and, thus, improve control over the Dock. If anything, the increase made the Dock more seaworthy for its immediate passage. When the Dock left the shore it did so in the flat calm waters of Golden Horn Bay, where the shipping of seas on deck would be either non-existent or minimal. Whilst weather conditions can change abruptly it was possible to forecast them with reasonable accuracy. There is no evidence that any difficulties were in fact encountered or should have been expected on account of the increased draft for the period that it lasted. The increase in the draft was a temporary measure. Unless there was a defect in the pumping system it would have been possible to reduce the draft from 4.4 metres to 2.8 metres very quickly. The entire ballast capacity of about 19,500 tonnes could be dewatered in about 2 hours – 286 or 286 + 363 tonnes in far less time.

The draft figure of 2.79 m is contained in the Assessment. The Assessment contains calculations which were “completed to determine the possibility of its oceanic towing”: para 1.1. I agree with Mr Barker that that must have been intended to relate to the towage of the Dock through the ocean by two tugs, rather than towage by one tug through and out of the Bay. The Dock was towed out by the TOPAZ. LAZURIT was not connected until the afternoon of 24th June.

I am satisfied that the draft was reduced to 2.8m on 26th June: see para 236 above. Captain Parshintsev’s order for the reduction in the draft appears in the TOPAZ logbook. It would have been entirely logical for him to have given that order in the light of what is specified in the Assessment. Captain Rada’s evidence, both contemporaneously in his letter of explanation of 4th August 2006 and in these proceedings, was that that reduction took place. There is no record (or other evidence) of any protest by those on board either tug that the draft had not been reduced as ordered. There was ample opportunity to check the draft by the side markings on the Dock when the TOPAZ was close alongside on 25/26th June. If after 24th June the draft had remained at 3.3 m I should have expected some reference either in the logs or in one of the explanatory notes filed after the loss. I accept Captain Rada’s evidence.

I am not persuaded that the entry in the TOPAZ logbook for 27th June signifies that the draft was not decreased to 2.8 from 3.3m. There seems to me no reason why the draft should have been reduced to and then kept at that intermediate figure. The more likely explanation is that given in the contemporaneous explanatory notes of Captain Rada and Mr A.Y Dudinov, the 3rd mate, namely that the 3.3 m figure was one, but only one, of the drafts that were reported orally over the radio by


New Hampshire Insurance Company & Ors v MGN Ltd & Ors

[1996] EWHC 398 (Comm) (06 September 1996)

URL: http://www.bailii.org/ew/cases/EWHC/Comm/1996/398.html

Cite as: [1996] EWHC 398 (Comm) Staughton J

At what point(s) in time were the Assureds under the Contracts of Insurance and/or the Chubb Policies under a duty to disclose material matters to Insurers and/or Chubb.

It is, we were told, common ground that there is a duty to disclose before a contract of insurance is concluded, before such a contract is renewed, and when a claim is made. But Mr Milligan for the Claimants except the pension interests submits that the situation on making a claim is conceptually different; non-disclosure then can only lead to the avoidance of a compromise agreement, if there has been one, or a right to recover money paid on the ground of mistake; it does not result in avoidance of the contract of insurance, unless there is fraud, or unless the contract says that it can be avoided for non-disclosure in making a claim.

We regard it an unnecessary for us to express any opinion as to what rights, if any, arise from non-disclosure on making a claim.

The question whether there is a continuing duty of disclosure in any other circumstances is of considerable importance. We are surprised that in recent times it has only been considered in one decision at first instance: Black King Shipping Corporation v. Massie (The LITSION PRIDE) (1985) 1 Ll R 437. However, the surprise is tempered when one realises that, in the ordinary way, disclosure would be of little or no benefit to the insurer during the currency of a policy. Unless it happen before the contract is made, or before renewal, or (perhaps) before a claim is paid, disclosure could only fill the insurer with foreboding that he had made a bad bargain as a loss was likely to occur; he would have no right to cancel the contract of insurance on that account, although we suppose that he might be able to obtain reinsurance.

It is said that the situation is different in this case, because the Insurers – and for that matter the insured – had a right of cancellation. It is enough to refer only to one of the provisions in that connection.

Section 16. This Policy or any Insuring Agreement may be cancelled by the insured by mailing to the Company written notice stating when thereafter the cancellation shall be effective. This Policy or any Insuring Agreement may be cancelled by the Company by mailing to the Insured at the address shown in this Policy written notice stating when not less than fifteen days thereafter such cancellation shall be effective.

It is said that disclosure would be of value to an insurer when he has an unfettered right to cancel; hence there is a continuing duty of disclosure. The argument cannot, as we see it, be anything less than that the duty applies on every day of the policy period, to every material circumstance which becomes known to the insured. However, we suppose that if the new circumstance were something which led to a loss within fifteen days, it could be said that it was not material as the insurer would have no effective opportunity to cancel.

The Marine Insurance Act 1906 provides:

17.          A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith is not observed by either party, the contract may be avoided by the other party.

18(1).    Subject to the provisions of this section, the assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured …

A novice could be forgiven for thinking that the only duty of disclosure is by the insured, and that it only applies before the contract is concluded (which could no doubt include the new contract which is made upon renewal). But the maxim that mention of one of two things excludes the other must be applied with caution when considering the draftsmanship of Sir Mackenzie Chalmers. His method of codification was, at any rate at times, to state the effect of rules decided by the courts, and not to pronounce upon points which had not been decided.

Mr. Rokison’s submission is that section 18(1) is merely an example of the general duty that is placed on both parties, at all times, by section 17. We can see force in that argument. But it is questionable whether in practice the law has been treated in that way.

In the Litsion Pride the war risks insurance of the vessel contained a term that, in the event of her sailing for, deviating towards or being within a war risks exclusion zone –

(A)          … additional premium shall be paid at the discretion of insurers hereon.

(B)          Information of such voyage or deviation shall be given to insurers as soon as practicable …

There was also, it seems, a clause entitling the insurers to give 14 days notice of cancellation.

Hirst J. (a p.510) quoted from the judgment of Scrutton LJ in Leon v. Casey (1932) 2 KB 576 at p.579:

The origin of the order to ships’ papers goes back to the time of Lord Mansfield. In those days the courts of common law did not give discovery of documents. If this was wanted the only means of getting it was by a Bill of Equity, and very often an action at law was delayed while the necessary proceedings in equity were taking their course. In consequence partly of this inconvenience and partly of the fact that insurance has always been regarded as a transaction requiring the utmost good faith between the parties in which the assured is bound to communicate to the insurer every material fact within his knowledge not only at the inception of the risk, but at every subsequent stage while it continues, up to and including the time when he makes his claim, the common law courts invented the order for ship’s papers, an order which is made as soon as the writ is issued in an action on a policy of marine insurance.

It must however be pointed out that the order for ship’s papers is now governed by the Rules of the Supreme Court, following criticism by Greer LJ in Leon v. Casey (at p.588) that it had become “an unfair and unjust weapon in the hands of the insurer”. That scarcely sounds like the product of the utmost good faith. Under O72 r.10 it is now a matter of discretion. Furthermore Scrutton LJ expressed the view that the duty of disclosure continues throughout the duration of the risk, without limit. That is not what is now contended for by the Insurers.

The argument of Mr Gilman for the insurers in the Litsion Pride was that after the insurance contract was concluded the test should be

whether the misrepresentation or non-disclosure would, if believed by a prudent underwriter, influence him in any relevant decision he had to make, e.g., the fixing of [additional premium], or whether to pay, compromise, or resist a claim … and also whether or not to invoke the 14 day cancellation clause.

Hirst J. accepted that argument. He distinguished Commercial Union Insurance Co v. The Niger Co Ltd (1922) 13 Ll.L 75 and another case relied on by the insured as follows (at p.511):

What the underwriter was seeking to do in these two cases was to fix upon the assured a duty to volunteer information ex post facto concerning new matter, which had come to light after the conclusion of the policy, and which affected the risk already accepted. The key to these cases is I think to be found in the dictum of Lord Buckmaster in the Niger case that there is no duty on the assured to disclose circumstances arising subsequently which might show that the premium had been accepted at too low a rate. This in my judgment does not touch the problem with which the Court is concerned in the present case.

It might be said that the Insurers in the present case are seeking to do exactly the same. Mr Rokison’s answer is that here the Insurers were entitled to disclosure of any new information that had become available in order to determine whether to exercise their right to cancel. But the same could be said in the Litsion Pride. Hirst J. continued:

Focusing specifically on the duty in relation to the giving of information of the voyage under the warranty, it seems to me that there is a very close analogy with the position which arose in the Style and Liberian cases, where the duty was held to apply. The information is material because it is required to enable the underwriter to make a decision as to the rate of AP, as to facultative reinsurance, and (at all events in the present case) possibly even as to cancellation under the 14 day notice clause.

And later (at p.512):

Consequently, I hold that the duty of utmost good faith applied with its full rigour in relation to the giving of information of the voyage under the warranty.

“The warranty” is a reference to the war risks trading clauses.

The decision of Hirst J. was referred to with approval by Hobhouse J. in Bank of Nova Scotia v. Hellenic Mutual War Risks Association (Bermuda) Ltd (The GOOD LUCK) (1988) 1 Ll.R 514. However, he held that the Association owed the bank as mortgagees no duty of the utmost good faith. His conclusion on the question of a continuing duty of disclosure was as follows (at p.545):

There is no duty to disclose matters relevant to the making of the contract once the contract had been made; the time has then passed within which they must be disclosed. The later disclosure of later discovered facts would serve no useful purpose and, therefore, is not required. By contrast there can be situations which arise subsequently where the duty of utmost good faith makes it necessary that there should be further disclosure because the relevant facts are relevant to the later stages of the contract. The Litsion Pride illustrates such a situation in relation to the making and prosecution of a claim. Similarly, in the law of partnership there is a continuing duty of the utmost good faith.

Before us the Litsion Pride was said to be a case on circumstances where the insurers had an intervening decision to make, rather than a claim to consider.

The Court of Appeal in the Good Luck (1990) 1 QB 818 summarised the reasoning of Hobhouse J. at first instance and the decision of Hirst J. in the Litsion Pride. But May LJ delivering the judgment of the court was, as it seems to us, at pains to express no opinion upon whether there was a continuing duty of disclosure: see pp. 886-888.

Rogers J. in the Commercial Court of New South Wales felt no such reticence in NSW Medical Defence Union Ltd v. Transport Industries Insurance Co Ltd (1985) 4 NSWLR 107. We quote the first paragraph of his judgment:

The plaintiff seeks to strike out pars 15 to 16 inclusive of the first defendant’s amended defence. In essence, by those paragraphs, the first defendant, an insurer, seeks to avoid liability under a policy of insurance on the basis that, during the currency of the policy the insured failed to comply with its obligation to act in good faith by failing to disclose certain material facts. It is claimed by the insurer that the disclosure of the facts was required by it in order to enable it to exercise two alternatives which were available to it. First, under condition D(v), the insurer had the opportunity of giving thirty days notice to terminate the policy. Secondly, it had the opportunity throughout of obtaining facultative reinsurance. It is said that the disclosures, if made, would have borne materially on a decision whether or not either or both of these opportunities should be availed of.

The judge rejected those arguments. He observed that the ability to cancel was thought to be quite irrelevant by Lord Buckmaster in the Niger case; and that the Litsion Pride was concerned with an express obligation in the policy to supply information if trading in an excluded zone.

We now turn to the Niger case, first in the Court of Appeal before Bankes, Warrington and Atkin LJJ. (1921) 7 Ll.L. 239. We must quote a lengthy passage from the judgment of Bankes LJ (at p.245):

The evidence shows that this business of covering these goods has been carried on by some, at any rate, of these Underwriters for very many years, and that until comparatively recently the practice was to enter into a fresh cover every year, and, of course, as long as that was the practice every year, the assured came under the obligation, before he entered into a fresh contract, to make a disclosure of any material facts which had come into existence, or which were in existence, and which were material to be known to the Underwriters. But there came a time when, I suppose for convenience, the parties altered the character of the contract, and altered it probably to an extent that they did not appreciate. What they did was, instead of having a fresh cover every year, and a fresh contract every year, they provided that the existing contract should go on until terminated by three months’ notice; and that, in my opinion, established a condition of things under which this obligation to make a disclosure ceased, because there was a concluded contract, and a contract which remained and continued a concluded contract until it was in fact put an end to; and if the obligation on the assured is only to disclose matters which have come into existence and are material to be known before the contract is concluded, then the doctrine has no application to this case. But Mr Leslie Scott contended, first of all, that this was an exceptional case, and although he could not quote any authority for his proposition, he suggested that the contract of insurance being uberrimae fidei, this Court ought to extend (at least, so I understood him) the doctrine so as to meet a case of this kind, in order that the Underwriters should have the opportunity of giving the three months’ notice when in fact the character or extent of the risk had altered. We asked him to formulate what the effect of introducing such a doctrine would be, and I think he must have felt himself in a difficulty in doing that, but ultimately I understood him to say that, if there was non-disclosure and an alteration of risk while the contract was a continuing contract, the Underwriter would have the right to exercise the option retrospectively when he became aware of the facts, as from the time when the disclosure ought to have been made, or alternatively, the contract should be treated as automatically concluded at the expiration of three months from that time. Well, I think that the statement of the consequences, which Mr Leslie Scott desires, indicate that this is not a case in which the doctrine can or ought to be applied. It may be that the Underwriters did not appreciate the difference in their position which they were making by the alteration in the form of the contract, and all I can say is that, if people enter into contracts of insurance for long periods, it would be a wise precaution to insert some provision requiring notice to be given them if the nature of the risk does alter or vary appreciably.

It seems to us clear that Bankes LJ was rejecting the submission that a continuing duty of disclosure existed by reason of the right to cancel. He may also have been saying, as Mr Rokison submits, that the existence of such a duty would on the facts have been of no avail to the insurers in that particular case. But that does not detract from his view that there was no continuing duty.

In our judgment that must also have been the view of the House of Lords in the Niger case (1922) 13 Ll.L. 75. In particular Lord Atkinson said (at p.79)

It would appear to me that in some of the arguments addressed to your Lordships on behalf of the underwriters, the fact has not been kept in mind that the cover is by the terms of the slip I have read a continuous cover, not limited in duration, save by the fact that it may be terminated by three months’ notice. I for myself beg to say that I can see no reason why the principle laid down in the cases I have cited as to the disclosure by the assured of material facts between the signing of the cover and the issue of the policy should not apply to the continuous cover created in this case.

Lord Sumner, in connection with an argument on this or another point of non-disclosure, said (at p.82):

This would turn what is an indispensable shield for the Underwriter into an engine of oppression against the insured.

We would echo that sentiment. Whilst there are no doubt cases where a defence of non-disclosure is fully justified, there are also in our experience some where it is not. We should hesitate to enlarge the scope for oppression by establishing a duty to disclose throughout the period of a contract of insurance, merely because it contains (as is by no means uncommon) a right of cancellation for the insurer.

It remains to consider two cases on what are called fidelity bonds or guarantees. It seems that these are given to an employer as a guarantee of the fidelity of an employee; and that non-disclosure of dishonesty of the servant after the contract is made does have an effect on the contract of suretyship. In Phillips v Foxall (1872) LR 8 QB 666 at p.674 there is this passage in the majority judgment:

… it seems to us equally reasonable to suppose that it never could have entered into the contemplation of the parties that, after the servant’s dishonesty in the service had been discovered, the guarantee should continue to apply to his future conduct, when the master chose for his own purposes to continue the servant in his employ without the knowledge or assent of the surety. If the obligation of the surety is continuing, we think the obligation of the creditor is equally so, and that the representation and understanding on which the contract was originally founded continue to apply to it during its continuance and until its termination.

If the guarantee at its inception was founded, as suggested, by Lord Eldon in Smith v. Bank of Scotland, on the trustworthiness of the servant, so far as that was known to both parties, as soon as his dishonesty is discovered and becomes known to the master, the whole foundation for the continuance of the contract as regards the surety fails.

That doctrine is evidently based on an interpretation of the contract, and on the law of suretyship, rather than on a duty of disclosure imposed from outside by the law as in the case of a contract of insurance. As Mr Phillips said, it arises under an implied term, and not from a duty of the utmost good faith. It was considered in the American case of Sumitomo Bank of California v. Iwasaki (1968) 447 Pac R (2nd) 956 at p.958, where Tobriner AJ said:

We shall explain why we adopt the Restatement rule. That rule provides that each time the creditor accepts the continuing offer of a surety on a continuing guaranty by extending further credit to the principal debtor, the creditor owes a duty to the surety to disclose facts known by the creditor if the creditor has reason to believe that those facts materially increase the risk beyond that which the surety intended to assume and that those facts are unknown to the surety. (Rest., Security 124. subd.(1), com. c. pp. 327-328,330.)

In our judgment that doctrine does not apply to insurance contracts in general, or to fidelity insurance in particular, although the insurer may have some other remedy if the insured knowingly maintains in his employment a dishonest servant.

We would answer this question by saying that there was no continuing duty of disclosure during the currency of any year of insurance by reason of the right to cancel. If and in so far as a contrary view was expressed in the Litsion Pride, we cannot agree.

Issue L – the Limits

This last issue is particularly difficult, largely owing to the obscurity of the contract wording. Despite the assistance of counsel we have found difficulty understanding the questions, let alone deciding them.

The question ordered by Waller J. was not that argued by Counsel or answered by Potter J. He posed three questions, as follows:

(1)          Do the policy limits apply separately to each company within the Group, i.e. as a limit per insured company, or is there a single limit applicable to all companies within the group?

(2)          Do the limits apply separately and non-cumulatively to each policy year, or does the aggregate limit of liability apply regardless of the number of years that the policy continued in force?

(3)          Does the limit apply without aggregation to “any one loss” or is there an aggregate limit of £1m on all claims in respect of which the same employee is concerned or implicated?

The limits referred to are those which are to be found on what we call the front of the policies, as follows:

3.            Table of Limits of Liability

Insuring Agreement I      Employee Dishonesty Coverage – Form A               £1,000,000*

Insuring Agreement II    Loss Inside the Premises Coverage           £1,000,000*

Insuring Agreement III   Loss Outside the Premises Coverage       £1,000,000*

Insuring Agreement IV   Money Orders and Counterfeit Paper Currency Coverage              £1,000,000*

Insuring Agreement V    Depositors Forgery Coverage      £1,000,000*

Added by Endorsements:                             

Insuring Agreement                        

Agreement VI    Computer & Funds Transfer Fraud            £1,000,000*

Deductible:         Agreements I, IV, V and VI £20,000 each and every loss   *any one loss

                Insuring Agreements II and III £10,000 each and every loss           

Question L (1) – Separate limits for each company?

Despite emphatic protests by Mr Rokison whenever the topic was mentioned, once it had been decided under issue F that each company was separately insured the answer to this question must be that in general there was a separate limit for each company. We asked Mr Rokison whether there would be two limits if employee A caused loss to company X and employee B caused loss to company Y; his answer was that there would be two limits, each of £1 million at the primary layer.

The problem arises in the special case of loss caused by the same employee to two companies. That is specifically dealt with in section 11 –

The Company’s total liability (a) under Insuring Agreement 1 for all loss caused by any Employee or in which such Employee is concerned or implicated or (b) under Insuring Agreement V for all loss by forgery or alteration or in which such person is concerned or implicated … is limited to the applicable amount of insurance specified in the Table of Limits of Liability or endorsement amendatory thereto.The liability of the Company for loss sustained by any or all of the Insured shall not exceed the amount for which the Company would be liable had all such loss been sustained by any one of the Insured.

Question L(2) – Separate limits for each year?

We have no difficulty in concluding, as the judge did, that there were separate limits in each year for which the policy is renewed and a premium paid. A clause in section 11 of the policy provided:

Regardless of the number of years this Policy shall continue in force and the number of premiums which shall be payable or paid, the limit of the Company’s liability as specified in the Table of Limits of Liability shall not be cumulative from year to year or period to period.

There was some discussion as to whether the clause was dealing with a possible claim to carry forward an unused limit or part of a limit from year 1 to year 2. That cannot have been contemplated, and one wonders whether the clause was designed or needed to prohibit it.

However, the question remains whether the limit applies to all loss of the relevant insured in a particular policy year, or in some other way.

It is common ground, and stated both in section 1 of the policy and endorsement 3 (which replaces it) that the dishonest and fraudulent acts referred to in Insuring Agreement 1 must be Committed “during the policy period”. The question then is whether

(a)          the limit applies to all loss which flows from the conduct of a particular employee, even if he commits further dishonest and fraudulent acts in a later year which cause further loss, or

(b)          the limit applies to all loss caused by dishonest and fraudulent acts of a particular employee in the policy year in question, the loss being sustained or discovered in the policy period or the discovery period.

We can see no ground for the wide interpretation under (a), which in effect means that there is no new cover in respect of the employee in question although a premium is paid to renew the policy for a further year. Mr Rokison submits that the limit is expressed to be for “any one loss”, and that dishonest conduct of one employee is one loss. In our judgment if the Insurers wished to achieve that result it was for them to say so with at least a minimal degree of clarity. The provision that the limit shall not be cumulative from year to year can as well be read as saying that loss in subsequent years shall be subject to the one limit as that further dishonest or fraudulent acts shall be.

There is also what has been called the straddling provision:

LIMIT OF LIABILITY UNDER THIS POLICY AND PRIOR INSURANCE

With respect to loss caused by any person (whether one of the Employees or not) or in which such person is concerned or implicated or which is chargeable to any Employee as provided in Section 4 and which occurs partly during the Policy Period and partly during the period of other bonds or policies issued by the Company to the Insured or to any predecessor in interest of the insured and terminated or cancelled or allowed to expire and in which the period for discovery has not expired at the time any such loss thereunder is discovered, the total liability of the Company under this Policy and under such other bonds or policies shall not exceed, in the aggregate, the amount carried under the applicable Insuring Agreement of this Policy on such loss or the amount available to the Insured under such other bonds or policies, as limited by the terms and conditions thereof, for any such loss, if the latter amount be the larger.

That, as it seems to us, covers loss suffered partly during the period of one policy and partly in the period of another. It does not touch upon the present problem.

Mr. Rokison also relied on the provisions as to a deductible in endorsement 4:

All loss caused by acts committed by any person or in which such person is concerned or implicated and/or arising from any one occurrence (as set forth in Section II of the policy) will be considered a single loss for the purpose of this endorsement. If a loss is covered in part under this

policy and in part under a prior similar policy or bond superseded by this policy, the Deductible Amounts(s) applicable to such loss under this policy will be reduced by the amount of any deductible(s) actually applied to such loss under such other policy or bond.

There is perhaps a slightly stronger argument that all loss in that clause includes loss from fraudulent or dishonest acts in a subsequent year. But it is only marginal, and not in our judgment sufficient to carry the day in relation to limits.

We would uphold the judge’s conclusion that the limits apply separately and non-cumulatively to each policy year in the sense that we have indicated.

Question L(3) – limit for each loss or each employee?

Within any policy year, is the limit to apply to all fraudulent or dishonest acts of one employee, or to each loss identified in some other way? This arises on the Claimants’ cross-appeal.

The answer is in our judgment plain. Section II says that the limit is to apply to all loss caused by any employee or in which such employee is concerned or implicated. But that is subject to section 12 in respect of loss straddling two policy periods.

Conclusion

The appeal and cross-appeal should be dismissed. So should the Insurers’ application for leave to appeal on certain aspects of the judge’s rulings as to the admissibility of evidence. No argument was addressed to us in support of that application.

There remains a cross-appeal of the claimants, by leave of the judge, against his order for costs. This order was that the costs be reserved. He was apparently persuaded to take that course on the ground that it did not yet appear how relevant the preliminary issues would be to the ultimate result. We are afraid that we do not regard that as a good reason. The Insurers did not have to rely on the points which were raised as preliminary issues if they did not want to, instead of which the Insurers defended them (for the most part) here and below. As the price of failure, the costs below on the argument of preliminary issues should be paid by the Insurers in any event.

We would not order that the costs should be taxed and paid forthwith. The parties should proceed to trial.

ORDER: APPEAL DISMISSED. CROSS-APPEAL, SAVE IN RELATION TO THE COSTS, WILL BE SET ASIDE. COSTS BELOW TO BE PAID BY THE INSURERS IN ANY EVENT. THE APPLICATION FOR LEAVE TO APPEAL ON CERTAIN ASPECTS OF THE JUDGE’S RULINGS AS TO THE ADMISSIBILITY OF EVIDENCE DISMISSED. PARTIES SHOULD PROCEED TO TRIAL.


Versloot Dredging BV & Anor v HDI Gerling Industrie Versicherung AG & Ors 

[2013] EWHC 1666 (Comm) (14 June 2013)

URL: http://www.bailii.org/ew/cases/EWHC/Comm/2013/1666.html

Cite as: [2013] EWHC 1666 (Comm)

Popplewell J

The law

There is a long line of authority which stands for a rule of law, applicable even when there is no express clause in the policy, to the effect that an insured who has made a fraudulent claim forfeits any lesser claim which he could properly have made. It originates from the early 19th century (see Levy v Baillie (1831) 7 Bing 349, Goulstone v Royal Insurance Co (1866) 1 F&F 276 and Britton v Royal Insurance Co (1866) 4 F&F 905), and has been confirmed and applied at appellate level up to the present day: see Lek v Matthews (1927) 29 Ll. L. Rep 141 (HL); Orakpo v Barclays Insurance Services [1995] Lloyd’s Rep IR 443 (CA); Galloway v Guardian Royal Exchange (UK) Ltd [1999] Lloyd’s Rep IR 209 (CA); The Star Sea (HL); Direct Line Insurance v Khan [2002] Lloyd’s Rep IR 364 (CA); Agapitos v Agnew [2003] QB 556 (CA); Axa General Insurance Ltd v Gottlieb [2005] All ER 163 (CA).

More recently the fraudulent claims rule has been extended by the decision of the Court of Appeal in Agapitos v Agnew [2003] QB 556 to cases in which the assured has deployed in support of a wholly valid claim some fraudulent means or device to advance the claim. Strictly speaking this aspect of the decision in Agapitos v Agnew was obiter, because it was held that the rule, whether or not extended, could not apply after the commencement of litigation in the light of the House of Lords decision in The Star Sea. Whilst there is room for argument whether such extension is justified (see for example Lord Hobhouse’s observations in The Star Sea at [71] on the controversial decision of Hirst J in The Litsion Pride [1985] 1 Lloyd’s Rep 437), the question was fully considered in the judgment of Mance LJ at [19]-[46], in a judgment concurred in by Brooke LJ and Park J. Mance LJ’s judgment was described by Park J as a comprehensive and scholarly exposition, with which I would respectfully agree. The extension has been recognised by the Supreme Court in Summers v Fairclough Homes [2012] 1 WLR 2004 at [29] and applied by the Privy Council in Stemson v AMP General Insurance (NZ) Ltd [2006] Lloyd’s Rep IR 252, and recognised or applied in a number of first instance decisions, including Eagle Star Insurance Co Ltd v Games Video Co (GVC) SA (The Game Boy) [2004] 1 Lloyds 238, Joseph Fielding Properties (Blackpool) Ltd v Aviva Insurance Ltd [2011] Lloyd’s Rep IR 238, and Aviva Insurance Ltd v Brown [2012] Lloyd’s Rep IR 211. In those circumstances it would not be right for a judge of first instance to decline to apply the extension, however much he might regret that the submissions of counsel for the insurers in Agapitos v Agnew prevailed. Mr Karia QC reserved his right to challenge the extension in a higher court.

The juridical basis for the rule has caused some difficulty. Its origin was linked to the continuing duty of good faith in insurance contracts, for which the remedy provided by s. 17 of the Marine Insurance Act 1906 is avoidance of the policy; and the rule was thought to exist under, or by analogy with, s. 17. It has also been treated as deriving from an implied term of the contract (see Orakpo), a view rejected by the House of Lords in The Star Sea (see per Lord Hobhouse at [62]). Recent authority, in which Lord Mance has played a leading role, favours an analysis which treats it as a sui generis principle of the common law resulting in the forfeiture of the claim to which the fraud relates: see Agapitos v Agnew at [45(g)] and Axa v Gottlieb at [18]-[20], [22], [31]-[32].

The justification for the rule and its extension, as articulated by Lord Hobhouse in The Star Sea at [62], is that: “The fraudulent assured must not be allowed to think: if the fraud is successful, then I will gain; if it is unsuccessful, I will lose nothing”. It reflects a policy of the law to discourage the making of fraudulent claims: Agapitos v Agnew at [14] per Mance LJ and Galloway v Guardian Royal Exchange per Lord Woolf MR at 213 and Millet LJ at 214. In Axa General Insurance Ltd v Gottlieb Mance LJ described it at [31] as “deliberately designed to operate in a draconian and deterrent fashion” and said: “……the policy of the rule is to discourage any feeling that the genuine part of a claim can be regarded as safe – and that any fraud will lead at best to an unjustified bonus and at worst, in probability, to no more than a refusal to pay a sum which was never insured in the first place.”

Two aspects of the rule and its extension merit closer examination in the present case. The first is as to the state of mind which is sufficient to make the claim or device “fraudulent”. The second is what may be termed materiality, that is to say the relationship which the fraudulent means or device must bear to the valid claim.

State of mind

In Agapitos v Agnew Mance LJ said at [30] that “A fraudulent device is used if the insured believes that he has suffered the loss claimed, but seeks to improve or embellish the facts surrounding the claim, by some lie”. He did not expand upon the concept of fraud in this context.

The state of mind necessary to establish fraud for the purposes of the tort of deceit is to be found in the well known passage in the speech of Lord Herschell in Derry v Peek (1889) 14 AC 337 at 374:

“I think the authorities establish the following propositions: First, in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth. And this probably covers the whole ground, for one who knowingly alleges that which is false, has obviously no such honest belief. Thirdly, if fraud be proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or injure the person to whom the statement was made.”

That a reckless untruth, of the kind described in Lord Herschell’s third category, is sufficient to amount to fraud for the purpose of the fraudulent claims rule, is apparent from the speech of Lord Sumner in Lek v Matthews at 145 and the decision of Saville J in Bucks Printing Press Ltd v Prudential Assurance Co [1994] 3 Re LR 219.

Mr Karia QC argued that it is also necessary for the insurer to prove dishonesty, and in particular [1] that the assured was dishonest by the ordinary standards of reasonable and honest people and [2] that the assured himself realised that by those standards his conduct was dishonest. This submission was taken from a submission made in Brown v Aviva which Eder J recorded at [67] as having been accepted on behalf of the insurer. This combined test originates in the speeches of Lord Hutton and Lord Hoffmann in Twinsectra Ltd v Yardley [2002] 2 AC 164, where it was formulated in the context of constructive trusts imposed for dishonest assistance in a breach of trust. The test of dishonesty in that context was reconsidered and explained by the Privy Council in Barlow Clowes Ltd v Eurocrest [2006] 1 WLR 1476 in terms which represent English law (Abu Rahmah v Abacha [2007] 1 All ER (Comm) 827, at [66] – [70]). The subjective element requires the assister to know facts which make his conduct, objectively viewed, dishonest, but there is no subjective element of conscious dishonesty; the test for dishonesty does not require that the assister considers that he is acting dishonestly.

In these circumstances, where the fraudulent device consists of a representation, there is little room for any distinction between the test of fraud provided for in Derry v Peek and the test of dishonesty which applies to dishonest assistance in a breach of trust. If any of the three limbs of the Derry v Peek test are fulfilled, the statement will have been made without an honest belief in its truth. That is what would be regarded as dishonest for the objective limb of the test in Barlow Clowes, irrespective of whether the representor consciously believes himself to be acting dishonestly. In this context “in effect, recklessness is a species of dishonest knowledge, for in both cases there is an absence of belief in truth”: per Rix LJ in The Kriti Palm [2007] 1 Lloyd’s Rep 555 at [257]. Where, as in this case, the fraudulent device alleged is a statement, the appropriate test for fraud is that set out in Derry v Peek. In particular conscious dishonesty is not a separate element of the test, any more than it is for dishonest assistance constructive trust liability.

This is not to diminish the burden which lies upon insurers in seeking to establish fraud. The standard of proof is the balance of probabilities, but the cogency and strength of the evidence required to prove fraud is heightened by the seriousness of the allegation: Re H [1996] AC 563, 586. The court will be astute not to water down the requirement of fraud into something akin to negligence, even gross negligence. When considering whether there has been recklessness as to the truth of a statement, not caring whether it be true or false, “not caring” does not mean not taking care; it means indifference to the truth, the moral obloquy of which consists in a wilful disregard of the importance of truth: see per Bowen LJ in Angus v Clifford [1891] 2 Ch 449, 471.

Materiality

In the cases concerned with the fraudulent claims rule itself, the preponderance of authority is that the fraudulent part of the claim must be substantial in the sense of being not insubstantial or immaterial or de minimis: Goulstone’s case (“wilfully false in any substantial respect” per Pollock C.B. at 279); Lek v Matthews (“anything not so unsubstantial as to make the maxim de minimis applicable” per Lord Sumner at 145); Orakpo (“fraudulent to a substantial extent” per Sir Roger Parker at 452); Galloway (not “immaterial”, “substantial” per Lord Woolf MR at 213, 214).

This is not a high threshold. In Galloway a householder made a claim on his contents policy for loss arising out of a burglary. In addition to a valid contents claim for £16,133.94 the assured presented a fraudulent claim of £2,000 for a computer, supported by a bogus invoice in respect of its purchase. This was sufficiently material to vitiate the valid claim. Millett LJ, with whom Mummery LJ agreed, expressed the view that assuming, without deciding, that the rule was limited to claims which were substantially fraudulent or fraudulent to a substantial degree, that was a question to be addressed by reference only to the fraudulent element, not by reference to the proportion which the fraudulent element bore to the valid element of the claim. A fraudulent claim for £2,000, viewed in isolation, was sufficiently serious to be stigmatised as a breach of good faith so as to engage the rule. In Direct Line Insurance v Khan [2002] Lloyd’s Rep IR 364, a husband and wife brought a claim for property and contents damage following a fire to their home which was properly quantified at £61,342, and a fraudulent claim for rental of alternative accommodation for £8,257. The court accepted a concession that the rental claim was “sufficiently substantial” to taint the whole claim and make it irrecoverable (see Arden LJ at [12]). If the approach of Millett LJ in Galloway be right, a fraudulent element of £2,000 (and quite possibly considerably less) is sufficiently substantial to vitiate a marine insurance claim of €3 million or more.

In the context of the extension of the rule to fraudulent devices, Mance LJ conducted an analysis in Agapitos v Agnew which emphasised the potential need to draw a distinction between a test of materiality, which would apply to a breach of the duty of good faith under s. 17 Marine Insurance Act 1906, and the test applicable to fraudulent claims or devices. His analysis deserves extensive citation:

“31. The authorities also indicate that there are differences between, on the one hand, a fraudulent claim to recover a non-existent or exaggerated loss and, on the other, a breach of the duty of good faith under section 17. Rix J said in the Royal Boskalis case, at p 599:”

“upon my understanding of the nature of a fraudulent claim, there is no additional test of materiality or, to put the same point perhaps in another way, the test of materiality is built into the concept of a fraudulent claim…”

32. This observation merits some further examination. I start by noting an aspect of this court’s decision in Galloway’s case [1999] Lloyd’s Rep IR 209. The claim there made, following a burglary, for some £18,143 consisted in the main of genuine loss, but as to £2,000 involved the alleged loss of a non-existent computer. The court agreed with the judge that the whole claim was forfeit. Lord Woolf MR, at p 213, explained references in Orakpo’s case [1995] LRLR 443 to the need for “substantial” fraud as intended to exclude fraud which could be regarded as “immaterial” (or, in Viscount Sumner’s words in Lek v Mathews 29 LlL Rep 141, 145, so “unsubstantial as to [be] de minimis”). In this context the right approach was to look at the size of the non-existent loss alone and not to draw some comparison between it and the size of the genuine claim. Millett LJ [1999] LRLR 209, 215 suggested that the right approach was to consider whether the making of the claim was “sufficiently serious to justify stigmatising it as a breach of [the insured’s] duty of good faith so as to avoid the policy”. This assumes that the remedy of avoidance is available in this context. Whether it is available was not in issue in either Orakpo’s or Galloway’s case (as Lord Hobhouse observed in The Star Sea [2003] 1 AC 469, 501, para 67), and is a matter which, I suggest, merits further examination before the common law commits itself.

33. Secondly, in relation to Rix J’s observation in the Royal Boskalis case [1997] LRLR 523 to the extent that loss claimed is non-existent, the claim will fail anyway and the fraud is clearly material in so far as it amounted to an attempt to recover for non-existent loss. But the real bite of the fraudulent claim rule is to forfeit even the genuine part of any claim; and the fraud by definition is not material in any ordinary sense to the genuine part. Thus, it is sufficient for the rule to apply that the fraud occurs in making a claim and relates to a part of the claim which, when viewed discretely, is not itself immaterial or “unsubstantial”.

……………

“36. What relationship need there then be between any fraud and the claim if the fraudulent claim rule is to apply? And need the fraud have any effect on insurers’ conduct? Speaking here of a claim for a loss known to be non-existent or exaggerated, the answers seem clear. Nothing further is necessary. The application of the rule flows from the fact that a fraudulent claim of this nature has been made. Whether insurers are misled or not is in this context beside the point. The principle only arises for consideration where they have not been misled into paying or settling the claim, and its application could not sensibly depend upon proof that they were temporarily misled. The only further requirement is that the part of the claim which is non-existent or exaggerated should not itself be immaterial or unsubstantial: see paragraphs 32-33 above. …..

37. What is the position where there is use of a fraudulent device designed to promote a claim? I would see no reason for requiring proof of actual inducement here, any more than there is in the context of a fraudulent claim for non-existent or exaggerated loss. As to any further requirement of “materiality”, if one were to adopt in this context the test identified in the Royal Boskalis case [1997] LRLR 523 and The Mercandian Continent 572 [2001] 2 Lloyd’s Rep 563, then, as I have said, the effect is, in most cases, tantamount to saying that the use of a fraudulent device carries no sanction. It is irrelevant (unless it succeeds, which only the insured will then know). On the basis (which the cases show and I would endorse) that the policy behind the fraudulent claim rule remains as powerful today as ever, there is, in my view, force in Mr Popplewell’s submission that it either applies, or should be matched by an equivalent rule, in the case of use of a fraudulent device to promote a claim—even though at the end of a trial it may be shown that the claim was all along in all other respects valid. The fraud must of course be directly related to and intended to promote the claim (unlike the deceit in The Mercandian Continent). Whenever that is so, the usual reason for the use of a fraudulent device will have been concern by the insured about prospects of success and a desire to improve them by presenting the claim on a false factual basis. If one does use in this context the language of materiality, what is material at the claims stage depends on the facts then known and the strengths and weaknesses of the case as they may then appear. It seems irrelevant to measure materiality against what may be known at some future date, after a trial. The object of a lie is to deceive. The deceit may never be discovered. The case may then be fought on a false premise, or the lie may lead to a favourable settlement before trial. Does the fact that the lie happens to be detected or unravelled before a settlement or during a trial make it immaterial at the time when it was told? In my opinion, not. Materiality should take into account the different appreciation of the prospects, which a lie is usually intended to induce on insurers’ side, and the different understanding of the facts which it is intended to induce on the part of a judge at trial.

38. The view could, in this situation, be taken that, where fraudulent devices or means have been used to promote a claim, that by itself is sufficient to justify the application of the sanction of forfeiture. The insured’s own perception of the value of the lie would suffice. Probably, however, some limited objective element is also required. The requirement, where a claim includes a non-existent or exaggerated element of loss, that that element must be not immaterial, “unsubstantial” or insignificant in itself offers a parallel. In the context of use of a fraudulent device or means, one can contemplate the possibility of an obviously irrelevant lie—one which, whatever the insured may have thought, could not sensibly have had any significant impact on any insurer or judge. Tentatively, I would suggest that the courts should only apply the fraudulent claim rule to the use of fraudulent devices or means which would, if believed, have tended, objectively but prior to any final determination at trial of the parties’ rights, to yield a not insignificant improvement in the insured’s prospects—whether they be prospects of obtaining a settlement, or a better settlement, or of winning at trial. Courts are used enough to considering prospects, e g when assessing damages for failure by a solicitor to issue a claim form within a limitation period.”

………….

“45. What then is the appropriate approach for the law to adopt in relation to the use of a fraudulent device to promote a claim, which may (or may not) prove at trial to be otherwise good, but in relation to which the insured feels it expedient to tell lies to improve his prospects of a settlement or at trial? The common law rule relating to cases of no or exaggerated loss arises from a perception of appropriate policy and jurisprudence on the part of our 19th century predecessors, which time has done nothing to alter. The proper approach to the use of fraudulent devices or means is much freer from authority. It is, as a result, our duty to form our own perception of the proper ambit or any extension of the common law rule. In the present imperfect state of the law, fettered as it is by section 17, my tentative view of an acceptable solution would be: (a) to recognise that the fraudulent claim rule applies as much to the fraudulent maintenance of an initially honest claim as to a claim which the insured knows from the outset to be exaggerated; (b) to treat the use of a fraudulent device as a sub-species of making a fraudulent claim—at least as regards forfeiture of the claim itself in relation to which the fraudulent device or means is used (the fraudulent claim rule may have a prospective aspect in respect of future, and perhaps current, claims, but it is unnecessary to consider that aspect or its application to cases of use of fraudulent devices); (c) to treat as relevant for this purpose any lie, directly related to the claim to which the fraudulent device relates, which is intended to improve the insured’s prospects of obtaining a settlement or winning the case, and which would, if believed, tend, objectively, prior to any final determination at trial of the parties’ rights, to yield a not insignificant improvement in the insured’s prospects—whether they be prospects of obtaining a settlement, or a better settlement, or of winning at trial; and (d) to treat the common law rules governing the making of a fraudulent claim (including the use of fraudulent device) as falling outside the scope of section 17 (as advocated, though more generally, by Howard N Bennett in the article to which I have already referred in paragraph 36). On this basis no question of avoidance ab initio would arise.”

The test “tentatively” proposed, therefore, is that fraudulent means or devices are sufficient to vitiate a valid claim if:

(1)          they are directly related to the claim and intended to promote the claim; and

(2)          the fraudulent means or devices would, if believed, tend, objectively and prior to any final determination at trial of the parties’ rights, to yield a not insignificant improvement in the insured’s prospects, whether they be prospects of obtaining a settlement, or a better settlement, or of winning at trial. In this context “not insignificant” has the same connotation as “not insubstantial”, “not immaterial”, “not de minimis”, which is the test for the fraudulent claims rule, of which the rule as to fraudulent means and devices is to be treated as a subspecies.

The logic and juridical pedigree of such an analysis is, with the very greatest respect, powerful. It was adopted and applied by the Privy Council in Stemson v AMP; by Blair J in Sharron’s Bakery (who as a result of a concession treated the test under a clause applying to claims “in any respect fraudulent” as replicating the common law); and by Eder J in Brown v Aviva. Nevertheless the low and relatively inflexible threshold which this test of materiality imposes is one which I find in a number of respects unsatisfactory.

The policy considerations which apply to fraudulent claims take on a very different aspect in the context of fraudulent means or devices which are deployed to support a wholly valid claim. The policy of the rule as applied to fraudulent claims is to deter an assured from seeking to recover more than his entitlement without risk of penalty; this is explicit in the rationale given by Lord Hobhouse in The Star Sea at [62] and Mance LJ at [31] of Axa v Gottlieb. In the context of the extension of the rule to fraudulent means or devices deployed in support of a valid claim, the assured is seeking to recover no more than his entitlement, albeit employing underhand means in doing so. It is true that he is still seeking to gain to some extent by his fraud: he intends to persuade the insurer to pay his valid claim more promptly than the insurer otherwise might and without recourse to litigation, or to make a more generous offer of settlement than otherwise might be forthcoming. But he is not seeking to gain any more than that which the court has subsequently been able to determine is his contractual entitlement.

A different justification for the fraudulent claims principle which has been suggested is that it lies in the asymmetry of information which also underpins the duty of disclosure at the time of making the contract of insurance. This is the explanation for the rule in the majority judgments of Hoffmann LJ and Sir Roger Parker in Orakpo at 450 and 452: a duty of good faith arises at the time of making a contract of insurance because the material facts are peculiarly within the knowledge of the assured; the same is generally true in relation to the casualty, and the continued existence of the duty of good faith at the time the claim is presented and pursued is justified by this imbalance; insurers have to be able to trust the assured to put forward a claim in good faith. But this asymmetry of information at the claims stage is a commonplace of many civil claims. Outside the insurance context, the quantification of a claimant’s damages will often depend upon facts and circumstances which are peculiarly within the knowledge of the claimant. I find this rationale for the rule, with respect, insufficient to explain its peculiar and exclusive application to insurance claims. It is not the justification which has been adopted in the subsequent authorities, including in particular The Star Sea, Agapitos v Agnew and Axa v Gottlieb.

The assured’s contractual entitlement is an entitlement to be indemnified, that is to say to be held harmless against the suffering of the loss in the first place: see Firma C-Trade S.A. v Newcastle Protection and Indemnity (The Fanti and The Padre Island) [1991] 2 AC 1, 35). Non payment by the insurer, even during a reasonable period for investigation, is a breach of the insurer’s obligation to indemnify. His failure to pay may well cause the assured to suffer consequential loss; but the assured cannot recover for losses caused by the insurer’s wrongful refusal to pay a valid claim: see Ventouris v Mountain (The Italia Express No 2) [1992] 2 Lloyd’s Rep 281. In this respect the law disadvantages the assured, and is widely regarded as unfair and in need of reform. In seeking prompt payment of a valid claim, an assured is not only seeking that to which he is entitled, but may often be seeking to avert consequential losses which are being caused by the insurer’s wrongful refusal to pay the claim. In the marine insurance context these may be very substantial. The irrecoverability of losses caused by the insurer’s failure to pay a valid claim bears on the current problem in two ways. First the degree of culpability which attaches to an assured who uses a fraudulent device to seek prompt payment of a valid claim, in order to avert further irrecoverable losses which are being caused by non payment, may lie at the lower end of the scale, especially when set in the context of the fact that the non payment of the claim is a failure by the insurer to do that which is the very essence of the contract of indemnity, namely to hold the assured harmless from the consequences of the casualty. This will especially be so if the insurers’ conduct is unreasonable. Secondly, if the fraudulent devices rule deprives the assured of his claim, it leaves him to bear losses comprising not only the amount insured, but also losses suffered by reason of non payment of his valid claim, which may potentially be very substantial. These may be very harsh consequences to visit upon an assured whose culpability is at the lower end of the scale.

All fraud rightly attracts condemnation. In the Law Commission’s recent second consultation paper on “Insurance Contract Law: Post Contract Duties and other issues”, it is recorded at paragraphs 6.1 and 6.6 that fraudulent insurance claims are a serious and expensive problem. The Association of British Insurers (ABI) reported that in 2010 insurers uncovered 133,000 fraudulent claims; and that the value of these claims totalled £919 million or 5% of the value of all claims made on its members that year. According to an ABI news release dated 28 July 2011, insurance fraud is said to cost the UK economy £2 billion every year. If these figures are accurate, they fully justify the widespread judicial comments that insurance fraud is prevalent and a scourge. But it may be appropriate to sound a note of caution. I would venture to doubt whether a significant element of the problem reflected in these figures is represented by wholly valid claims which are supported by a fraudulent device.

Whilst any fraud is to be condemned as reprehensible and is to be discouraged, the degree of culpability and the force of the condemnation must take their colour from the differing circumstances of each case. Not all fraud attracts the the same moral obloquy, as is recognised in the sentencing practice applied to criminal offences involving dishonesty and fraud. The assured who burns down his house for the insurance proceeds, or makes a claim for a fictitious loss attracts greater condemnation than the householder who includes, within a property and contents claim of £500,000, a claim for £2,000 for a computer he has genuinely lost, but believing that the insurers will not pay without some proof of purchase, supports it by presenting an invoice which is for a similar computer which has not been lost, in circumstances where he knows it is not the right invoice but can’t be bothered to search for the right one. Those cases where fraud is employed by an assured in pursuit of a wholly genuine and valid claim may come towards the lower end of the scale of culpability. The conduct of the insurer in declining the claim may be unreasonable. Insurers may be seen by assureds, whether legitimately or not, as “messing them about” in delaying or declining the payment of a valid claim. In the marine context, assureds often pay large premiums, and the insurance is taken out with the purpose, and legitimate expectation, that the cover will enable them to cope with the serious financial impact of a casualty: delay in payment of a claim can cause real financial hardship. That was the position of the Owners in this case and Chris Kornet’s frustration at the continuing and serious adverse consequences for the Owners resulting from the Underwriters’ delay in accepting the claim, however reasonable the Underwriters’ conduct, is an understandable human reaction.

As formulated in Agapitos v Agnew, the materiality test is not concerned with the protection of the particular insurer who is the victim of the fraudulent device. There is no requirement that the insurer should have been deceived by the lie, or that the lie should have played any part in his consideration of whether or when to pay the claim. It is the assured’s attempt to deceive which is sufficient to attract the penalty of forfeiture of the valid claim. Moreover the logic of the test is that the attempt to deceive, once committed, is irremediable. A correction or retraction would be ineffective. The assured who in a fit of exasperation tells a lie but, having calmed down, corrects it the following day, would still forfeit his claim: see Stemson at [34].

The test is therefore capable of operating to visit disproportionately harsh and unjust consequences upon an assured in favour of an undeserving insurer.

Such potential consequences fall to be judged against the background of two anomalous aspects of the fraudulent devices rule. The first is that the rule of law under consideration is one imposed upon the parties as an incident of their contract notwithstanding that the parties have not agreed it. Many non marine policies contain a term which provides for forfeiture of the claim in the event of fraudulent claims or means: see for example the clause in Sharron’s Bakery at [75]. Insurers are free to include such a term in their policies if the assured will agree to it. In the absence of such a clause, the parties have not agreed that any fraudulent device will forfeit a valid claim, either expressly or by a process of implication or interpretation of their agreement. The fraudulent claims rule appears to have had its origin in clauses inserted in fire policies until the law took a turn in the early 19th century of treating such clauses as no more than a reflection of the position at law. Whether that was a wrong turn is not now open to debate, for the fraudulent claims rule is established at the highest level. But the scope of the fraudulent devices rule is less well established, and the question under consideration is as to the consequences which the law should visit on parties to a contract who could have provided that a valid claim should be forfeited if tainted by a fraudulent device used in support of it, but have chosen not to do so. That would suggest that the approach should be to interfere with the parties’ bargain no further than the policy of the law strictly requires.

The second anomalous aspect of the rule is that whilst any fraud is reprehensible and is to be discouraged, it is not normally the function of the civil law to provide such deterrence. The fraudulent claims rule in insurance is a form of penal non damages which, so far as I am aware, has no parallel elsewhere in the common law. Yet deliberate exaggeration of claims, for example in the context of personal injuries, occurs regularly and does not attract the sanction of loss of that part of the claim which is valid: see for example the observations of Lord Clarke in Summers v Fairclough Homes at [32], of Park J in Agapitos v Agnew at [58], and of Smith LJ in Ul-Haq v Shah [2010] 1 WLR at [17]. Fraudulent claiming is not a problem peculiar to claims by assureds under contracts of insurance. His Honour Judge Hawkesworth QC (quoted in Ul-Haq at [13]) has said the following in relation to road traffic accidents, where the claim is in tort and does not arise under a contract of insurance, and the defendant is, nominally at least, not an insurer:

“Unhappily such fraudulent claims are now legion. They occupy the court time of District Judges and Circuit Judges in West Yorkshire literally week in and week out. My own judicial experience reflects, I have no doubt, that of many of my brethren throughout the country. Just about every variant of a fraudulent claim comes before the court, including deliberately staged collisions, damage caused to vehicles which have never been in collision at all, claims deriving from the most trivial touching of vehicles, and claims in which a driver will assert that his car was carrying other members of his family including his children, when in fact none were present but all of whom have reported to a hospital or their General Practitioner that they have been injured, and who are then able to produce an apparently independent expert’s report confirming the fact of such injury. The cost to the insurance industry and to other honest policy holders must be very substantial. In addition, and of more relevance to these proceedings, the cost in court time in trying such cases is very high, with the added knock-on effect of casting suspicion onto many genuine claims so that claimants are put to proof of their legitimate and genuine claims for compensation when in other circumstances they might not have been called upon to do so.”

These are all examples of fraudulent claims which are in whole or in part invalid, rather than valid claims supported by a fraudulent device. Yet the common law makes no provision for the forfeiture of the valid element of such claims outside the insurance context, let alone those which are wholly valid. If the anomalous rule is to be extended to fraudulent devices used in support of valid claims, it is to my mind important that it should not itself be allowed to be used as an instrument of injustice.

As a result of all these considerations, I would be strongly attracted to a materiality test which permitted the court to look at whether it was just and proportionate to deprive the assured of his substantive rights, taking into account all the circumstances of the case. The blunt instrument of a relatively inflexible test of materiality, reminiscent of the old latin tag “fraus omnia corrumpit”, must surely be capable of yielding to a more proportionate response, which can meet the varying circumstances of each case. Such a flexible approach has been introduced in Australian law in section 56 of the Insurance Contracts Act 1984 (which however does not apply to marine insurance) which allows a court, in relation to claims which are partly false and fraudulent, to order payment of an amount which it thinks just and convenient where forfeiture of the part of the claim which is valid would be harsh and unfair.

Support for such an approach can be found in the decision of the Supreme Court in Summers v Fairclough Homes [2012] 1 WLR 2004. In that case the claimant suffered an accident at work and sued his employers. The claim was defended by the employer’s liability insurers who were the real party at interest. The claimant obtained judgment on liability with damages to be assessed. For the purposes of the quantum hearing the claimant signed a witness statement describing the debilitating effect of his injuries and the extent to which they had rendered him unable to work. His initial schedule of loss claimed over £800,000. The employer’s liability insurers discovered by means of covert surveillance that this was fraudulent and involved a gross exaggeration of his injuries, and sought to strike out the claim as an abuse of process. The trial judge held that the exaggeration of the injuries, and the consequent claims for loss advanced in successive schedules of loss, were dishonest and that he had deliberately lied as to his ability to work. The judge assessed the value of the valid claim at £88,716.76. He declined to strike out that claim, on the grounds that he was bound by the decisions of the Court of Appeal in Ul-Haq v Shah and Widlake v BAA Ltd [2009] EWCA 1256 which decided that there was no power to do so. The Supreme Court overruled those decisions and held that there was power to strike out claims as an abuse where they were fraudulent in any respect, but declined to do so in respect of Mr Summers’ claim. There was no appeal against the amount which the trial judge had assessed as being the extent of his valid claim.

Lord Clarke, giving the judgment of the Court, recorded at [24] that it was accepted on behalf of the claimant that in making the false statements of truth and in presenting a dishonest case as to the effect of his injuries and on quantum, the claimant was guilty of a serious abuse of process. At [33] he stated:

“We have reached the conclusion that notwithstanding the decision and clear reasoning of the Court of Appeal in Ul-Haq, the court does have jurisdiction to strike out a statement of case under CPR 4.3(2) for abuse of process even after the trial of an action in circumstances where the court has been able to make a proper assessment of both liability and quantum. However we further conclude, for many of the reasons given by the Court of Appeal, that, as a matter of principle, it should only do so in very exceptional circumstances.”

Having repeated at [36] that the court would only strike out a claim as an abuse at the end of a trial in very exceptional circumstances, Lord Clarke went on at [43]-[44] to approve paragraph 72 of the judgment of the Court of Appeal in Masood v Zahoor [2010] 1 WLR 746, to the effect that it would only do so where the abusive conduct was such that the claimant had forfeited his right to have his claim determined, which would be “a very rare case”. At [46]-[49] he referred to a claimant’s rights under Article 6 of the European Convention on Human Rights requiring the court to examine the circumstances of the case scrupulously in order to ensure that to strike out the claim would be a proportionate means of achieving the aim of controlling the process of the court and deciding cases justly. At [49] he said:

“The draconian step of striking a claim out is always a last resort, a fortiori where to do so would deprive the claimant of a substantive right to which the court has held he was entitled after a fair trial. It is very difficult indeed to think of circumstances in which such a conclusion would be proportionate. Such circumstances might, however, include a case where there had been a massive attempt to deceive the court but the award of damages would be very small.”

At [61] he concluded that

“The test in every case must be what is just and proportionate. It seems to us that it will only be in the very exceptional case that it will be just and proportionate for the court to strike out an action after a trial.”

I find this decision instructive in the context of fraudulent means or devices deployed by an assured prior to the commencement of litigation. The fraudulent claims rule itself, and its extension to fraudulent devices, is restricted to the period prior to the commencement of litigation (see Summers v Fairclough Homes at [29], The Star Sea at [77] and Agapitos v Agnew at [47]-[53]). But the policy of deterrence of fraud, which is said to underpin the rule, is not diminished at the point of time when the assured brings the claim before the court. On the contrary, one might have thought that the policy of deterrence was at its strongest after the commencement of litigation, when such fraud amounts not only to an attempt to deceive insurers but additionally to an attempt to manipulate the court’s process. If in the latter context an assured is not to be deprived of his substantive rights save in the very rare and exceptional circumstances where that is a just and proportionate sanction for his fraudulent conduct, it is difficult to see a justification for applying a lower threshold to the same conduct in presenting his claim prior to the commencement of litigation.

In these circumstances, and with the very greatest diffidence and respect, I would hesitate to follow the tentative proposals suggested by Mance LJ in Agapitos v Agnew. My own view would be that if the law is to extend the draconian effect of an anomalous rule, applicable only to insurance claims, and then only prior to the commencement of litigation, to striking down wholly valid claims, the policy of the law should be to require at least a sufficiently close connection between the fraudulent device and the valid claim to make it just and proportionate that the valid claim should be forfeit. The law does not provide in this context that the end always justifies the means; but nor should it say that any dishonest means which are more than de minimis should deprive a litigant of his just ends. What will be just and proportionate will depend upon the circumstances of each case, which may vary considerably.

Can such a conclusion be reconciled with the decision of the Privy Council in Stemson v AMP General ? I do not believe that it can. In that case an assured brought a claim for property damage arising from his house burning down. It was common ground that the fire was arson and the main issue was whether the assured was party to the arson. The trial judge held that he was, and the decision was upheld by the Court of Appeal of New Zealand and the Privy Council. The trial judge held that the claim also failed on the additional ground that it was supported by a fraudulent device. The assured had made a dishonest statement to the insurer’s claims investigator that he had not previously attempted to sell the property or even considered putting it on the market. The trial judge found that he had been to see a real estate agent and asked him to put the property on the market, in a serious attempt to sell the property, shortly before the fire. He described this as a knowingly false statement “of very distinct significance in the context of the investigation into this fire”, and held that this provided a separate ground entitling the insurer to avoid liability under the policy quite independently of the arson.

Lord Mance, giving the judgment which represented the unanimous opinion of the Board on this point, upheld this ground. He recorded at [35] that counsel for the assured did not challenge any of the statements of principle which, as Mance LJ, he had set out in Agapitos v Agnew and concluded at [36]:

“On that basis, the Board has no hesitation in upholding the judge’s conclusion that, quite apart from any question of arson, the respondent was entitled to reject the appellant’s insurance claim (as it did) on the ground that the appellant had sought to promote it in May 1992 by lying to the respondent about the position, and his state of mind, regarding any attempt to sell the house prior to the fire. The materiality of such matters to the respondent’s investigation and evaluation of this insurance claim is not challenged and is, as the judge indicated, obvious.”

In that case the assured’s claim was wholly fraudulent, so that the Board was not considering the point in the context of a valid claim. Nevertheless the unspoken assumption underlying the conclusion that it was an additional ground for declining the claim is that it would have been sufficient to defeat the claim if the householder had been the innocent victim of a malicious arsonist. In treating the test as one of the materiality to the insurer’s investigation and evaluation of the claim, the Board were applying the test proposed by Mance LJ in Agapitos v Agnew.

Decisions of the Privy Council are not binding on me, but they command the very greatest respect. The decision in Stemson was reached without any argument on this point, but was reached unanimously and without hesitation. The reasoning of Mance LJ in Agapitos v Agnew, whilst strictly speaking obiter and so not binding on me, was a full and considered analysis after argument on the point, and was agreed with by the full court. By contrast, I have not had full argument on the point. In those circumstances I shall apply the test of materiality proposed by Mance LJ in Agapitos v Agnew and ignore my own tentative inclination to apply a test of what is just and proportionate.

Investigation of the casualty and presentation of the claim

On 29 January 2010 Gertjan Kornet attended the Vessel at Gdynia in the immediate aftermath of the casualty, as did Han Gravendeel of Doldrums, the surveyors appointed on behalf of the Underwriters. On 30 January 2010 the crew signed a joint “declaration” pursuant to a request from Gertjan Kornet that they talk together and prepare a joint statement. The declaration dealt only with the narrative of the casualty, and started its account of events with the bilge alarm being heard by the Engineer at 2058.

Water was pumped from the Vessel between 30 January and 2 February, and diving inspections took place on 30 and 31 January. Arrangements were made to discharge the cargo, which was completed on 20 February, and the Vessel moved to drydock between 22 and 24 February, where surveys and inspections were undertaken by Gertjan Kornet and Mr Gravendeel amongst others. On 26 February the Vessel left Gdynia under tow for Bremerhaven, where she arrived on 4 March for permanent repairs.

On 24 February Gertjan Kornet prepared a report headed (in translation) “EXPLANATION OF THE CAUSE OF THE LEAKAGE DC MERWESTONE” which was emailed to Chris Kornet and to Carins, the Owners’ Dutch broker. The report concluded that the initial suspicion that the stern screw was the source of ingress was misplaced; and that the sealing and pressure testing of compartments through which the leak might have come pointed to the bowthruster room as the source; but that the question which “everyone was wondering” was whether that could have caused the engine room to fill so quickly. It was in this context that Gertjan Kornet recorded his discussions with the crew, which referred to the bilge alarm going off at 2115 but did not address whether an alarm had gone off earlier in the day. The report was based on what were described as some “fairly critical questions” asked of the crew who remained on board, which included the Master and Engineer.

The claim was presented to Gerling through Carins, the producing broker, and Jardine Lloyd Thompson (“JLT”), the placing broker. At the request of Gerling, and with the cooperation of the Owners, arrangements were made for the Underwriters’ Admiralty Manager, Mr Billowes of Ince & Co, to attend the Vessel and to interview the crew. He attended the Vessel on 2 April 2010 and interviewed the Masters (Capt Loosman and Capt Lilipaly), the Chief Officer and the Second Officer in Holland on 1, 6 and 7 April 2010, and the Engineer in Manila on 12-13 April 2010. Gertjan Kornet and Kees Parel appear to have sat in on at least part of the interviews at Werkendam, but the Owners did not have a representative present throughout and were not provided with notes or statements of the evidence taken.

On 16 April 2010 Mr Billowes sent an email to Werner Schurink at Carins asking him to ask the Owners to provide 36 categories of documents and in addition “Owner’s explanation for the cause of the ingress, the spread of the ingress into the engine room and the reason the ingress could not be controlled by the ship’s pumps.” It was forwarded by Mr Schurink to Chris and Gertjan Kornet, Ton Schootens the adjuster, and Han Gravendeel of Doldrums, the Underwriters’ surveyor, with the suggestion that they all work on it “full steam ahead”.

The response came in a letter dated 21 April 2010 signed by Chris Kornet which was forwarded to Mr Billowes by Carins on 23 April 2010. It included the following passages:

“After further internal investigation due to the problems onboard DC Merwestone we will inform you as follows.

Facts

Floating visual by crew 28 January 2010 around 21.00 hrs.

Bilge alarm from bow thrusters and engine room have the same alarm point so nobody can see exact which area gives alarm.

First alarm was going off around noontime due to rolling vessel (weather SSE 7) vessel rolling. No investigation in bow thruster room.

When bilge alarm activate during rolling nobody has controlled this due the rolling.

…………….

Due to the weather circumstances the first bilge alarm has go gone of off [sic] in the morning. If there was leakage or due to rolling we are not sure.

………..

Conclusion

1. starting time of leakages is around 13.00 hrs on 28 of January”

On 1 June 2010 the two case handlers at Ince & Co sent an email to Mr Schurink stating that they had reviewed the documentation and information provided by Owners, including the letter dated 21 April. Ince & Co sought clarification in the form of questions on 13 topics. Question 2 was as follows:

“(2)(a) What evidence do Owners rely on that the bilge alarm operated around noon on 28 January?

(b) Who heard it and when?

(c) Who acknowledged it?

(d) Who took the decision not to investigate it?”

The response came in a letter to Gerling signed by Chris Kornet dated 27 July 2010 giving the following answers:

“2(a) Owners were told by the vessel’s captain that the bilge alarm operated around noon on 28 January.

2(b) Owners believe it was the watchkeeper/Master on the bridge and the Engineer in the engine room. They thought the alarm was routine. For further information, Owners suggest Underwriters refer to their own interview notes.

2(c) Owners do not know. They suggest that Underwriters refer to their own interview notes.

2(d) Owners assume it was the Master. It was in any event not possible to go forward. Temperatures were minus 10 to minus 20, and the vessel was shipping heavy seas and water over the fore deck. Furthermore, Underwriters have interviewed the crew members.”

The Report of Captain Barker of TMC dated 27 January was forwarded through the broking channel to JLT on 22 February 2011. At paragraph 3.3 it included the following as part of the narrative of the casualty:

“Whilst at sea, in SSE’ly Beaufort force 7 winds, at about noon on 28th January the bilge alarm sounded. There is a bilge alarm fitted in the Bow Thruster Room and the Engine Room however the alarm is connected to a single buzzer/warning light in the Engine Room and on the Bridge. If the alarm sounds it is necessary to verify the bilge levels by visual inspection. The vessel was rolling, and due to the adverse weather (which would have been just aft of the port beam), the alarm was accepted without anyone going forward to inspect the Bow Thruster Compartment. The crew’s experience was that the alarm is sometimes triggered when the vessel was rolling and they were not unduly concerned. The bilge warning light would have remained on.”

It will be recalled that by the time of the trial the Owners no longer contended that an alarm had gone off before 2058 on the 28 January 2010.

Preparation of the 21 April and 27 July letters and TMC report

As indicated above, Chris Kornet received by email from Carins, on the evening of Friday 16 April 2010, Ince & Co’s request for the Owners’ explanation for the cause of the ingress, the spread of the ingress into the engine room and the reason the ingress could not be controlled by the ship’s pumps. On the morning of Tuesday 20 April at 1053, he sent his draft response to Mr Schurink, which contained the relevant passages about the noon alarm in materially identical form to those in the letter as sent on 23 April.

Chris Kornet’s evidence in cross examination was that before preparing that draft, he spoke to the Master on the telephone for 5 to 10 minutes, on 20 April, and that the Master told him during that conversation that the alarm had gone off at around noon, although not that it had been ignored as attributable to the Vessel rolling. The watchkeeping arrangements on the Vessel were for watches from 1-5, 5-9 and 9-1. The Master took the 0900-1300 watch and so would have been on watch at around noon. Chris Kornet accepted in his evidence that the explanation for not investigating the alarm was speculation; it was based on the Master’s confirmation that there had been an alarm and what he, Chris Kornet, thought the most likely explanation based on his own understanding of the conditions. His understanding that the weather at noon on 28 January 2010 was SSE 7, as recorded in the 21 April 2010 letter, originated in the deck log, which records that as the wind speed and direction on that day, together with rough sea and moderate swell. That entry is for a 0800-1200 watch. For a noon to 1600 watch the relevant entry is wind N 3, sea slight, swell low. Chris Kornet was cross examined on the basis that the log showed that the weather at noon was slight seas and a low swell, but that is not the obvious reading of the log. The log was on a pre printed form which assumed normal watch changeover times of noon/midnight, 4 o’clock and 8 o’clock, whereas on the Vessel the watches changed at 1 o’clock, 5 o’clock and 9 o’clock. Although one might expect the wind and sea state recorded to pertain to the beginning of the watch, the entries record the vessel’s position at the end, rather than the beginning, of the watch, so that the 0800-1200 entry has the GPS position at noon. The 0800-1200 entry records the pilot coming on board at Klaipeda at 0800, casting off lines at 0950, and the pilot disembarking at 1050, from which it would have appeared that at the beginning of the watch the Vessel was still in Klaipeda and not subject to rough seas and a moderate swell which were recorded against that watch. Even if that is not the correct reading of the log, judging from the photocopies in the bundles, which do not have the entries on the same page as the time to which they relate, it would be an easy mistake to make to treat that as the noon weather and sea state. I accept that when preparing his responses, Chris Kornet believed the weather at noon to have been SSE7 with rough sea and moderate swell as a result of his reading of the deck log entry, whether that was a correct reading or a misreading, or a misremembering of the document.

Chris Kornet’s draft was promptly passed on by Mr Schurink to Mr Gravendeel with a request to consider whether the theory of ingress was plausible from a technical aspect. Mr Gravendeel responded later that day with a calculation that the cable duct openings were equivalent to a six inch diameter pipe, and other points not here relevant, which were passed to Chris Kornet for preparation of his final draft. On 21 April Mr Gravendeel said that he would take a critical look at one or two things when he was on board the Vessel the following day at Bremerhaven in relation to the filter lid; he did so and reverted on 23 April. There was no input or change to the passages dealing with a noon alarm prior to it being sent, save for an apparent intention to correct “go of” to “gone off” which suffered a word processing mishap of addition rather than substitution. The 21 April letter, as sent on 23 April, was drafted by Chris Kornet on his own, not in conjunction with his brother Gertjan. The question about the filter lid was dealt with separately in a letter dated 23 April.

When the 1 June email was received by Mr Schurink, it was promptly forwarded to Chris Kornet and Gertjan Kornet the same day, with Mr Schurink’s comment that he “could only see one really annoying question, namely 10A”. That was a question asking who at K&Z had authorised the cutting of the ballast line.

Gertjan Kornet prepared a response for internal consideration the same day which answered Questions 2(a) to (d) compendiously as follows:

“No crew member report this. But according the last ism report it was working so theoretical it have to be working. Also at that time. We have to be aware the report which was send by owners was a report about the situation which most probably happened, not the one who happens. Looking to the weather forecast and wind direction the vessel was rolling at that time, so from experience we have the idea what has happened. No crew member has report this.”

This response was forwarded to Chris Kornet that afternoon. Chris Kornet’s reaction was “Questions, but when is my question going to be answered” meaning when were the Underwriters going to make a decision on payment of the claim. He did not at that stage, or indeed at any subsequent stage, take up with Gertjan Kornet the latter’s assertion that no crew member had reported a noon alarm. He provided his own additional comments to Mr Schurink on 2 June without addressing question 2.

At 1248 on 2 June Mr Schurink coordinated the answers into a single document and sent it to Chris and Gertjan Kornet emphasising that it was a very important document and that “you as shipowners have to back it completely”. It answered question 2 as follows:

“2a. According to the last ISM report it was working properly

2b. no crew member reported this to us

2c. nobody

2d. we cannot say if this decision was made at all as no comment was made on this alarm.”

This draft was also forwarded to Mr Gravendeeel for his advice from a technical aspect, which resulted in a slight change to the answer to question 6. When Mr Schurink forwarded a revised version to both Chris and Gertjan Kornet on 3 June he left the answers to questions 2(b)(c) and (d) blank. His covering message recorded that Chris Kornet was going to give him the correct answers and commented “after all on 21/4 we wrote “alarm was sounded at noon””. This drew attention to the difficulty in reconciling what had been drafted as a result of Gertjan’s Kornet’s response with what Chis Kornet had said in the 21 April letter.

Chris Kornet’s response was to draft a form of wording which he sent by email to the Master at 1515 on the same day, 3 June, in the following terms (correcting some of the typographical errors and linguistic and syntactical infelicities in the original):

“In the morning a bilge alarm went off do you know roughly at what time and what did you do and why? If I say the following can you go along with it think about what you stated earlier. [this part was in Dutch, the remainder was in English]

Please be aware the report we sent was based on brief information from various persons. Based on the information we sent the message as what could happen based on this info

When vessel starts rolling after leaving Klaipeda we had bilge alarm. This is a combined alarm between bow thruster room and engine room. We check the engine room but this looks in normal condition. Due to the rolling we take it as a fact bilge alarm was from bow thruster room and activated due to rolling.

Alarm sound is on the bridge and in the engine room so watch keeping person should have heard this

Acknowledgement has to be done in the engineroom

We can not give a clear answer on the last questions. It should be motorman or officer of watch.”

In his second witness statement which he verified in evidence, Chris Kornet said that he had convinced himself at around this time that there had been an alarm earlier in the day, and he had spoken to the Master “on several occasions” to say that he could not understand how there could not have been an alarm; and that eventually the Master said something like “I guess there must have been an earlier alarm”. Chris Kornet’s statement said “I took that to mean that he himself had heard the alarm.”

The passage in the email asking the Master to “think about what you stated earlier” is not a clear pointer to Chris Kornet already having had a conversation with the Master on this topic by that time: it might be an exhortation to ensure that what the Master confirmed was consistent with what he had said when interviewed by Mr Billowes of Ince & Co. It does not suggest that in any earlier conversation the Master had confirmed a noon alarm: it asserts a morning alarm and asks the Master what time it went off.

A little under four hours later, on the evening of 3 June, Chris Kornet sent an email to Carins saying that he had checked the information set out with the Master, and setting out answers in materially identical terms to the text of what had been sent to the Master earlier in the afternoon to see if he could “go along with it”. Chris Kornet’s evidence was that he spoke to the Master in the interim and the Master confirmed he was happy with the wording, although that was reconstruction rather than recollection because he freely accepted that he could no longer recall the specific conversation.

In the Master’s evidence to me, the Master accepted that the alarm had not gone off in the morning; he also appeared to accept in cross examination that he had never had a recollection at any stage that it had. However I formed the impression that he did not really understand the difference between these two concepts. He was asked whether he had told Chris Kornet that it might have happened but that he had no recollection, to which he replied “Yes, something along those lines”. He rejected the suggestion that Chris Kornet was very insistent on this account of events. The inherent probabilities are that Chris Kornet did have a further communication with the Master following the form of wording sent to him for approval; there would have been little point in sending it to him unless a response was insisted upon. Chris Kornet had copied in Mr Schurink with his email to the Master before he had a response and said “we will confirm”. I conclude that there was such a conversation in which the Master confirmed that he would support the account set out in Chris Kornet’s email. My assessment of what is most likely to have happened is that in this conversation, Chris Kornet made clear to the Master his view that the alarm must have gone off around noon, and that the latter ultimately conceded that there must have been such an alarm, which Chris Kornet took to be confirmation from the Master that he must have heard it because it was during his watch. The Master gave Chris Kornet confirmation that he would support the account sent to him in Chris Kornet’s email, which included the explanation for ignoring the alarm as attributable to the Vessel rolling.

On 7 June Mr Schurink adapted the answers he had been sent into a further draft and sent it back to Gertjan and Chris Kornet with the following rubric:

“The further edited version. Read your corrected item two (a/b/c/d) very carefully again! If I see things from the point of view of the insurers, I would still have a question about why the bow thruster room was not checked? Possible reply could be weather on board too bad and therefore dangerous?????”

In fact the account which Chris Kornet had sent to Mr Schurink confirming what he had checked with the Master did include a reference to the strong wind and temperatures of minus 20, but Mr Schurink had not included it in his redraft. Chris Kornet replied a week later on 14 June:

“We as owners have asked the crew why they have not checked the bow thrusters.

Answer weather was very bad se 7/8 see log book. Vessel was rolling water covers deck and hatches tempeture -20 degrees, so it was not safe for crew to go outside”

There is no suggestion that there was any new enquiry of the crew which prompted this response. Chris Kornet’s response was then added to the current draft as part of answer 2(d).

There is no documentation in the brokers file or from the Owners which reveals substantial discussion about the terms of the answers over the following six weeks. When the final version was signed by Chris Kornet on 27 July 2010 and sent to the Underwriters, the answers to question 2 had changed to the form I have set out above. These included

(1)          confirmation that the Master had said that he had heard the noon alarm;

(2)          confirmation that the Owners believed that it had been heard also by the Engineer;

(3)          confirmation that it had not been investigated because they thought it was routine; and

(4)          reference to the notes of interviews taken by Ince & Co on behalf of the Underwriters; this latter reference suggests that Chris Kornet believed that his account would be at least consistent with, if not corroborated by, what the crew had previously said during those interviews.

It is not clear what source of information was used by Captain Barker in compiling the TMC report of 27 January 2011, and the question was not explored at the hearing. The account set out in the report identified, as is usual, the factual basis on which he was expressing his conclusions. In this context it treated as fact the sounding of the noon alarm, and gave the rolling of the Vessel as the reason for the crew’s failure to investigate it. Chris Kornet could not remember whether the report had been sent to him, but accepted it was possible. In my view it is likely. By sending the report in support of the claim, the Owners were putting those matters forward as their explanation of what had happened on 28 January 2010, and I infer that Chris Kornet was aware that that was taking place.

Chris Kornet’s state of mind

There are two relevant features which form important context. The first is that as a result of legal advice from Carins, Chris Kornet believed, when preparing his responses in the 21 April and 27 July letters, and sending the TMC report, that it would assist the claim if he minimised any opportunity for attributing fault to the Owners, rather than the crew, in relation to the cause of the casualty. That is apparent from the following:

(1)          In an email of 26 March 2010, sent in the context of the forthcoming interviews of the crew by the Underwriters’ solicitors, Mr Schurink advised Chris and Gertjan Kornet as follows:

“This email is strictly confidential, please do not forward.

….. Important; nobody can say “the insured is to blame” (in the sense of the shipowner, let’s say “Werkendam”). That would unleash a discussion about the final sentence in 6.2.5 of the policy conditions, namely;

Provided such loss or damage has not resulted from want of due diligence by the Assured, Owners or Managers.

On the other hand, it will probably not come to that; after all, we’ve got nothing to hide.

However, the men (crew) must not screw things up at the expense of the office. Admit mistakes. Everybody makes mistakes once in a while, especially if there is a bit of panic, and errors by the crew (crew’s negligence) is covered.”

Chris Kornet accepted in evidence that he regarded this as legal advice, and that he understood that it was to the effect that the Owners and their office should be distanced from the casualty.

(2)          The advice was reinforced by a further email from Carins on 16 April in the context of the request in Ince’s email for an account of the cause of ingress:

“We have let the list settle. I assume we can answer everything. We have to be careful with the first two questions. On the one hand, we have to give an “adequate”, satisfactory answer, on the other hand, the owner does not have to be aware of (important) defects …. “

(3)          In similar vein was an email of 21 April from Mr Schurink to Chris Kornet, in which the broker addressed the other question asked by Ince & Co in their email of 16 April, which requested an explanation of the fire pump filter cover being found to be loose. Mr Schurink emphasised that it didn’t matter what the answer was (so long as it was the truth) if it was a mistake by someone other than the owners.

(4)          On 24 May 2010 Mr Whaley of JLT summarised his assessment of the legal position in an email which was forwarded to Chris Kornet in the following terms:

“Further to our exchange of emails over the weekend, I have reviewed the Doldrums report once again and based on their conclusions the cause of loss is Frost dmg due to the extreme weather conditions experienced in Northern Europe in Jan 2010, exacerbated by the actions of the crew once the Ingress of water commenced. We have the benefit of the Additional Perils cls, which basically provides all risks cover with specific exclusions. Unless Gerling/Ince can demonstrate that Owners did not act with due diligence and knowingly allowed the vessel to put to sea in an unseaworthy condition or the damage is due to wear and tear, then there is a claim under the policy, lack of due diligence is a very difficult defence to run under English law, unless of course the vessel was in breach of Class/ISM etc.”

(5)          In the light of these exchanges Chris Kornet would have understood why Mr Schurink described Ince’s question 10A, asking who at K&Z had authorised cutting the ballast line as “annoying”; it was because it focussed on the involvement of the Owners.

(6)          On 7 June 2010 the Owners instructed solicitors, Holman Fenwick Willan LLP. It is to be inferred that they gave advice in relation to the policy terms.

The second element of context is that Chris Kornet became increasingly frustrated that the Underwriters were not paying the claim. By the time the 21 April letter was finalised and sent on 23 April, the yard at Bremerhaven had indicated that they would not release the Vessel without some payment, or security, for the substantial cost of repairs. Chris Kornet was anxious for a swift decision from the Underwriters to make a payment on account of the claim, to enable the Vessel to be released. As the months passed and the brokers pressed for a decision, those on the Owners’ side became increasingly convinced that the delay was not promising and that the Underwriters would require further information. In the week following receipt of Ince & Co’s 1 June questions, Chris Kornet’s frustration with the Underwriters’ failure to pay the claim had become more pronounced. The Vessel was still in the yard, and the Owners needed the insurance proceeds to provide a bank guarantee for €1.2m which the yard was demanding for release of the Vessel. In his evidence Chris Kornet repeatedly emphasised that his main preoccupation in the week he received the 1 June questions was to get the Vessel released from the yard. He wanted to be paid by the insurers, not to have to answer further questions. His frustration was palpable in his evidence, and was exemplified in an answer he gave in cross examination, without any intended humour or irony, that he regretted that on his computer “there was only one button which was not there, and that was the button F*** off I want the money”. At the end of that week at the beginning of June he managed to secure more favourable terms on which the yard would release the Vessel, but his formulation of the answers to question 2 took place in that week against the background of his frustration with the Underwriters.

I cannot accept Chris Kornet’s evidence that he spoke to the Master on 20 April before preparing his letter dated 21 April, or that he was told by the Master then that the alarm had gone off at around noon. There is no reference to this conversation in his second witness statement, which was provided pursuant to an order to respond to the allegation of fraudulent presentation of the claim in the Underwriters’ Re-Amended Defence, and was expressly relied upon in support of the Owners’ pleaded case. The contents of this witness statement were confirmed in his evidence in chief. The statement deals in detail with the circumstances leading to his letter dated 21 April without any reference to any conversation with the Master on 20 April. It refers instead to conversations with the Master in June, which is consistent with and corroborated by the documents identified above. If there had been a conversation on 20 April it is most improbable that he would not have told his brother Gertjan, who could not then have drafted the initial response in the terms he did on 1 June saying that no one had reported a noon alarm; and he would have been bound to have corrected what would have been an important and obvious mistake by Gertjan Kornet, when he received that draft; whereas he made no adverse comment on it in his responses on 1 and 2 June, and went back to the Master on 3 June with an account which needed the Master’s confirmation. Chris Kornet’s evidence of a 20 April conversation came unheralded for the first time in cross-examination and after the Master had been cross-examined and released, so that he could not be asked about it. But the Master’s evidence casts some further doubt on it. The Master was on holiday in Indonesia for four weeks after his interview with Mr Billowes on 6 April, and when on holiday was not in contact with his office or at best “hardly ever”. Moreover if the Master had stated on 20 April that there had been an alarm at noon, it is improbable that there would not have been a discussion about whether it was investigated and to what it was attributed, yet Chris Kornet says he was told nothing on this occasion by the Master about the crew’s reaction to the alarm.

In these circumstances my assessment of Chris Kornet’s state of mind at each stage is as follows.

When he prepared the 21 April letter, his principal focus was on addressing a source and rate of ingress which was realistic. In doing so he reached a conclusion that the water in the bowthruster room was probably sufficient to trigger the alarm at around noon. He was conscious that that required an explanation as to whether the alarm had gone off at around noon, and if so why it had not been investigated. He also believed that it would not assist Owners’ case if the alarm had failed to trigger, because it would point to the defective condition of the Vessel rather than crew negligence, and that an explanation that the alarm had gone off, and been ignored, would be preferable to one which involved the alarm not sounding. He had had no evidence from the crew that an alarm had gone off around noon, or been ignored, or as to what the reason was for ignoring it. He genuinely believed that if the alarm had gone off, it would probably have been ignored as a result of the weather conditions he believed the Vessel was encountering; ignoring alarms being triggered by rolling, with little water present, was from his experience a plausible explanation for ignoring the alarms. As he accepted in evidence, this was an explanation he himself hit upon as a matter of speculation, rather than based on anything the crew had told him. His account was given to fit his theory of ingress without making any attempt to check whether it was supported by anything the crew had said about the alarm going off. He suspected that his account might not be supported by the crew, because he knew that Gertjan Kornet had asked “critical questions” of the crew in preparing his report, and he had not been told by his brother or anyone else that any of the crew had heard an alarm earlier in the day. He genuinely believed that his account of the noon alarm and the crew ignoring it was a realistic explanation of events, but he was reckless whether it was supported by the crew’s recollection because he did not want the absence of confirmation from the crew to get in the way of an explanation which involved no fault on the part of the Owners or managers. He was indifferent to whether the Master or any other crew member had previously said that the alarm had gone off.

Mr Karia QC submitted that a finding of fraud was inconsistent with the explanations being copied to Mr Gravendeel, the Underwriters’ surveyor. But the latter’s involvement was expressed to be one of considering whether the explanation for the ingress was plausible from a technical point of view. He would not be expected to check or consider the Owners’ account of what the crew said about a noon alarm. His involvement gives no reason to doubt that Chris Kornet’s state of mind was as I have found.

When he put forward the answers in the 27 July letter, Chris Kornet’s state of mind was as follows. When the specific questions were posed in paragraph 2 of Ince & Co’s email of 1 June, he recognised that the account he had given had not been based on evidence from the crew but that the 21 April letter had given the impression that it had. He was therefore anxious to answer the question by suggesting that it was supported by what had been said by a member of the crew, so as not to appear to have said anything misleading in the letter. To this end he asked the Master whether he could live with an account which involved the Master having heard the alarm at noon, and the crew having ignored it as attributable to the rolling of the vessel. He received confirmation from the Master that he could support that account of events. He took this to be confirmation by the Master that he had heard a noon alarm. Accordingly his confirmation that the Master had said that he had heard the noon alarm was true; and he honestly believed that it had been heard also by the Engineer and that it had not been investigated because they thought it was routine. Although he did not check the latter aspect with the Engineer or the crew, he was not reckless as to its truth: it had been confirmed by the Master’s confirmation that he could support the account set out in the email Chris Kornet sent to him. Chris Kornet believed the answers given in the 27 July letter to be true, and that his answers would be at least consistent with, if not corroborated by, what the crew had previously said during Mr Billowes’ interviews.

For similar reasons the account given in the TMC report was believed by Chris Kornet to be true.

In these circumstances the Underwriters’ fraudulent device defence only falls to be considered by reference to the 21 April letter.

I should record that I derived no assistance from the considerable debate about the passages in the 21 April letter, and subsequent documents, dealing with the decision to cut the ballast line, whether it was the Owners or the crew who first suggested it, and whether the Owners authorised or instructed it. The nuances deployed in interpreting the language used by the Owners in the letter, and in evidence, were more sophisticated than the circumstances warranted. English was not the first language of Chris or Gertjan Kornet. I acquit the Owners of any dishonesty or intention to mislead in those passages.

Was the 21 April letter a “fraudulent device”?

The letter addressed in some detail Chris Kornet’s theory as to the source and volume of water ingress at various stages, concluding that the source of ingress was a combination of the emergency fire pump and possibly ingress of ballast water. In many respects it was self evidently his theory as to the course and cause of the casualty, rather than recitation of underlying evidence or raw data. The cross examination proceeded on the footing that there was a clear dichotomy between a theory as to what might have happened on the one hand, and a factual account of what had happened on the other. But in my judgment no such clear distinction can be drawn. It is a common experience of marine casualties that what happened is a matter of contention and debate based on numerous indicia, of which human recollection is only a part, to be considered together with scientific and engineering expertise and the inherent probabilities informed by maritime experience. The indicia are often not all of a piece. There is no clear boundary between fact and theory.

On the other hand the relevant passage in the letter came under the heading “Facts”, and was said to be “after further internal investigation”, which in relation to whether an alarm went off, and if so why it was ignored, would reasonably have been taken to include inquiries of the crew. Read as a whole, the letter contained an assertion that one or more members of the crew had claimed to have heard the alarm going off at about noon and had given an explanation that the alarm had not been investigated because attributed to the rolling of the Vessel. Making all due allowance for the fact that English is not Chris Kornet’s first language, in which he is proficient but not completely fluent, this must have been the impression the letter was intended to give. I have little doubt that this was how he intended and understood it. That was why when subsequently faced with Ince & Co’s question 2, and recognising that the 21 April letter was not consistent with the answers his brother had drafted, he approached the Master for confirmation of the account; and that is why in his evidence to me he felt the need to invent a conversation with the Master on 20 April. In this respect the letter was false and misleading. In this respect Chris Kornet had no grounds to believe it was true, and was reckless whether or not it was true. It was an untruth told recklessly in support of the claim.

Mr Karia QC submitted that the letter of 21 April was not written with a view to improving the Owner’s prospects of settlement, but merely reflected Chris Kornet’s attempt to explain the rate of water ingress. That does not adequately reflect the circumstances in which it was written. Ince & Co were investigating the casualty on behalf of Underwriters and asked for the information in their email of 16 April “in order to complete our report to underwriters”. Prior to receipt of the email, the Owners had been pressing Gerling through the broking chain for payment of the claim. In an email of 23 April Mr Schurink confirmed to Chris Kornet that the letter was to go to Ince & Co so that they could complete their report to underwriters. It was clear from the questions asked by Ince & Co in their email of 16 April that the Underwriters had concerns as to the underlying condition of the vessel, the assured’s knowledge as to the underlying condition, and why the ingress of an apparently small quantity of water could have given rise to such a major casualty. Chris Kornet was keen to secure a payment on account of the claim, at least, in order to ensure the release of the vessel from the yard after the repairs which were shortly to be completed. I have no doubt that the letter was intended by him to promote the claim in the hope of a prompt settlement, and that the purported factual account about the noon alarm was part of that promotion.

The false statement was directly related to the claim and intended to promote the claim. Does it meet the “limited objective element” of the test of materiality that, if believed, it would have tended at that stage to yield a not insignificant improvement in the Owner’s prospects of getting the claim paid, bearing in mind that in this context “not insignificant” has the same connotation as “not insubstantial”, “not immaterial”, “not de minimis”? The answer must be yes. Insurers investigating a casualty of this nature would understandably be sceptical of how debilitative flooding of the engine room could have resulted from a relatively small leak in the bowthruster room, and an explanation for the failure of the Vessel’s alarms to prevent such a result would be a not insignificant factor in an insurer’s assessment of the validity of the claim, including in particular consideration of the application of the Inchmaree proviso. Mr Karia QC did not advance any argument to the contrary on behalf of the Owners.

It follows that the Underwriters’ defence of fraudulent device succeeds, and that the Owners’ claim, which is otherwise valid, is for that reason forfeit.

I have reached this conclusion with regret. In a scale of culpability which may attach to fraudulent conduct relating to the making of claims, this was at the low end. It was a reckless untruth, not a carefully planned deceit. It was told on one occasion, not persisted in at the trial. It was told in support of a theory about the events surrounding the casualty which Chris Kornet genuinely believed to be a plausible explanation. The reckless untruth was put forward against the background of having made the crew available for interview by the Underwriters’ solicitor, who had had the opportunity to make his own inquiries of the crew on the topic. To be deprived of a valid claim of some €3.2 million as a result of such reckless untruth is, in my view, a disproportionately harsh sanction.

Amendment Application

At the conclusion of the hearing the Underwriters applied to amend their defence. I refused the application and indicated that I would give my reasons for doing so together with my judgment. I have set them out in a separate judgment.

Conclusion

The Owners’ claim fails.


American International Marine Agency of New York Inc & Anor v Dandridge

[2005] EWHC 829 (Comm) (05 May 2005)

Siberry QC

Discussion

The first and, as it seems to me, the central question is whether the general words of incorporation in the Reinsurance, “…subject to the same clauses and conditions and against the same perils as in the original policy or policies…” (“the general incorporation provision”) are sufficiently wide, and are apposite, on their true construction, to incorporate the follow the leader clause in the Binder. It was this question upon which I invited and received further submissions after the conclusion of the hearing. It is necessary to determine this question before (if appropriate) addressing the separate question of whether the follow the leader clause satisfies the four criteria for incorporation identified in the HIH case (supra) – see Pine Top Insurance Co. Ltd. v. Unione Italiana Anglo Saxon Reinsurance Co. Ltd. [1987] 1 Lloyds Rep. 476.

This central question in turn raises the issue as to the meaning of the words, “the original policy or policies” as they appear in the general incorporation provision. It is only if those words are apt to refer to the Binder, or at least to all the terms of the Claimants’ participation in the Reinsurance as recorded in the Binder, including the follow the leader clause, that the general incorporation provision would be capable of incorporating the follow the leader clause, subject to compliance of that clause with the criteria for incorporation.

In approaching this question, I bear in mind that there is indeed a presumption, in the case of facultative reinsurance, that in the absence of clear words to the contrary, the scope and nature of the cover afforded is the same as the cover afforded by the underlying insurance – see the cases cited at para 20 above. I consider that this presumption is capable of application, with modification, to a case such as the present, where the insurance was for both total and partial loss but the reinsurance was on TLO terms – it can be applied in relation to the total loss cover under both insurance and reinsurance. I also bear in mind that wherever an issue of incorporation arises, the underlying question is whether the parties intended the particular clause in question to be incorporated, and that this will depend on the construction of the reinsurance as a whole and on the surrounding circumstances.

The first problem for the Claimants is that the Binder postdates Reinsurers’ subscriptions to the Reinsurance Slip by between 2 and 4 days – and the Claimants’ signature of the Binder postdates those subscriptions by a further 2 days. Thus on the face of it at least, the Claimants did not become parties and bound to the Insurance, whether on the terms of the follow the leader clause or otherwise, until several days after the contract of reinsurance had been concluded. That poses an obvious difficulty for the Claimants’ contention that references in the Reinsurance to “the original policy or policies” were references to the Binder.

Reinsurers contended that it was some time before 28th March 2000 that the Claimants agreed to provide insurance to the assured by taking a 15% line. They invited me to infer this from the fact that (as appeared from a document in bundle B tab 5) the Claimants requested SBJ to obtain a TLO reinsurance quote on 28th March 2000, and from the inclusion of a 15% line from AIMA in the security schedule attached to the French Market Slip – though, as mentioned above, this Slip provided that it was “FOR FRENCH MARKET USE ONLY”. However, there was, as the Claimants pointed out in their written Reply Submissions, no agreed fact as to when the Claimants agreed their participation in the Insurance, and it is not unusual for a reinsurance to come into existence before the insurance is written. In the absence of any such agreed fact, I must, as it seems to me, proceed on the basis that it was not until they signed the Binder that the Claimants became bound to their 15% participation in the Insurance.

Another strong indication that references in the Reinsurance to “the original policy or policies” were not references to the Binder, which recorded the terms only of the Claimants’ participation in the Insurance, is that, as mentioned above, the lines subscribed by the respective Reinsurers were scratched as percentages of the full insured values, not merely of the Claimants’ 15% participation. The “original policy” in respect of which (for example) Hiscox Syndicate No. 33 scratched a 5% reinsurance line cannot have been the Binder, or any other agreement, containing or evidencing only the Claimants’ 15% participation. The Claimants suggested that I could infer that it was explained to Reinsurers that the Claimants had only insured 15% of the underlying risk. But even if it was, it does not alter the fact that Reinsurers scratched their lines as percentages of 100%, not of 15%, of the underlying risk. In the light of this, the natural interpretation of the words “the original policy or policies” is that they refer to the Insurance as a whole, and not to any particular terms – in this instance the follow the leader clause – unique to the participation of particular insurers, even though it was on behalf of such insurers only that the Reinsurance was obtained.

It is not without significance that the Agreed Facts record that the Vessel was insured under a H&M policy (singular), defined therein as “the Insurance” (singular), of which Axa were lead underwriters, and in which the Claimants had a 15% participation. I accept that, as the Claimants contended in their Further Written Submissions, the parties cannot have intended, in the Agreed Facts, to use the word “policy” in the strict sense of a document entitled “policy of insurance” signed on behalf of all insurers; and that similarly the words “original policy or policies” in the Reinsurance should not be narrowly construed to refer only to such a document – which did not exist – but rather that the word “policy” should be understood in the looser sense of the underlying contract of insurance. The commercial reality was that there was indeed a single underlying “Insurance” of the Vessel, of which Axa were the leading underwriters and in which the Claimants had a 15% participation – albeit that the French market, and the Claimants, bound themselves to their respective participations in different contractual documents, and that the terms of the respective participations of the French following market and the Claimants differed as regards the role of Axa as leading underwriter.

In my judgment neither the fact that the Reinsurance was classified as “US Reinsurance”, nor the fact that it was a renewal, has any bearing on the interpretation of the general incorporating provision – indeed, the contrary was not suggested. There was no Agreed Fact, and no evidence, as to the terms of any prior year insurance by the Claimants.

Accordingly, I have concluded that the words “the original policy or policies” in the general incorporation provision (and indeed elsewhere in the Reinsurance) refer to the Insurance as a whole, and not to the Binder, and therefore that that provision was not apt to incorporate the follow the leader clause in the Binder. If the Claimants had wished to bind Reinsurers to any variation of the original Insurance agreed to by Axa, and to which the Claimants themselves might become bound as a result of having signed up to the follow the leader clause, they should have sought and obtained Reinsurers’ specific agreement to be bound by any such variation, contrary to the position that obtains at common law.

In the circumstances, it is not strictly necessary to consider whether, if contrary to the above conclusion the general incorporation provision did indeed refer to the clauses and conditions of the Binder, the follow the leader clause would have satisfied the four criteria for incorporation. As this issue was fully argued, however, I shall briefly express my conclusions thereon. For convenience I repeat the clause, which provided as follows:

“Following French Market Leaders (Axa Global Risks) in all respects, including rates and claims but excluding ‘ex gratia’ “.

In my judgment this clause does not satisfy any of the four criteria. It is neither germane nor apposite to the Reinsurance, it does not make sense (and cannot be made to make sense) in the context of the Reinsurance, and it is inconsistent with the express terms thereof. Whatever the correct legal analysis of the effect of a follow the leader clause in a contract of insurance (see the differing views of HH Judge Kershaw QC and Rix J in, respectively Roadworks (1952) Ltd v. Charman (supra) at pp. 105-106, and Mander v. Commercial Union Assurance PLC [1998] Lloyds Rep. (I & R) 93, at pp. 143-144, albeit in the different contexts of an facultative slip and an open cover respectively), such a clause concerns the relationship between the leading underwriter and the following market, as well as that between the following market and the insured. The leading underwriter and the following market generally have mutual interests, but the same is not true of the leading underwriter and the following market on the one hand, and reinsurers on the other. The present case provides a good illustration of this: the reduction in insured value agreed by Axa, presumably because it was thought to be in, or at least not contrary to, the interests of Insurers, would, if it had bound Reinsurers who had insured on TLO terms, have been potentially very prejudicial to their interests. This also illustrates why it is inherently unlikely that Reinsurers would have agreed, with respect to variations, to give their underwriting pen to Axa, with whom they had no contractual or other relationship. A follow the leader clause is not analogous to a follow the settlements clause in a reinsurance contract – as Mance J observed in Roar Marine Ltd v. Bimeh Iran Insurance Co [1998] 1 Lloyd’s Rep 423 at p. 430, the context is quite different. For these reasons it seems to me that the follow the leader clause is neither germane nor apposite to the Reinsurance.

Moreover this follow the leader clause clearly does not make sense in the context of the Reinsurance in unmanipulated form: Axa were not the leaders, let alone the “French Market Leaders”, of the Reinsurance, and it was obviously not the intention of the parties to the Reinsurance that Reinsurers should follow Axa in respect of rates, whether in respect of the original insured values or of any alteration thereto – Reinsurers (or at least the leading Reinsurers) made up their own minds as to the appropriate rates for the TLO cover they wrote.

The Claimants’ response to these obvious problems was to submit that the clause was incorporated in unmanipulated form but with the same general effect as that achieved, as the Court of Appeal concluded, in the HIH case (supra) – in short, that reinsurers could not take a defence not open to insurers by virtue of the clause held to have been incorporated (see paras 24-25 above). Contrary to the Claimants’ submission, however, I do not think an analogy can properly be drawn with the HIH case. In that case, not only was there no issue as to the meaning of the words “as original” in the incorporation clause in the reinsurance policy: they clearly referred to the policy of insurance containing the clause, clause 8.1, about which the issue of incorporation arose. Unlike the follow the leader clause, clause 8.1 was a term which directly regulated the relationship between insurer and insured. The reasoning which led the Court of Appeal to its conclusion is not, as it seems to me, applicable to a follow the leader clause, which does not directly regulate that relationship, though it may have an indirect effect thereon.

It was not suggested by the Claimants that the follow the leader clause could be incorporated in a manipulated form, and it is difficult to envisage any manipulation that would make any sense in the context of the Reinsurance. None was suggested.

Moreover the clause would, if incorporated with the effect contended for by the Claimants, have been inconsistent with other provisions of the Reinsurance. Thus, for example, the Reinsurance provided that the vessels were valued at US$2.5 million each “or as valued in original policy or policies”. As the decision in the Norwich Union case (supra) makes clear (see para 33 above), such language refers to the valuation in the original policy in respect of which the reinsurance was obtained: it does not mean “as valued in the original policy as amended from time to time”. But if the follow the leader clause was incorporated, it would, as the Claimants contended, follow that the applicable valuation was that set out in the original policy or any amendment thereto agreed by Axa. Further, the Reinsurance expressly provided that certain categories of variation to the original policy (“Continuations and/or Deviations and/or Extensions”) would bind Reinsurers “whether notice be given or not”, and therefore necessarily without their agreement. I agree with Reinsurers that there is no room alongside this term, and the other provisions of the Reinsurance, for the incorporation of a term which would have had the effect that Reinsurers would have been bound by all variations to the Insurance by Axa, with or without notice to Reinsurers or their reinsured.

In the light of the foregoing, it is unnecessary for me to decide what the position would have been if the follow the leader clause had been incorporated into the Reinsurance with the general effect contended for by the Claimants, and in particular to decide whether Reinsurers would nonetheless have been discharged under clause 4 of the ITC, as they contended, on the grounds that both the Insurance and the Reinsurance terminated automatically upon the expiry of the Vessel’s Class with DNV, and that Axa’s agreement to insure the Vessel on terms that it was classed with INSB resulted in a new contract of insurance, rather than a variation of the original Insurance. Nor is it necessary for me to reach a decision on whether the Claimants were themselves bound by Axa’s agreement, having regard to the terms of clause 4 of the ITC and the follow the leader clause.

Suffice it to say that I saw considerable force in the Claimants’ argument that, although as a matter of strict analysis the Insurance may have terminated automatically on 31st August 2000 when the vessel’s Class with DNV expired, Axa would by virtue of their oral agreement before the casualty (but apparently after the vessel’s reclassification with INSB on 6th September 2000, as para 8 of the Agreed Facts indicates), and by their subsequent written agreement as recorded in endorsement No. 10 to the French Market Slip, have been estopped from contending as against the insured that the Insurance had expired; and that the Claimants would by virtue of the follow the leader clause (and also by their issue of Endorsement No. 7 to the Binder – see para 10 of the Agreed Facts) have been similarly precluded from taking the point that the Insurance had expired. If that is right, the Claimants were indeed bound by Axa’s agreement to the changes.

Conclusions

Accordingly, I answer the questions posed in the Agreed Issues as follows:

Was the claim recognised and paid by the Claimants not within the risks covered by the Reinsurance as a matter of law? – Answer: the claim was not within the risks covered by the Reinsurance as a matter of law.

1 (a)       Was any amendment to the Insurance in respect of the Vessel’s class and/or insured value binding upon the Reinsurers by virtue of the express terms of the Reinsurance? Answer: the amendments in question were not binding upon Reinsurers.

(b)          Were the Claimants in breach of classification warranties in the Reinsurance, and if so what is the effect thereof? Answer: Yes, with the result that Reinsurers were discharged from liability under the Reinsurance.

(c)           Were the Claimants in breach of the Reinsurance by virtue of the amendments to the Insurance in respect of the Vessel’s class and/or insured value, and if so what is the effect thereof? Answer: Yes, with the result that Reinsurers were discharged from liability under the Reinsurance.

(2) (a)    On a true construction of the Reinsurance, was the “follow the leader” provision incorporated into and/or to be given effect in the Reinsurance such that the Reinsurers were precluded from contending that a claim recognised by the Claimants did not fall within the risks covered by the Reinsurance as a mater of law if the Claimants were bound to pay the claim by virtue of the operation of the “follow the leader” provision? Answer: No.

(b)          By virtue of the operation of the “follow the leader” provision, were the Claimants bound by Axa’s decisions on the change in the Vessel’s class and the reduction in the insured value of the Vessel and/or bound to pay the claim? Answer: In view of my conclusions in respect of the Reinsurance, it is not necessary to answer this question.

It follows that the Claimants’ claim fails and must be dismissed.


Genesisuk.Net Ltd v Allianz Insurance Ltd 

[2014] EWHC 3676 (QB) Mackie QC

The law

Allianz accepts that the burden of proving that Mr Roe, as director of the Claimant, caused the premises to be set alight is on it.(Slattery v Mance) [1962] 1 QB 676). The test is the civil test, i.e. the balance of probabilities but “commensurate with the gravity of the charge” (see National Justice Compania Naviera SA v Prudential Assurance Co Ltd (The Ikarian Reefer) (No.1) [1995] 1 Lloyds Rep 455, at 483 col 2 – 484 col 1). Proof of motive will not be conclusive, but will be persuasive (see Ikarian Reefer at 498 col 2). It is not necessary to produce a seamless proof or “smoking gun” as “…it is unlikely that there will be any documentary or other direct evidence of consent or connivance and that it is therefore necessary to consider what inferences, if any, can properly be drawn from the circumstantial evidence” (The Captain Panagos DP [1989] 1 Lloyd’s Rep 33, CA at 43 per Neill LJ).Inferences will be used to fill gaps, so long as there is some credible evidence; ambiguities are not fatal (see The Zinovia [1984] 2 Lloyds Rep 264 at 271 to 273, Bingham J). If there is sufficient unambiguous evidence the assertion regarding the insured’s “previous reputation and respectability will not save him from adverse judgment” (see The Zinovia at 273 col 1).

Genesis generally accepts these principles, with some legitimate caution about the shipping cases, but as to the standard of proof makes two points. First while the parties are agreed that the Fire is caused by arson, arson by an aggrieved third party with intent to cause damage to the property of another is inherently more likely than arson by a person on his own property. Second, although the standard remains the civil standard, Mr Butler submits that in practice there is little if any difference between that and the criminal standard in a case of this nature – see The Zinovia at p.272, The Ikarian Reefer at p.459. Mr Butler also emphasises that the case does not come down to a straight choice between competing theories– the question for the Court is whether the insurer’s theory is proved on a balance of probabilities (The Popi M [1985] 1 WLR 948). However, the existence of a substantial or substantiated alternative possibility is relevant, and has the effect of preventing the burden of proof from being discharged – The Ikarian Reefer at p.459.


Venetico Marine SA v International General Insurance Company Ltd & Ors 

[2013] EWHC 3644 (Comm) [2014] 1 Lloyd’s Rep 349, [2014] Lloyd’s Rep IR 243Smith J

Was the “Irene EM” an actual total loss?

Although the claimants presented as their primary case their submission that the vessel was a constructive total loss, I find it more natural and convenient to consider first whether she was an ATL. Under section 57 of the Marine Insurance Act 1906, a vessel (or other subject-matter insured) is an ATL if she is “destroyed, or so damaged as to cease to be a thing of the kind assured, or where the assured is irretrievably deprived thereof”. The claimants pleaded that the “Irene EM” was an ATL because she had ceased to be “an operational vessel, and had become a dead ship, in that she could not be operated or restored to an operational condition”, and Mr Templeman argued that therefore she had “ceased to be a thing of the kind assured”. On the face of it this seems an unlikely proposition in view of what happened after the grounding: the vessel proceeded to Dahej, waited her turn to berth, discharged part of her cargo, went off berth, shifted anchor in winds rising to force 7 in order to avoid bad weather, returned to berth, completed discharge, and on 15 November 2009 moved off berth to anchorage. In other words, in the two and a half weeks after the grounding on 30 October 2009, she carried out commercial operations. However, it is unsurprisingly not suggested that, once the damage was discovered, the claimants could continue to operate the “Irene EM” unless and until she had been repaired.

Mr Smith accepted that, if the vessel could not legally be moved from Bhavnagar except in order that she might be scrapped, the “Irene EM” was an ATL, because it would, as Mr Smith put it, be a sufficient change in the characteristics of the vessel to mean that she was no longer “a thing of the kind insured”. He was right to accept this: I agree that the vessel was an ATL if it was physically or legally impossible to carry out repairs that would restore her as an operating vessel. The case is different from that considered by Potter LJ in Fraser Shipping Ltd v Colton, [1997] 1 WLR 586, where the insured subject-matter was already a dead ship under tow and heading for break-up: there the damage did not alter her essential identity. Here, if the “Irene EM” could not be operated, her essential commercial identity was lost, and, as Lord Esher MR put it in Asfar v Blundell, [1896] QB 123, 128: “…if the nature of the thing is altered, and it becomes for business purposes something else, so that it is not dealt with by business people as the thing which it originally was, the question for determination is whether the thing insured, the original article of commerce, has become a total loss. If it is so changed in its nature by the perils of the sea as to become an unmerchantable thing, which no buyer would buy and no seller would sell, then there is a total loss…”.

On the other hand, the vessel was not an ATL if it was physically and legally possible to repair the damage, even if it would be prohibitively expensive to do so (although there might then be a CTL): that, I think, is what Rix LJ meant when he said in Masefield AG v Amlin Corporate Member Ltd (The “Bunga Melati Dua”), [2011] EWCA 24, that “the doctrine of constructive total loss in marine insurance law has meant that the test for an ATL has been applied with the utmost rigour”. That was a case about whether there was an ATL of a vessel because her owner had been “irretrievably deprived thereof”, but the principal that the test whether there has been an ACT is what is impossible, not what is commercially impractical, applies generally and not only in cases of irretrievable deprivation. Indeed, Mr Smith submitted that in essence the claimants’ case is one of irretrievable deprivation, and I am inclined to think that he is right: in Geo Cohen & Sons & Co v Standard Marine Ins Co Ltd, (1925) 21 Ll L Rep 30 the plaintiffs, represented by Mr A D Bateson KC and Mr H Claughton Scott KC, presented a case somewhat similar to this as one of irretrievable deprivation, and that approach was not questioned by Roche J.

At the start of the trial the claimants’ case that the vessel was an ATL was presented on the basis that it was impossible safely to move the ship except for scrapping. As Willes J said in Barker v Janson, (1868) 3 CP 303, 305:

“If a ship is so injured that it cannot sail without repairs, and cannot be taken to a port at which the necessary repairs can be executed, there is an actual total loss, for that has ceased to be a ship which never can be used for the purposes of a ship; but if it can be taken to a port and repaired though at an expense far exceeding its value, it has not ceased to be a ship, and unless there is a notice of abandonment there is not even a constructive total loss”.

The claimants’ argument is:

i)             That it was impossible to repair the vessel or to carry out an underwater survey of the vessel in her position at Bhavnagar anchorage, because the currents were too strong and the water was too muddy.

ii)            That the vessel needed to go to a graving dock for permanent repairs, and she could not be moved there.

iii)           That, moreover, the vessel could not be moved to a place such as Mumbai for underwater inspection and temporary repairs, before going to a graving dock for permanent repairs.

The defendants did not dispute the first proposition. They denied other two, and specifically pleaded that the vessel had enough residual strength to be towed to “a place such as Bahrain in order to undergo permanent repairs provided the tow was carried out carefully”. It was also canvassed during the trial that she might have undergone permanent repairs in Dubai. However, I need not consider separately the possibility of towage to Bahrain or Dubai: the defendants relied on the evidence of Dr Dingwall and, more particularly, Mr Colman in support of this part of their case, and both acknowledged that the vessel could not have towed to Bahrain unless and until there had been an underwater survey, and the defendants’ argument, as I understand it, is that she could have been towed to Mumbai for that purpose. The position about repairs in Dubai is, I think, similar.

The crucial question, therefore, is whether the vessel could have been towed to Mumbai for underwater inspection and any necessary repairs, but the claimants did not submit that the vessel was in such a state that she would necessarily sink or otherwise fail to reach Mumbai. Mr Templeman’s argument was that she could not be towed there safely. This introduces an ingredient into the test of what is an ATL that is not, as far as counsel were aware, considered in the authorities and might be thought not readily reconciled with the rigorous test for an ATL of impossibility. It also introduces a question about the test of safety that the court should adopt: about what risk means that an insured cannot safely restore a vessel (or other subject-matter insured) to be “a thing of the kind assured”. Despite these questions and the apparent dearth of authority, I have sympathy for Mr Templeman’s argument: there must come a point where the dangers to life or other risks associated with repairs are so great, and the chances of successful salvage so small, that it would be unrealistic to contemplate repairs. However, I do not need to engage with these questions. Mr Smith accepted that the question was whether uninsured but otherwise prudent owners would, if properly informed, have taken the risk involved in having the vessel repaired, and Mr Templeman did not dispute this. I am prepared to adopt this test and, as I conclude, even on this basis the ATL claim fails. I do not consider that the test could be more favourable to the claimants: on a more favourable test they could not say that “all hope or possibility of having an operational vessel has been lost”: see Arnould (loc cit) at para 18.03.

By the amendment, the claimants introduced an alternative argument that asserted legal impossibility, and was as follows:

i)             Under the MSN, the vessel could be towed only with permission of the DGS or, because the tow would have been from one port or place on the Indian coast to another, permission of the IRS (to whom authority to grant permission had been delegated by the DGS).

ii)            Under the MSN the vessel would have had to be inspected in accordance with a prescribed checklist, and certified for the intended voyage by BV.

iii)           BV would not have provided the necessary certificate.

iv)           Therefore, the vessel could not lawfully have been towed from Bhavnagar anchorage for temporary repairs.

The claimants have a further argument: that the vessel could not have been taken to Mumbai because the port authorities there would not have accepted her.

Mr Smith submitted that the relevant date for assessing whether the vessel was an ATL is 9 December 2009, when the claimants tendered their notice of abandonment. Mr Templeman did not dispute this. Although the question is not free of legal difficulty (see Arnould (loc cit) at para 28-04), I am prepared to consider the matter on that basis: undoubtedly the question whether the vessel was an ATL turns upon an objective assessment of the position, regardless of the claimants’ perception of the position however reasonable it might have been, and therefore nothing turns on whether the date for assessment is 9 December 2009 or some later date.

Was the vessel an ATL because it was physically impossible safely to move the vessel for repairs?

As I have explained, the claimants submitted that it was not possible safely to have the vessel towed to Mumbai for underwater inspection and any necessary temporary repairs. This was based on the report of Mr Dimoulas of 19 April 2010 and his evidence in support of the advice that he gave in it: specifically, it was based on his evidence that the vessel only had sufficient residual strength for navigation in calm water conditions.

Mr Dimoulas considered two possible conditions of the damaged hull: (i) that the bottom plating and stiffeners, the double bottom plating and stiffeners and the double bottom girders together with half the width of the hopper plating and stiffeners were damaged; and (ii) that the damage was similar except the whole width of hopper plating and stiffeners and also bilge plating and stiffeners were damaged. He then considered whether in each condition the vessel would have withstood a wind bending moment in accordance with BV’s rules for navigation in difference conditions, namely (i) calm water, (ii) sheltered areas, (iii) coastal areas, and (iv) unrestricted navigation.

A tow to Mumbai would have involved what the BV rules would have categorised as unrestricted navigation. The rules stipulated that a vessel was in coastal waters if she was within 20 miles of the shore and within a maximum of 6 hours sailing time of a port of refuge. Captain Bourdis said that the vessel would have had to have taken the “Safety Fairway” routing shown on Admiralty Chart no 2736 (Mumbai to Dwarka), which would have taken her 40 to 50 miles off the Indian coast, and that at Mumbai outer anchorage she would have been more than 20 miles off the coast. Mr Colman thought that the tow could have been confined to coastal waters by clinging to the coastline past Pipavav, but he agreed that it would have been difficult and extended the tow, and in any case the evidence that the anchorage would have been outside coastal waters was unchallenged and uncontradicted: I accept it. But the vessel would not have had to withstand extreme rigours of unrestricted navigation. What matters is whether the vessel could have safely been towed in the conditions likely to be encountered on the Safety Fairway route, and whether the claimants have shown that she could not have been.

It is convenient before assessing Mr Dimoulas’ evidence to consider the defendants’ evidence about this, which was given by Dr Dingwall and Mr Colman. As I have said (at para 226), Dr Dingwall recognised that, if the double bottom floors were wholly ineffective, the “Irene EM” would not have had the residual strength safely to undertake even a short voyage; his view that she might have been towed to Mumbai was based on his opinion that it was “closer to reality” to suppose that the double bottom floors were “wholly effective”. Dr Dingwall was a witness of fact, and it seems to me that he was here expressing views that should have been presented only through an expert. Nevertheless, I treat his views as admissible: when he was cross-examining Dr Dingwall, I warned Mr Templeman that he was asking him about matters of expertise, and he said that, if I treated Dr Dingwall’s evidence as that of “an expert to a greater or lesser extent as a result of [the] cross-examination …, then that is a consequence [he would] live with”.

However, this evidence is of limited value for two reasons. First, Dr Dingwall’s views about how the vessel was damaged are based on incomplete information: he could not, of course, inspect the double bottom structure, and he accepted that in the end his view about her condition was no more that a “gut feeling … that the whole of that double bottom had [not] gone”. However, as Dr Dingwall acknowledged, given the other hull damage it is no more realistic to suppose that the strength of the double bottom floors was not compromised at all by the grounding. Both extreme scenarios were unrealistic, and Dr Dingwall’s instinctive view that some of the double bottom structure remained, assuming it to be correct, does not help to say which is “closer to reality”.

Secondly, as I said in paragraph 227, the circumstances in which Dr Dignwall’s report was produced make me cautious about accepting it as reliable. It was produced under pressure of time, and developed from a memorandum of Mr Martin, which was itself produced in response to a request from Captain Gregory to know whether there was “a case to argue”. In his evidence, Dr Dingwall described his report as intended as “a starting point for discussions”. It was not a computerised structural analysis of the kind that he initially undertook and was, to use his own expression, “simplistic”. The evidence did not say whether the more elaborate computer model was developed after Dr Dingwall’s initial work, and if so what it indicated: apparently Dr Dingwall did not continue to work on this case after producing his report of 12 February 2012, and he did not know what (if anything) had been done by others.

The claimants have another point: Dr Dingwall’s opinion was that, if the vessel could be towed at all, it would only be if certain conditions could be satisfied (see para 226), and Mr Templeman argued that they could not be have been met. I need deal with these points only briefly:

i)             First, Dr Dingwall said that the loading condition or ballast distribution must achieve a neutral still water bending moment. I accept Mr Dimoulas’ evidence that a neutral moment could not have been achieved: he said that at best the bending moment might have been reduced to 608,701 KN/m. Mr Colman was more optimistic about the moment that might have been achieved by flooding the no 5 hold and adjacent side tanks and de-ballasting the fore and aft of the vessel, but he was uncertain whether it would have been acceptable to BV to flood the hold. Captain Bourdis said that this would not have been possible: the oil could not have been removed at open sea and it would have been dangerous to try. I need not reach a firm conclusion about that, and do not have the evidence to do so. It suffices that Dr Dingwall’s condition could not have been met.

ii)            Dr Dingwall required that the tow be “in a benign sea with a forecastable wave height equivalent to or less than that recommended for a short restricted voyage”. He apparently was considering whether the vessel might go to a nearby anchorage with good water visibility.

iii)           Thirdly, Dr Dingwall said that there should be ports of refuge identified along the route. Captain Bourdis, whose evidence about this I have accepted (see para 409), said that, in order to be on a “coastal passage”, as defined by international regulations, a vessel had to be not more that six hours from a port of refuge, and that this could not have been achieved on a voyage to Mumbai.

Mr Colman recognised that the residual strength could be calculated only by making an assessment, if not an assumption, about what damage the vessel had suffered, and therefore did not seek to calculate it. He reasoned as follows: the vessel remained at anchor at Bhavnagar for some 9 months until August 2010, and apparently during that time she suffered no further damage from the forces to which she was exposed. While she was there, her topside tanks were de-ballasted to allow inspection, and her still water bending moment when she was in what he called “inspection condition” proved sufficient for her to survive at anchor. Mr Colman calculated it at 88,026 tonne metres: the calculation, which was made by reference to frame 101 in the centre of hold no 5, was not presented as precise, but as “a good starting point”. He then calculated that, if she were re-ballasted (by a change of ballast in her top side tanks, emptying nos 1, 2 and 7 and filling to 80% nos 3, 4, 5 and 6), her still water bending moment could have been reduced to 45,172 tonne metres, and it could have been reduced further if the no 6 double bottom tank were flooded.

Mr Colman’s reasoning supposed that the vessel did not suffer further damage while she was at anchor between November 2009 and August 2010, including when she re-ballasted. I consider that this assumption is justified: Mr Colman considered, and I accept, that if she had suffered further damage when she re-ballasted, this would have been observed by the crew.

Mr Colman then considered whether, in that condition (which he called her towage condition), the vessel could have been towed to Mumbai, which he considered would take “36 hours in a short weather window with benign wave conditions”, and whether, after survey and assessment, it would then probably prove “a practical proposition” to tow her to Bahrain for permanent repairs. (As I have said at para 228 above, it might have taken rather longer than 36 hours, but that is not important.) The crucial issue between the parties turned out to be about the first stage in his conclusions, but the focus of Mr Colman’s reports was on the second stage: for this he used data provided by Noble Denton to analyse statistically the wave conditions for a voyage over eleven days to Bahrain in December, January, February or March, and to estimate the predictable exposure to wave bending moments for long crested and short crested waves which the vessel might have encountered. His conclusions were that, with a reduced still water bending moment, the tow to Mumbai “should not have presented any problems”, even without a neutral still water bending moment (as Dr Dingwall had stipulated); and that towage to Bahrain would have been “a practical proposition” once a proper survey and assessment had been carried out to compute her residual strength.

Mr Templeman’s main criticisms of Mr Colman’s reasoning focused on the calculations of the still water bending moments.

i)             First, the calculation in inspection condition supposed that the topside tanks were de-ballasted simultaneously, but Mr Papanikolas’ evidence (which was not challenged and which I accept) was that they were de-ballasted, inspected and re-ballasted in pairs. If the tanks were fully de-ballasted in this way, the still water bending moment in the inspection condition would have been about 82,793 tonne metres (not 88,026 tonne metres).

ii)            Secondly, if the tanks were only partly re-ballasted, as Mr Papanikolas said they were, the moment would have been further reduced.

iii)           Next, the calculation of the still water bending moment in inspection condition would have been further reduced if the no 5 double bottom tank (or fuel oil tank) was fully flooded, and it would then have been 73,638 tonne metres.

iv)           Mr Colman accepted that it might not have been acceptable to BV for the no 6 double bottom tank to be flooded, because the bulkheads might have been damaged by water sloshing in the tank.

v)            Although Mr Colman explained other possible methods of reducing the still water bending moment further, I accept Mr Dimoulas’ evidence that they would have been dangerous because the extent of damage to the double bottom structure was not known.

To my mind, Mr Colman’s reasoning was an inherently uncertain exercise in that it essentially involved extrapolating from how the damaged vessel responded to conditions at anchor and forming a view about how she would respond to a sea voyage, which Mr Dimoulas (explaining why he had not adopted this approach himself when assessing the risks of a tow to Mumbai) described as “a more dynamic situation”. The questions about the calculations of the still water bending moments add to the uncertainties. That said, Mr Colman’s reasoning and his conclusion about a tow to Mumbai did not depend upon precise calculations and there was generous scope for imprecision. Moreover, his conclusions were reinforced by the simple fact that the vessel continued to operate after the grounding without incident: these considerations go against Mr Dimoulas’ opinion that the vessel could not have been moved to Mumbai safely.

I therefore return to Mr Dimoulas’ evidence about this. He concluded that the damage to the vessel was consistent with, and probably the result of, excessive force caused by her grounding on some sort of shelf by way of hold no 5, and that this resulted in hogging beyond elastic deformation of her structure. The bottom plating and stiffeners, the double bottom plating and stiffeners and the tank top stiffeners were, he concluded, all deformed correspondingly, and could not sustain any compression loads. He calculated the still water bending moment of the vessel in the condition in which she was at Bhavnagar to be 66,000 tonne metres (or more precisely 65,951 tonne metres, which Mr Dimoulas rounded up for calculation purposes). This was converted to kiloNewton metres (by multiplying by 9.81) to give a moment of 647,460 kNw. He made a rough calculation that the vessel’s condition was such that she could withstand only about another 190,000 kNm above the still water bending moment. The BV rules stipulated that the Vertical Wave Bending Moment was to be 1,325,101 kNm for unrestricted navigation, 80% of that (1,060,000 kNm) for coastal areas and 65% (876,135 kNm) for sheltered areas. Accordingly, Mr Dimoulas concluded that in neither of the conditions that he considered (see para 408) could she be relied on to withstand towage in coastal areas or unrestricted waters, and that it would be safe in sheltered areas only if she was in the former condition (that is to say, only half the width of her hopper plating and stiffeners was damaged).

Mr Dimoulas assumed in both cases that neither the bottom plating and stiffeners nor the double bottom plating and stiffeners nor the double bottom girders contributed anything to the residual strength of the vessel: that is to say that across (at least) one cross-section of the ship the double bottom section could withstand no compressive force at all, as if it were entirely missing across the width of the ship. Mr Dimoulas made this assumption on the basis of his assessment of the damage and his experience of seeing comparable damage previously: in particular, he based it on seeing that the tank top was damaged, that the double bottom plating was domed, that the girders and other members below were deformed and “tripped”.

It is a curious feature of Mr Dimoulas’ evidence that his calculation of a still water bending moment of 66,000 tonne metres was made by reference to frames 80 to 84 of the vessel in hold no 6, describing this as “the location of worst damage” and an application of “the worst bending moment I could find”. It would have been more natural, I think, to have considered the position by reference to hold no 5, where he supposed the impact of the vertical force to have been greatest. I need not explore this further because, as I see it, there are other more important criticisms of his evidence. In my judgment, the claimants simply have not justified this assumption, and I consider it inconsistent with the evidence, in particular in two respects.

First, the assumption supposed that the damage to the double bottom structure extended right across the width of the vessel. There is no evidence that it did, this assumption is inconsistent with the photographs and the evidence of Dr Jones, and it is not supported by any evidence. In cross-examination Mr Dimoulas referred to the damage to the hopper tanks, and said that, because the port tank as well as the starboard tank was damaged, the girders had probably been damaged across the width of the vessel. However, he also accepted that the extent of the damage to the respective tanks indicated that there was less damage to the internal members on the port side. He explained, and I accept, that even a slight deformation would reduce the girders ability to withstand a compressive force, but I do not accept that the claimants have proved that all the girders, particularly those on the port side, were entirely ineffective.

Secondly, it was assumed that the damage was entirely attributed to a vertical force and that the effect of the longitudinal bending moment was insignificant. This has not been shown: I have concluded that vertical forces played a part in the misalignment of the vessel, and that therefore the hog demonstrated that her residual strength was compromised. But it does not follow, and the claimants have not demonstrated, that none of the damage to the double bottom structure was attributable to a longitudinal bending moment, and so they have not demonstrated that none of the damaged parts of the double bottom structure had made any contribution to the vessel’s residual strength.

It might be said that the claimants were not in a position while the vessel was at Bhavnagar to know this, and so could not have been confident that the vessel could be towed. But they did know that there was relatively little damage to the port hopper tank.

There is another fundamental answer to Dr Dimoulas’ reasoning. It was based on the requirements of BV’s rules, but they are not concerned with vessels under tow: see para 38. The reasoning does not engage with the possibility, which Captain Gregory contemplated, that the vessel might have been moved by a salvage team comprising a salvage master and a riding team of four, and, with regard to the water in the double bottom structure by way of hold no 5, that the tanks could have been pumped out and filled with compressed air to maintain the pressure and to prevent cracks from propagating. The claimants have not proved the risks of a salvage team moving the vessel.

I conclude that the claimants have not shown that the vessel was an ATL because she could not safely be towed to Mumbai.

Was the vessel an ATL because it was legally impossible to move the vessel for repairs?

I come to the claimants’ other arguments that the vessel was an ATL because it would have been impossible to obtain the requisite permissions (i) for her to be towed from Bhavnagar to Mumbai, and (ii) for her to be accepted by the Mumbai authorities.

Would the authorities have permitted the tow? The claimants argued that the vessel could not have been towed to Mumbai because the permission of the Bhavnagar Port Authorities would have been required, it would not have been given unless BV certified her condition, and BV would not have done so. The defendants disputed this because, they said, the claimants have not established that BV would not have certified her condition; even if BV would not have provided the requisite certificate, others, including IRS and Nobel Denton, could have inspected her and provided it; and in any event, the requirements could have been relaxed.

I shall not adjudicate upon the defendants’ first point. Even though the BV rules do not stipulate conditions for a vessel to be towed, I am inclined to think that the correspondence with BV is sufficient to shift to the defendants an evidential burden to show that BV might have been persuaded to relax the stance adopted on 31 March 2010, but (as I said in para 53), if the claim had depended on this, I would have given the defendants the opportunity to do so or to make further submissions on the point.

However, I accept the defendants’ second argument: the MSN provides, with regard to voyages between ports or places on the Indian coast, that the IRS had been “delegated to issue permission … including towing plan approval”. It also provides that there should be surveys and inspections “for issuance of permission” carried out by “the recognised inspection bodies”. It goes on to describe what the surveyor is to inspect and check, and continues “The vessel being towed … shall also be inspected in accordance with the checklist”; and it adds in parenthesis “Please refer Form B”. The checklist in form B lists eighteen “survey items”, including “vessel/s is/are seaworthy for the intended voyage”, and the “Guidance Notes” for this survey item said “Check general condition and integrity of hull and deck. If in damaged condition, inspection and certification for the intended voyage should be given by the classification society”.

I cannot interpret the MSN as stipulating that, if the classification society does not inspect and certify a damaged vessel for the intended voyage, the IRS has no power to permit a voyage even by a vessel that has been inspected by other reputable surveyors and certified as fit to undertake it. The contrary is indicated by:

i)             The wording of the MSN itself, in which nothing indicates that form B had this remarkable effect.

ii)            The description of the relevant part of form B as “Guidance Notes”.

iii)           The wording of the “Guidance Notes”, which say that inspection should (not must) be done and certification given by the Classification Society.

This conclusion is consistent with Mr Murray’s evidence that the IRS is an “inspection body”, and that Noble Denton are recognised and authorised by the DGS to issue permits for towage. The claimants have not pleaded or argued that, if other inspectors might properly have certified the vessel, they would not have done so, and there is no evidence to support any such suggestion. I therefore reject the argument that the vessel was an ATL because she could not have been towed legally to Mumbai.

I add this, although it is not the basis of my decision. The fact is that the vessel was towed to Alang, a distance of 15 to 20 miles, and I infer, in the absence of evidence to the contrary, this was permitted by the relevant authorities. There is no evidence about what inspections were carried out before the tow and what certification was given. Without any explanation about this, I would have been reluctant to infer, as the claimants invited me to do, that a voyage to Mumbai would not have been similarly permitted. It might be that, as the defendants submitted might be done, the certification requirements were relaxed, but that is speculation and I prefer to put my decision on this point simply on the basis that BV’s certification was not required.

This leads to the question whether, if the vessel had been towed to Mumbai, the Port Authorities there would have accepted her. It would not have been straightforward to have the vessel taken to Mumbai for underwater inspection and repairs in Mumbai dry-dock while the Indian naval vessel was capsized at the port entrance. However, this obstruction did not close the port, and the problem was a temporary one. On 5 May 2010 Mr Murray was told that the naval vessel had been cleared and the dry dock could accommodate a vessel of the size of the “Irene EM”.

Mr Templeman, however, submitted that permission to have the vessel inspected and temporarily repaired at Mumbai could only have been obtained if public officials had been bribed and so could not have been obtained lawfully. He relied on the exchanges between Captain Gregory and Mr Murray, to which I referred at para 233, and the emails between CSME and their local agents on 1 and 3 April 2010. I accept that Captain Gregory and Mr Murray were contemplating bribery, and it might be that permission could thereby have been obtained more quickly and easily, but the exchanges do not establish that otherwise it would have been impossible to obtain it. As for CSME’s exchange of emails, I have explained that (i) I interpret them as being only about inspection at Mumbai inner anchorage, and (ii) I am not persuaded that they explained the authorities’ permanent policy, rather than the position while the port entrance was obstructed. But in any case I do not accept that this single exchange provides a sufficient evidential basis for Mr Templeman’s submission.

I therefore reject the claimants’ arguments that the vessel was an ATL.

Was the “Irene EM” a constructive total loss?

Under section 60(1) of the 1906 Act, “Subject to any express provision of the policy, there is a constructive total loss where the subject-matter insured is reasonably abandoned on account of its actual total loss appearing to be unavoidable, or because it could not be preserved from total loss, without an expenditure that would exceed its value when the expenditure had been incurred”. Section 60(2) provides that, “In particular, there is a constructive total loss – (ii) In the case of damage to a ship, where she is so damaged by a peril insured against that the cost of repairing the damage would exceed her value of the ship when repaired. In estimating the cost of repairs, no deduction is to be made in respect of general average contributions to those repairs payable by other interests. But account is to be taken of the expense of future salvage operations and of any future general average contributions to which the ship is liable if repaired”.

The claimants’ case was that the cost of repairing the damage would have exceeded $12 million, her agreed value: they did not rely on the first limb of sction 60(1) or contend that the vessel was a CTL because she was abandoned on account of her ATL appearing to be unavoidable. The defendants disputed that repairs would have cost $12 million, but (subject of course to issues of liability) accepted that, if they would have done so, the claimants are entitled to recover on the basis that the “Irene MV” was a CTL: they raised no other answer to the CTL claim. The proper approach to the question of what was the cost of repairs is, as I understand the law, what would be their cost to a prudent uninsured shipowner. In Roux v Salvador, (1836) 3 Bing NC 266, 286 (cited in Arnould (loc cit) para 28-020,) Lord Abinger CJ put it in terms of whether “… a prudent man, not insured, would decline any further expense in prosecuting an adventure, the termination of which will probably never be successfully accomplished”.

The claimants contended that the only proper way to repair the damage caused by the grounding to the hull was by the section method: to cut away the mid-ship section of the hull (from forward of no 5 hold to aft of no 6 hold) in a graving dock, to build a replacement section and to assemble it with the original fore and aft sections. This was the conclusion of Mr Moschos in his report of 15 December 2009 (at para 184), the basis upon which COSCO quoted on 15 January 2010 for the cost of repairs (para 194), and the method that BV said in their email of 18 January 2010 was the only “acceptable” method of repairing the vessel (para 197).

Before Mr Templeman made his closing submissions in reply to Mr Smith, the claimants conceded that their contention that the vessel was a CTL depended on them establishing that the only proper method of carrying out repairs was the section method, and they had not pleaded or otherwise presented an alternative case. At the end of his closing submissions in reply, Mr Templeman said that he was not sure that the concession was correct, and sought to demonstrate, by adapting repair costs put forward in Mr Smith’s closing submissions, that, even if another repair method were adopted, the costs would (just) have exceeded $12 million. Mr Smith did not reply to this new contention, and I would need persuading that it is open to the claimants to advance it on the pleadings and fair for them to advance it in view of how the trial proceeded. In view of my other conclusions, I need not decide this. Had the case turned on it, I would have given the defendants the opportunity to respond to Mr Templeman’s argument.

The claimants relied for their main contention on the quotation for repairs given by COSCO as contemporaneous evidence of the cost of the necessary repairs. Their quote of a lump-sum price for repairs was for $17,406,680. It was presented on the basis:

i)             That the repairs would take 180 “good weather” days, including 75 days when the vessel would be in dock;

ii)            That they would use 2,690 tonnes of steel;

iii)           That the “unit price” of renewing steel was $3.5 (in respect of steel weights over 100 tonnes); and

iv)           On an assumption with regard to mechanical and electrical parts that “all equipment to be supplied by yard” and this work would cost $3 million.

The claimants did not seek exactly to justify every individual component of COSCO’s quotation. For example, Mr Moschos’ evidence was that the amount of steel required for the repairs would have been 2,400 mt, being 1,400 mt for the replacement section, 500 mt for other bottom plating and another 500 mt for renewals in other areas adjacent to the replacement section. The thrust of their argument is that the quotation demonstrates that the cost of repairs to the hull alone would comfortably have exceeded $12 million, and that there is additional comfort that they would do so:

i)             A considerable part of the $3 million allowed for electrical and mechanical repairs is properly to be included.

ii)            If the vessel were repaired at COSCO’s yard, there would have been further costs by way of:

a)            Temporary repairs to enable the vessel to be towed to China.

b)            Towage to China.

c)            Other incidental sums that Mr Moschos identified as expenses that the claimants would be likely to incur.

iii)           It is corroborated by the quotation from Jurong.

It is convenient first to comment upon these considerations. I cannot exactly calculate how much should be allowed for work on the engine, but it is not, I think, controversial that some work would have been necessary because of the grounding, notwithstanding that the claimants have not shown that specific damage was caused. All the estimates of costs included some allowance for this, and the pleaded defence included an allowance of $392,500 for engine repairs.

Mr Moschos’ evidence was that he asked COSCO to give their quotation on the basis that it would include costs for dismantling the main engine and checking its alignment, and also allow for the crankshaft to be replaced. I observe in passing that the $3 million is not far removed from the $2.5 million that Captain Jackson anticipated in his email of 13 December 2009, but the sum of $3 million must be reduced: this follows from my conclusion (at para 388) that the claimants have not shown that the crankshaft was damaged as a result of the grounding. There is some basis for an argument that the $3 million should not be reduced by more than $1 million on this account and that $2 million should still be allowed: Mr Luukas’s evidence was that “for a new crankshaft you would probably be looking at $750,000”, and Mr Boyd’s preliminary view in his report of 21 December 2009 was that $2 million should be allowed for engine repairs, a figure that did not allow for replacing the crankshaft. However, in cross-examination he described that sum as a “very, very rough estimate”, and I accept that it cannot have been more than that on the basis of the information that he had.

The $392,500 for engine repairs allowed in the pleaded defence was based on what Mr Murray and Captain Gregory allowed in their report of 5 May 2011. It included $70,000 for replacing the thrust shaft bearing and thrust pads and other sums relating to the propeller and stern tube. Only $200,000 was allowed for work relating to the main engine, and it contemplated little more than having the six units of the main engine stripped and the bearings replaced as necessary. I reject that estimate as unrealistically low: Mr Luukas put the labour costs involved in stripping down the engine at $500,000 without making any allowance for parts and on the basis that it would not be necessary to strip the engine down to the crankshaft. (Mr Luukas was referring to the cost of work at a Chinese yard, but the evidence was that generally repairs would have been more expensive in the Middle East.) I accept Mr Templeman’s submission that the costs of dismantling and testing parts of the main engine would have been considerably more than accepted in the defence. I cannot not assess them exactly, but on a conservative basis allow $1 million.

The cost of temporary repairs: the pleaded defence, again based on the report of 5 May 2011, allowed a total of $200,000 for an “Inspection in clear water and temp repairs (patching)”. However, this included no real allowance for repairs: an estimated cost of $191,350 for underwater inspection at Mumbai was rounded up by some $9,000 to allow for the epoxy repairs to fill in cracks. Given that the bottom structure by way of hold no 5 had five cracks that were open to the sea, I do not accept that this was a realistic allowance.

Mr Boyd made an allowance for temporary repairs of $500,000 “for budgetary purposes”, and he described this as a generous allowance “based on the damaged that [he] observed at Bhavnagar”: he explained in cross-examination that this represented an allowance of 50 tonnes of steel at $10 per tonne.

Mr Moschos initially, in his report of 26 January 2010, allowed $1.5 million for temporary repairs, which represented an allowance for 300 tonnes of steel at $5 per tonne. The rate of $5 per tonne is not extravagant and was not criticised: it is half of what Mr Boyd allowed. Mr Moschos considered that 300 tonnes of steel would be required because he expected that the longitudinals would be buckled and that it would be necessary to compensate for the loss of longitudinal strength by welding a number of “I sections” along the deck on both sides of the vessel from bow to stern. However, after reading Mr Dimoulas’ reports Mr Moschos concluded that more extensive temporary repairs would be necessary to reinforce the residual strength, including “reinforcements … on bottom and deck plating”. Because Mr Dimoulas estimated that the repairs would require 945.5 tonnes of steel, Mr Moschos increased his estate of the approximate cost of this work to $5 million. Although on the face of it this is a dramatic increase, Mr Moschos had a rational and considered basis for his figures. As he explained in his report of 23 April 2010, the greater part of the steel that Mr Dimoulas calculated would be required, nearly 700 tonnes of the 945.5 tonnes, was for I beams welded to the top of the double bottom plating (continuously through the bulkheads), for which he had not made allowance in his earlier estimate. Another 154.9 tonnes was attributed to the need for I beams welded on top of the deck plating by continuous fillet welds.

The extent and so the cost of temporary repairs depend upon what residual strength the hull had, and so upon the extent of the damage to the double bottom structure. As I have explained, I conclude that the claimants have not proved that the damage to the bottom structure was as extensive as Mr Dimoulas supposed (particularly with regard to whether the members were deformed across the whole width of the vessel), but, as I see it, the vessel would still have to be strengthened by I sections before the vessel was towed for permanent repairs, and the amount of steelwork that would be required would not have been much less than Mr Dimoulas estimated. The figure of $5 million was not presented as an exact calculation, but it seems to me that the claimants, through Mr Moschos’ evidence, have justified a sum of, say, at least $3.75 millon for temporary repairs.

Mr Moschos’ evidence was that $1.5 million should be allowed for towage if permanent repairs were carried out at Zhoushan. This was the estimated cost of a tow of approximately 45 days. It excluded port dues and agency fees at the ports and did not include insurance either for the tow or during repairs. In cross-examination Mr Moschos was not able to explain the sum beyond saying that it was provided to him by the claimants and he adopted it. Mr Smith argued that it was apparently based on a quotation obtained by the claimants on 15 January 2010 from Five Oceans Salvage and that, given that the daily rate for hiring a tug was $12,500 per day (excluding fuel, luboil, port dues and agency fees), the calculation should have produced a sum of $1.4 million rather than $1.5 million. The difference is insignificant, and I can assume (without deciding) that this reduction should be made.

When estimating how much it would cost to have the vessel repaired in Bahrain, Captain Gregory allowed $1 million to tow the vessel. Mr Boyd would allow $600,000 for a tow to Dubai. Both these sums included a salvage master and crew and included pumps and some other incidental expenses, but apparently did not include agency fees, port dues or insurance. The longer tow to China would have cost much more, and, making what I can of the evidence, I conclude that it would have cost at least $1.25 million.

Mr Moschos allowed incidental costs of $1,270,000:

i)             Office expenses during repair period – $200,000;

ii)            Consulting and attendances during initial surveys and repairs – $300,000;

iii)           Port charges and disbursements – $50,000;

iv)           Classification fees and expenses – $200,000;

v)            Adjusters’ fees and expenses – $120,000;

vi)           Strength calculations and design and production studies – $80,000;

vii)          Insurance for towage – $250,000;

viii)         What Mr Moschos called “slops disposal” – $70,000.

These figures were not, understandably, examined in any detail, and in view of the rough and ready nature of these calculations I need only say that the sums are not obviously extravagant as estimates of the costs to which they related. Mr Smith submitted that some of these items, namely office expenses, costs for consulting and attendances, and adjusters’ fees, would not have been recoverable from insurers, and so should not be brought into account when deciding whether the vessel was a CTL. This point was not expanded in submissions before me, and no authority was cited about it. On a simple reading of section 60 of the 1906 Act, the relevant costs are not defined by what would be recoverable from insurers: subject to the policy terms, in cases of damage to a ship what matters is “the cost of repairing the damage”. The policies in this case referred to “the cost of recovery and/or repair of the vessel”. However, my decision does not depend upon this point, and I do not determine it: it is better decided in a case in which there have been full submissions from the assured and the underwriters.

I observe that Mr Moschos did not include costs of supervising the repair works, although the defendants themselves allow $100,000 for this in their pleaded case. This was apparently estimated on the basis that the vessel would be in dock for only 60 days, and presumably would have been more for the work contemplated by COSCO.

I do not attach much significance to the quotation from Jurong. It included a cost of S$16.8 million for renewing 1,400 tonnes of mild steel, which represents S$12 per tonne, roughly the equivalent of a little more than $9 per tonne (according to the rate of exchange used by Mr Moschos in his report of 30 November 2010, which was not challenged and which was endorsed by Mr Boyd). Mr Templeman submitted that this provided comfort that COSCO’s rate for steelwork is not extravagant. I am cautious about relying on the Jurong quotation even for this limited purpose: it was not provided until October 2010, and it was sought only for the purpose of the litigation and to bolster the COSCO quotation. Mr Boyd’s evidence was that, in view of the amount of steelwork involved, the claimants ought to have been able to negotiate a “substantial discount”, and Mr Moschos said that he believed that, if presented with the Jurong quotation, COSCO would have reduced theirs (although he thought that the “final cost of repair” would still have been some $28 million or more). I do not accept that the Jurong quotation would corroborate COSCO’s quoted rate for steelwork if the rate does not otherwise withstand the defendants’ criticisms. Mr Smith had other observations about Jurong’s quotation (including the sums relating to generators, and other criticisms about machinery repairs), but I can pass over them since the claimants relied on it only in relation to steelwork rates.

The proper method of repairing the hull

Unless the claimants are entitled to advance an alternative case (see para 440) that the vessel was a CTL, they have to prove that the only proper way to repair was the section method. On the face of it, it might seem an extravagant method of repairing in that it would have involved replacing undamaged steel, such as undamaged parts of the deck. Mr Moschos’ evidence, however, was that it was necessary in order to correct the misalignment, that is to say the twist as well as the hogging. The defendants accepted that the twist had to be corrected, notwithstanding Dr Dingwall’s description of it as “slight”, but they did not accept that it would have been necessary or reasonable to adopt the section method in order to do so.

The defendants’ witnesses referred to two other methods of repair:

i)             Captain Gregory and Mr Murray considered that the vessel could have been repaired properly and at less expense by cropping out only damaged steel and renewing it. This was the basis on which they estimated the cost of $5 million in their report of 5 May 2011. It was also the basis on which Mr Boyd estimated the repair costs at $8 million, including $2 million for engine repairs, in his preliminary assessment of 21 December 2009.

ii)            Mr Boyd recommended in his statement of 25 January 2013 and in his oral evidence that the block method was appropriate to repair the damaged double bottom structure by way of the no 5 and no 6 holds. He contemplated that other damaged areas, including the decks and the bulkheads, might be repaired by crop and renewal. He explained that the advantage of the block method over the crop and renew method is that, while it uses more steel (because undamaged steel is cut out), it is less labour intensive, and so reduces costs overall. He did not propose the method because it would better correct the misalignment.

There is no persuasive evidence from the expert witnesses about what method of repairs was required to restore the “Irene EM” to her pre-grounding condition or an operating condition. Mr Colman said in his first report that he did not consider that the costs of repairs and towage would have been as much as the claimants asserted “as the extent of the necessary renewals would have been far less than two complete hold sections of the Vessel”. When he was cross-examined, Mr Colman confirmed that he had formed this opinion on the basis of photographs that he had seen, and readily accepted that others who had inspected the vessel, including Mr Moschos, were better placed than he to express an opinion about this. He stated that the vessel’s hog and any twist could have been removed by the crop and renew method or the blocks method, and that he thought it unnecessary to replace steel forward of the bulkhead between holds 4 and 5 or aft of the bulkhead between holds 6 and 7. However, as I understood his answers, here too his opinions simply reflected his assessment of the extent and nature of the damage based on photographs and without taking account of the oral evidence; and here too he would defer to those who had inspected the damage.

What did the witnesses of fact say about the crop and renew method? Mr Carney said in cross-examination that he had experience of twisted vessels being repaired by cropping and renewing, and that classification societies had agreed to this method of repair, but he was not an expert witness and Mr Templeman (properly and with my encouragement) refrained from cross-examining him as such. In any case Mr Carney’s evidence was not directed to the damage to the “Irene EM” and was too general for his opinion to be persuasive.

More importantly, in my judgment, the proposals for repairs that Captain Gregory and Mr Murray put forward would not have corrected misalignment of the vessel’s hull, and they really accepted this. Mr Murray accepted that, if the vessel was twisted as Dr Dingwall had observed, repairs by the crop and renew method would not have remedied this. As I understood his answers, Captain Gregory also accepted in cross-examination that his proposals would have replaced damaged steel and no more. (Q. “So if you are talking about cropping and renewing a total of 257 tonnes of damages steel members, that is not going to correct either the hog or the misalignment of the vessel’shull, is it? It will replace damaged steel, but do nothing more”. A. “That is for replacing damaged steel, nothing more.”) He went some way to retract this answer in re-examination: he said that he thought it “most unlikely” that after crop and renewal repairs the vessel would have remained hogged, and that it was “unlikely” that she would have been twisted. But he immediately qualified his answer about whether the twist would have been corrected, and it was clear that he had not given the matter much thought. In my judgment, his repair method was not directed to dealing with misalignment, and I cannot place any weight upon his answers in re-examination about this.

In any case, I do not consider reliable the evidence of Captain Gregory and Mr Murray about the cost of repairs to the vessel. I have already explained why I have reservations about the reliability of their evidence generally, but Mr Templeman submitted that there is specific reason to reject their evidence about the cost of repairing the vessel: that I should not accept it because their exchanges show that Captain Gregory initially adopted the position that the repairs would cost $5 million, Mr Murray was asked to provide a justification for that figure and he did so. Mr Murray denied this when he was cross-examined, but in view of the correspondence (which I have set out at para 276) I reject Mr Murray’s denial. I have already indicated that I agree with Mr Templeman’s submission: see para 277. The credibility of Mr Murray’s evidence about repairs is further reduced because, as he engagingly said in cross-examination of his first thoughts about the cost of repairs, “Everyone laughed at it in the industry”. I recognise that the immediate focus of this evidence was the cost of repairs rather than the method, but the two questions are inseparable when it comes to assessing the reliability of witnesses’ views.

Mr Templeman sought to cast doubt upon Mr Boyd’s evidence about the blocks method on the grounds that he had originally contemplated the crop and renew method, and estimated the cost of using the blocks method only in his supplementary report of 25 January 2013. There is nothing in that: Mr Boyd’s report of 21 December 2009 suggested that consideration be given to repairing the double bottom structure by renewing “blocks” where steelwork was damaged, and by the time of his witness statement in January 2013, he had more information, in particular from (i) photographs taken by Dr Jones, Mr Moschos and Mr Murray and (ii) Captain Gregory’s report of 5 May 2011.

Mr Templeman had another argument that I should reject Mr Boyd’s evidence about the blocks method: when he contemplated the crop and renew method, he had estimated that 778 tonnes of steel would have to be replaced. In his report of 25 January 2013 he still maintained that his “original estimate of 778 tonnes of steel repairs remains validas a conservative estimate of the amount of likely steel renewal work”, notwithstanding that the blocks method would involve more steel being replaced. This does not undermine Mr Boyd’s evidence: he explained that the extent of the damage was less than he had supposed when he made his initial estimate and he applied the savings to off-set the extra volumes involved in the block method. This perhaps illustrates that Mr Boyd’s assessments were was far from exact, but that is inevitable, and Mr Boyd recognised this by rounding up his assessment of 778 tonnes to 1,000 tonnes in his report to underwriters on the cost of repairs.

I therefore reject these attacks on how Mr Boyd came to put forward his estimate of the cost of repairs in his supplementary witness statement. It must be considered on its merits, or more precisely, I must consider whether nevertheless the claimants have proved that they are entitled to have the cost of repairs assessed on the basis of the section method and that the block method would not have been appropriate. Their argument is that the misalignment could not have been remedied by cutting out a block from the bottom structure and replacing it with a new block to fill the space. Both the block that was cut away and the upper structure and other parts of the vessel with which its replacement was to be fitted were twisted. Mr Templeman argued that there were, therefore, three possibilities:

i)             That the replacement block would be made to fit with the other parts of the vessel and reflect the twist in them, but the repaired vessel would still be twisted.

ii)            That the replacement block would differ from the block that was removed, but it would not fit the space.

iii)           That the replacement block would not reflect the twist, and the upper structure and surrounding area would also be removed and replaced with a section (or sections) to fit the new block and not be twisted, but that it is effectively the section method.

The defendants replied to this argument with two (linked) points:

i)             First, they say that Mr Templeman’s argument assumed that the vessel was twisted because of plastic deformation, but if it might have been at least partly elastic. It would then have been sufficient to use the block method, or even the crop and renew method, to repair any steel that was plastically deformed. Mr Boyd explained, and in any case it is self-evident, that then the vessel will revert to its proper alignment and any elastic twisting will be corrected.

ii)            Without expert evidence, the claimants are not in a position to prove that the block method would not have corrected the twist, by replacing such steel as was plastically deformed and contributed to the deformation. (Mr Smith went so far as to submit that expert evidence from a naval architect was required, but I cannot see that expert evidence from a surveyor experienced in ship repairs, such as Mr Moschos, would not have done, if properly adduced.)

I conclude that these points do not answer the claimants’ argument. The question, as I see it, is how the claimants would reasonably have gone about repairing the damage, judging them by the standards of owners who were uninsured and behaving prudently. Mr Moschos inspected the vessel and concluded that the only feasible repair method was the section method. His evidence was challenged on the basis that parts of the double bottom structure were intact, but not on the basis that, if the double bottom structure were repaired, then the misalignment to the upper structure might be corrected because it was entirely elastic. I do not doubt that the hogging was caused by a combination of plastic and elastic deformation, but I have concluded that the principal reason was plastic deformation caused by the vertical forces from the grounding.

I add this, although my decision does not depend upon it. There is no convincing evidence that, if the claimants had carried out further investigations before embarking upon section method repairs, they would have been able to determine whether any deformation to the upper structure was plastic or elastic. (I do not understand that Mr Sarbanis’ note was directed to this. Mr Murray referred in cross-examination to investigations “get[ting] actually what was the actual condition when it was in dock” but this was a general observation and not directed to the misalignment.) As I infer from the evidence, the claimants would have had to decide what repair method should be adopted on the basis of the information available to them, and the reasonable decision would have been to adopt the section method because otherwise they could not have had a reasonable degree of confidence that the repairs would prove effective.

I have some sympathy for Mr Smith’s submission that Mr Moschos’ evidence was insufficient to establish this part of the claimants’ case and to discharge the burden of proof. I have found it difficult to engage with this issue without expert evidence. Mr Moschos said, and I accept, that, when asked to prepare their quotation, COSCO “put … in their computers, their naval architecture department, computers, they take the input of the report that I gave them and the plans and they design a new section that would present an aligned vessel and in their opinion in order to do that they have to replace steel that appears undamaged, and would be necessary to be renewed in order to achieve full alignment”. But this is a frail surrogate for expert evidence. However, in my judgment this is not ultimately fatal to the claimants’ case. As Mr Templeman said, the question how the vessel should be repaired cannot be divorced from the issues about what damage she actually suffered, and realistically I doubt whether an independent expert who had not seen the damaged vessel could have gone further than Mr Colman in expressing an opinion about this. And I find some comfort for my conclusion in Mr Sarbanis’ report and BV’s email of 18 January 2010, in which they required that the vessel be repaired by the section method “Due to the nature of the damage i.e. extreme hogging/misalignment and twisting of the vessel’s hull”, and said that only then could she be an operating vessel: see para 198.

Mr Templeman based another argument on this email: that, if she were not repaired by the section method, the “Irene EM” would not have been given classification, that therefore she could not have been insured, and so that she could not have been operated. In other words, for practical purposes the position adopted by BV and stated in the email took out of the claimants’ hands any decision about how the repairs might be done. I reject that argument: as I have said (at para 197), I accept Mr Templeman’s interpretation of what BV meant in their email, but it does not follow that after further inspection of the damage, in particular the damage to the double bottomed structure, they would not have agreed to another method of repair; nor that, if the claimants had adopted another method of repair, BV would not have accepted the vessel back into class when they saw the results. While the claimants were contemplating the section method, BV had no reason to object to it even if they thought that the claimants were being more cautious than necessary. It does not mean that, if the claimants had re-assessed the damage and had proposed less expensive repairs, BV would not have considered them. After all, it was not for a classification society to insist on particular repairs: their role was to survey the vessel after repairs had been done and to decide whether to accept the vessel back into class. Of course, it was sensible for the claimants to seek BV’s views about what repairs might be acceptable to them, and for BV to give them guidance. But in the end, if the vessel was to be repaired, it was for the claimants to decide what repairs would (i) restore the vessel to her pre-incident condition and (ii) meet classification requirements. Indeed, if the claimants had had the vessel properly repaired to their surveyor’s satisfaction but BV declined to classify her, the claimants were entitled under BV’s rules to challenge the decision.

Was it proper to have the vessel repaired in China?

The claimants’ argument that the vessel was a CTL is based on the cost quoted by COSCO for having the vessel repaired by them in China. The defendants contended that the vessel could have been repaired at less expense in Dubai or in Bahrain. Mr Moschos’ evidence was that, as he had said in his report of 26 January 2010, he sought a quotation for repairs from COSCO rather than a yard in the Gulf mainly because they would have the necessary facilities and because steelwork prices would be lower in the Far East. Accordingly, the claimants said:

i)             That the necessary repairs could not have been done in the Middle East; and

ii)            If, however, the repairs could have been done in the Middle East, they would not have been cheaper, or at least the overall cost of repairing the vessel(including making temporary repairs, towage and other incidental costs) would still have exceeded $12 million.

I consider these questions only on the basis that the section method was used for repairs: see para 440.

Mr Moschos explained, and I accept, that COSCO mainly constructs new buildings, and therefore had facilities to carry out section method repairs. It is not disputed that they did. However, Mr Boyd said in his supplementary statement was that “Dubai Drydocks [had at the relevant time] three graving docks with sufficient capacity to take the Vessel” and “the necessary expertise to carry out repairs”. He also said that ASRY had a 500,000 dwt graving dock that could have taken the vessel. I do not doubt that evidence as far as it goes, but it is not sufficient for the defendants’ purposes. First, it is not clear that Mr Boyd had in mind repair works using the section method: his statement considered other methods, and his evidence about the facilities at Dubai Drydocks and ASRY is most naturally to be understood as directed to repairs by other methods. Mr Murray gave evidence in his supplementary statement that Dubai Drydocks and ASRY both had facilities for carrying out the crop and renew repairs, and that ASRY also had experience “of converting vessels and as such would have been able to fabricate a new mid-section comprising of Hold No 5 and 6 if necessary”: he exhibited material from ASRY’s website illustrating this. I accept Mr Murray’s evidence about ASRY, but its implication was that he did not dispute that Dubai Drydocks did not have either the experience or the facilities for such repairs. I infer that they did not.

However, this does not entirely answer Mr Moschos’ evidence or the claimants’ case about whether the necessary repairs could have been done in the Gulf. Mr Moschos acknowledged that there were graving docks in Dubai and Bahrain, but, as I infer from COSCO’s quotation, the works would have taken something like six months. Mr Moschos said that, even if they had the facilities to carry out section method repairs, the Gulf yards would not have wished to devote them to a single contract at the expense of their general repair business. I accept that evidence. Mr Smith challenged it on the basis that the Dubai Drydocks had three graving docks but as I have concluded they did not have the facilities: it was not suggested that ASRY had more than one dock.

I therefore do not need to consider whether, if the repairs had been carried out in the Gulf, they would have cost more than $12 million. But even if I am wrong and a Gulf yard would have made its facilities available, I infer that this would have been reflected in higher charges. In any case, Mr Moschos’ evidence was that the Gulf yards in Dubai and Bahrain “are the most expensive yards in the world”: this might not be literally true, but it satisfies me that the claimants could not have had the necessary repairs done more cheaply in the Gulf than in the Far East. The evidence relied upon by the defendants about the rates charged in the Gulf remains relevant only for testing whether COSCO’s quotation sufficiently proves what would have been charged in the Far East.

Cost of hull repairs in China by the section method

I have considered the cost of engine repairs and other costs that the claimants would have incurred if they had had the vessel repaired by COSCO. I must consider their quotation for hull repairs. Their total quotation for $17,406,680 comprised, as well as an allowance of $3 million for mechanical and electrical work,

i)             $1,520,780 for “General terms of shipyard stay/drydocking”

ii)            $9,415,000 for “Hull damages, steel work general”

I need not set out all the other items in the quotation. They include, for example, painting and an estimated cost for renewing pipes on the deck and elsewhere.

The defendants presented arguments that I should not accept the COSCO quotation as reliable evidence of the cost of repairs generally or the cost of repairing damaged steelwork in particular. They submitted:

i)             COSCO were not asked to quote against a written specification, and made their own assessment of the repairs that were required on the basis of photographic and other information about the damage. I do not regard this as a telling point: the COSCO quotation is detailed and, if there are valid criticisms of their assessment of the damage, appropriate allowances can be made.

ii)            Mr Moschos did not seek to negotiate a reduction in the price that COSCO quoted, and the inference is that Mr Moschos, who had already concluded that the vessel was a CTL, was not really seeking a competitive quotation for the works. There is some force in this: Mr Boyd’s evidence was that he would expect a “substantial discount” since (as he supposed) 1,400 tonnes of steelwork was involved. (He thought that a further discount might be negotiated if the blocks method were used, but did not say that the section method would attract a discount.) I make some allowance for this, but I assess it bearing in mind that Mr Moschos asked COSCO to quote their best possible price from the start, and COSCO quoted a “Lump sum price after discount” (emphasis added).

The sum of $1,520,780 was in respect of the docking and other facilities for 180 “good weather days”. The defendants did not contend that the COSCO quotation over-stated how long repairs would take, or advance any specific argument about this sum. I see no justification for taking a figure of less than $1 million.

The sum of $9,415,000 was based on steelwork of 2,690 tonnes at $3.5 per tonne. Are the amount and the rate justified?

The 2,690 tonnes comprised (i) 1,985 tonnes for fabricating a new midship section by way of holds nos 5 and 6, including replacement of the double bottom top tank section, hopper and topside tanks, side shell sections and hatch coamings tank and bulkheads; (ii) 580 tonnes for the bottom section forward of hold 5 and (iii) 125 tonnes for the bottom section aft of hold 6. The defendants said that that the proper measure of the new section itself is 1,400 tonnes and that there is no justification for allowing for any other steelwork forward or aft of holds nos 5 and 6. In the specification provided for Jurong, MMM stated that for “the refabrication and replacement of the whole of No 5 and 6 holds section … it is estimated that about 1,400 tons of steel is required”. Mr Boyd gave evidence that he had had this tonnage checked by “one of my naval architect colleagues”, Mr James Anderson, who considered it “about right”. The defendants submitted that claimants cannot justify a higher figure.

Mr Moschos explained, and I accept, that the tonnage of 1,985 tonnes was assessed by COSCO’s naval architect department, who used the information that he provided and “put it in their computer”. He did not himself participate in calculating the tonnage. It might be that COSCO made allowance for additional works to other parts of the upper structure forward of hold no 5 or after of hold no 6 (additional repairs for other parts of the double bottom structure being included separately by COSCO). However that might be, I accept the defendants’ contention that the claimants have not showed that the replacement section itself involved more than 1,400 tonnes of steelwork.

Having rejected COSCO’s assessment that the replacement section involved 1,985 tonnes of steelwork, I am unable to regard as reliable their assessment that a total of 705 tonnes of further steelwork was required for work on the double bottom fore and aft of the replacement section. However, I cannot accept that no other steelwork needed to be repaired in the double bottom section: for example, steelwork was needed to repair the damage to the shell side frames by way of hold no 7. In the specification Jurong were asked to submit a quotation on the basis that in all 500 tonnes of further steelwork were required. The claimants have not produced evidence to support this tonnage figure or from which I can assess with any accuracy what further steelwork would have been required if the section method were adopted, but on the most conservative basis I cannot believe that it would have been less than 200 tonnes.

I am not persuaded by the defendants’ various attacks on COSCO’s rate of repairs of $3.5 per tonne. Mr Boyd said that, assuming the hull damage to involve 1,400 tonnes of steelwork, the repairs by the blocks method could have been done at Dubai for $5,166,000, on the basis that the cost would have been some $3.7 per tonne (or $4.1 per tonne less a discount of 10%). I do not adopt that as a measure of the cost of repairs in China using the section method: rates for the Gulf cannot be transferred uncritically to the Far East and rates for one method of repair cannot be transferred uncritically to repairs by another. But this alone casts doubt upon the defendants’ submission that a realistic price would have been $1.38 per tonne.

However, I am sceptical of this part of Mr Boyd’s evidence. The rate of some $3.7 per tonne is lower than what Mr Boyd originally assumed in his estimate of 21 December 2009, when that he took a rate of $5.5 per tonne, which he described as “fairly generous”. He later revised his views in light of his experience of another casualty repaired by way of crop and renew at Dubai Drydocks in December 2009 and January 2010, and he allowed a 10% discount because the repairs of the “Irene EM” (largely, disregarding the deck repairs) were of grade A steel rather than high tensile steel. However, he had had involvement with the repairs to the other vessel when he originally estimated the cost of repairs, and in cross-examination he had no convincing explanation as to why he would not have taken due account of this and no convincing reason for reducing it to $4.1 per tonne (before discount).

What then is the basis upon which the defendants say that $3.5 per tonne is too high a price? They did not adduce expert evidence about the market price for repairs at the relevant time, but relied upon (i) prices discussed in internal emails within Noble Denton in February and March 2010; and (ii) information that Mr Murray gave about rates charged by yards for other repairs of other vessels.

The exchanges are these:

i)             In emails dated 9 February 2010 and 26 March 2010 Mr Murray advised that the cost of steel renewal in China was “presently 0.92 cents/kg all inclusive”, and said that an Indian owner had negotiated that price and that “most yards in China charge around the same price”.

ii)            In an email dated 10 February 2010 Mr Murray advised that a representative of ASRY was “in town looking for work. 2.5 USD/kg is the price quoted”.

iii)           In an email dated 25 March 2010 Mr Murray reported that he had visited the Bombay Port Trust and had met with “workshops who advise that steel charges will be in the range of USD 2/kg”. On 26 March 2010 Captain Gregory wrote that “USD 1 to 1.50 has been mentioned for China over here, which ties in with what you say”.

Mr Murray’s evidence was that:

i)             In 2008 ASRY undertook repairs of 423 tonnes of steelwork involving the renewal of steel including “internals”, and they charged a rate of $4.69 per tonne, less a discount of 5%, a net price of (say) $4.45: see para 276.

ii)            He thought that the claimants might have reduced significantly the price quoted by COSCO and he relied upon other quotations: (a) a quotation dated 3 March 2011 to ASP Shipmanagement (Ind) Ltd, in which COSCO quoted a price of $0.85 per tonne for a small amount of steelwork; and (b) quotations dated June 2009 given by COSCO and another Chinese shipyard, Dalian Daeyang Shipyard Co Ltd, which were based on rates of $1.05 or $1.10 per tonne for some 650 tonnes of steelwork.

(He also gave evidence about a conversation with a broker from Interlinks Marine, but I do not accept that: see para 276.)

I do not find this evidence persuasive. Mr Templeman fairly observed that the other COSCO quotations were for different repairs to different ships and different times, and no doubt were affected not only by fluctuating rates for the cost of steel but also by how busy they were and how anxious they were for the work. Captain Gregory and Mr Murray themselves adopted a rate of $6.5 per tonne for steelwork in their report of 5 May 2011. Captain Gregory said that he relied wholly upon Mr Murray to provide an appropriate rate for steelwork, but neither he nor Mr Murray provided any coherent explanation for the rate used in their report if prices were as low as the defendants now suggest.

The defendants’ pleaded case adopts $6.5 as the “unit steel price” for repairs at ASRY. Mr Murray said that prices in Dubai were higher than at ASRY, but the pleaded case is broadly consistent with the rates for Dubai stated by Captain Jackson in his email of 13 December 2009: see para 210. Captain Jackson also said that rates in China were no better than $3, and here too his advice is consistent with COSCO’s quotation. This seems to me more telling evidence than that on which the defendants relied. After all, Mr Murray’s initial views about how much the repairs would cost were dismissed within Noble Denton.

In his second statement Captain Gregory expressed his opinion that “a realistic rate for a Chinese repair yard in 2010 for steel weights in excess of 1,000 tonnes would have been some USD 1.00/kg”. Although he apparently had been based in Singapore for 16 years and said that he was “very familiar with both yards”, he was not giving expert evidence. In any case I am not persuaded by his views: he gave no reason for his opinion (beyond expressing an expectation that COSCO would agree to “a significant discount”); it is inconsistent with Captain Jackson’s contemporaneous view; if he thought prices were so very much lower in China than the Gulf, he would surely have referred to this when estimating the cost of repairs; and I do not regard Captain Gregory as a reliable witness on a matter like this.

Mr Boyd too gave evidence about rates charged in China. He expressed an opinion said to be based on his “experience” that the rate of $3.5 was “exceptionally high for a Chinese yard” but, as I said at para 29, he had no experience of Chinese yards and I attach no weight to his opinion in itself. However,

i)             When Mr Boyd received a copy of COSCO’s quotation in February 2010, he contacted Braemar’s Shanghai office, who advised about the rates for steelwork in excess of 1,000 tons as follows: “somewhere between USD 1.0 and USD 1.2 per kilo (assuming advance quotation, rather than just turning up and hoping for the best), but subject to the usual caveats – curved steel, high tensile steel, and repair location all attract surcharges of between 12% and 15% each”.

ii)            In 2012 a tariff from Chengxi Shipyard indicated a rate of $1.63 per tonne for renewal of mild steel.

iii)           In 2012 Braemar’s Shanghai office was involved with the repair over 38 days of a 38,849 GRT bulk carrier requiring the renewal of 876 tonnes of steel in dry-dock by the Chengxi Shipyard Co Ltd in China. Apparently the yard pre-fabricated blocks before the vessel arrived. The charge was $3,202,444 (including dry-docking and general services but excluding “owners’ work), some $3.6 for each tonne renewed. The work involved high tensile steel that, according to Mr Boyd, is usually 15% to 25% more expensive than mild steel.

I accept that this evidence is more directly relevant than other evidence on which the defendants relied, but I am not persuaded by it that the rate charged by COSCO is significantly above the market rate for the repairs by the section method. The rate quoted by COSCO was for specific work: it included, for example, work on the internals of the holds and tanks, some (limited) high tensile steel renewals and “small pieces which are to be charged on a per piece basis”, all of which, according to Mr Moschos’ undisputed evidence, attracted additional charges. Apparently none of the other rates presented by Mr Boyd or Mr Murray are directed to repairs by the section method and there is no evidence about whether such repairs are more or less expensive than if another method is used. Mr Boyd did not suggest that Braemar’s Shanghai office was provided with COSCO’s quotation or given information about the damage that was to be repaired or the method that was to be used or details of what was required, but I infer that they had considerably less information about the repairs required than Captain Jackson did. I am persuaded that, for the purposes of assessing the cost of steelwork, the price of $3.5 quoted by COSCO should not be reduced by more than 10%,

I have sought to examine the cost of repairs in some detail as best I can on the basis of only limited evidence. In my judgment, the claimants’ pleaded claim about what repairs would have cost is exaggerated, and the costs would have been much closer to $12 million than the claimants allege. Conscious that the burden of proof is on the claimants, I must consider whether the evidence is sufficient to establish that they would have exceeded that amount. Despite the limited evidence, I conclude that they have done so, even making conservative assumptions in the defendants’ favour throughout and ignoring some items that the claimants might properly bring into account. I illustrate this follows:

Docking – no less than $1 million (see para 476)

Hull repairs – no less that $5 million (being 1,600 tonnes of steelwork at $3.15 per tonne: see paras 479, 480 and 490)

Engine – no less than $1million (see para 445)

Towing – no less than $1.25 million (see para 451).

Temp repairs – no less than $3.75 million (see para 449).

This presentation does not bring into account other minor costs: port dues and agency fees relating to the tow (see paras 450, 451); such of Mr Moschos’ “incidental expenses” that are properly included (para 452); supervision fees (para 454). Nor does it bring into account other items included in COSCO’s quotation, such as piping renewal, the cost of which was estimated to be US$1 million: see para 474.

The conclusion that I have reached about the cost of repairs as a result of this examination of such information as is available is the same as I would, if necessary, have reached on a broader and more impressionistic approach. After all, the claimants’ case is based on a quotation from a reputable shipyard, and it could not credibly be argued on the evidence that it was not honestly sought and honestly provided. If my conclusions about other expenses such as temporary repairs and towage are correct, the vessel would have been a CTL if the costs were little more than a third of the price quoted. The defendants’ evidence about the cost of repairs was simply not of a quality to undermine so completely the evidence of the quotation.

Conclusion

I conclude that the damage to the vessel resulting from the grounding on 30 October 2009 was covered by the insurance. I also conclude that the vessel was a CTL. I reject the alternative argument that she was an ATL. The claim therefore succeeds, and the claimants are entitled to judgments against the appropriate defendants in a total of $18 million together with statutory interest, subject to giving the credit to which I referred in paragraph 2 of this judgment.


Kyzuna Investments Ltd. v Ocean Marine Mutual Insurance Association (Europe)

[2000] EWHC 206 (Comm) Thomas J

The applicable principles of law

The applicable principles of law were not in dispute and can be shortly summarised.

(1)          Section 27(2) of the Marine Insurance Act 1906 defines a valued policy as:

A valued policy is a policy which specifies the agreed value of the subject matter insured.

(2)          At the time the common law was codified by the Act, the common form of Marine Policy (the S.G. Form set out schedule 1 to the Act) contained the following provision on value:

The said ship, etc., goods and merchandises, etc., for so much as concerns the assured, by agreement between the assured and the assurers in this policy, are and shall be valued at …

The editors of the 16th edition of Arnould on Marine Insurance (1981) commented that that clause was also usually contained in every form of Marine Policy in use in the UK.

The current form of Marine Policy now in general use (MAR91) and which came into general use with the revision to the policy form and Institute Clauses in the early 1980’s contains a schedule where the name of the insured, vessel and subject matter are to be set out; this also sets out a space for “agreed value (if any)” and “amount insured hereunder”.

Thus the standard forms of marine policy allow for agreement as to value by making specific reference to the value as an agreed value in accordance with Section 27(2) of the Marine Insurance Act.

(3)          It is clear from a number of cases that the words “agreed value” need not be used; for example it appears to have been common to use the term “valued at” on a slip. In Wilson v Nelson (1864) Q.B.N.S. 220 a policy on the S.G. Form contained after the words “are and shall be valued at” the words “as under”. The policy then concluded with the words “£1300 on freight”. The Court held that it was not a valued policy; the sum of £1300 was no more than the sum insured. Blackburn J said:

And in all the policies I have ever seen, I think I may say that the invariable practice is, when it is intended that the policy shall be valued, after stating that the sum insured and the thing insured, to add “valued at the same” or at so much adding the same or a greater sum.

It is not essential that the words “valued at” are used, provided the intention of the parties is clear that there is a specified agreed value, proposed by the assured and accepted by the underwriter. I agree with the view expressed in a footnote to paragraph 424 of Arnould which states:

Yet if the intention of the parties is clear the policy will be regarded as valued notwithstanding that the words “valued at” are not used.

The editors cite as authority for that proposition the decision of Wright J in Loders & Nucoline Ltd v the Bank of New Zealand (1929) 33 Lloyd’s Rep 70; but there is nothing, in my view, in that case which supports the proposition. However the proposition must, self evidently, be right.

(4)          The use of the term “sum insured” will normally indicate the amount for which the subject matter is insured and not as specifying the agreed value. There are a number of authorities that make this clear.

The judgments in Wilson v Nelson draw a careful distinction between the sum insured and what is required if there is to be a valued policy.

In British Traders Insurance Company v Monson (1964) 111C.L.R. 86 the High Court of Australia had to consider a policy which contained insuring words that stated:

The liability of the company shall in no case exceed in respect of each item the sum expressed in the said schedule to be insured thereon or in the whole the total sum insured hereby.

The Schedule

“THE PROPERTY INSURED             SUM INSURED

as per schedule attached hereto and incorporated herein              £5,318

Total Sum insured            £5,318”

The High Court stated that a somewhat faint attempt had been made to suggest the policy should be construed as a valued policy; they held it was not.

In contrast in Elcock v Thomson [1949] 2KB 755, the policy after setting out the “sum insured”, went on specifically to provide that this sum was accepted by the underwriters and the assured as being the true value of the property insured.

The current leading text books, to which I was referred, all refer to the use of the term “sum insured” as being the maximum amount insured under the policy or the ceiling on recovery. For example in Dr Malcolm Clarke’s The Law of Insurance Contracts (1999 edition), he refers at paragraph 28 -7 to the “sum insured” as being a ceiling on recovery which does not make the policy a valued policy. Professor Merkin in the 7th edition of Colinvaux’s Law of Insurance (1997) refers at paragraph 1-15 to the sum insured as the amount at which the insurers’ liability is limited. Professor Rhidian Thomas in his “The Modern Law of Marine Insurance” (1996) draws the distinction between the use of the term the “sum insured” as a ceiling to the liability of underwriters and the agreement to a valued policy.

I was also referred to the decisions in Blascheck v Bussell (1916) 33 TLR 74 and Re Freesman and Royal Insurance Co. of Canada (1986) 29 DLR (4th) 621 where the courts took the view that the sum stated in the policy was the sum insured and not an agreed value.

(5)          It is common for a policy of marine insurance to be a valued policy. There are at least two principal reasons why such policies are used:

Agreement on valuation avoids disputes over valuation in the event of loss (see Barker v Janson (1868) LR 3 CP 303 and, in particular, the judgment of Montague Smith J at p.307).

Although under s 27(4), an agreed value is not conclusive for the purpose of determining whether there has been a constructive total loss, the Institute Clauses have provided for many years that the insured value is to be taken as the repaired value. In many cases, this has the effect of making it more difficult for there to be a constructive total loss.

In General Shipping and Forwarding Co v British General Insurance Co (1923) 15 Lloyd’s Rep 175, Bailhache J set out some considerations why marine underwriters preferred agreed over-valuations of the hull.

(6)          In policies where (as in this policy) the proposal is made the basis of the policy, any terms in the proposal which conflict with the policy are overridden by the conflicting term in the policy. The law was summarised by Lord Wright is Izzard v Universal Cargo Insurance [1937] AC 773 at 780:

No doubt the proposal conditions and the express conditions of the policy must be read together and, as far as may be, reconciled, so that every part of the contract may receive effect. But if there is a final and direct inconsistency, the positive and express terms of the policy must prevail.

(7)          As the wording was put forward by the defendant underwriters, any ambiguity should be resolved against them.

The application of the principles to the policy

The argument advanced by the Defendant underwriters was simple; they contended that the schedule to the policy was clear in that it used the term “sum insured” and when that was read with the general insuring wording, it was clear that this was not an agreed valued policy. The wording used was indistinguishable from that considered by the High Court of Australia in British Traders Insurance Company v Monson.

Although the Claimants were prepared to concede that the term “sum insured” in the policy schedule would, in accordance with the authorities, normally point to the policy being an unvalued policy, they contended that reading the policy as a whole together with the proposal, this was a valued policy. They relied on the fact that the Defendant underwriters had asked for a valuation, the fact that the proposal form had specified sums to be given as “the value to be insured” and the fact that the specific provisions of the policy dealing with unrepaired damage and constructive total loss referred to the insured value.

The most cogent part of the Claimants’ submission rested upon the reference in the definition of constructive total loss to “the sum appearing in the schedule hereto as the value of the insured property”. This was the part of the policy specifically drafted by the Defendant underwriters and thus it was to be expected that the reference in that clause must have been intended to be to a reference to an agreed value in the schedule. The same point was made (but with less force as the clause is part of a standard provision) by the similar reference to insured value in clauses 16.3 and 17.2 of the Institute Yacht Clauses.

However the draftsman of the part of the policy specifically drafted by the Defendant underwriters referred in the definition of special equipment to “the sum insured” and not an insured value, despite the fact that this is also dealt with in the same part of the schedule. Moreover, the main insuring clause expressed the agreement of the underwriters to indemnify “up to the amounts and/or limits contained herein”. The words actually used in the schedule were “the sum insured”; far from meaning the value has been agreed, this ordinarily means that the sum is the ceiling on recovery.

In my view the references in the Institute Clauses to an insured value are references in standard clauses applicable only if there is an agreed value. If no value is specified as agreed, the references in these clauses cannot assist. Nor in my view does the reference in the clause defining a constructive total loss. I do not consider that the reference in that clause to the insured value of the vessel, can, in the face of the terms of the general insuring clause and the special equipment clause, mean that the policy as a whole is to be read as a valued policy and the words in the schedule read as if they expressed an agreed value. In the face of those other provisions, I do not consider that the parties have made their intention clear that the sum in the schedule was an agreed value.

Nor do I consider that the request of underwriters for a valuation assists the Claimants. It is common for underwriters to insist on a valuation; for example it is very common in the case of insurance on works of art or valuables such as jewellery. This was an unusual vessel and underwriters wanted some independent valuation before considering insuring her. They were not thereby indicating they were prepared to agree to a valued policy. Although the proposal contained the words “value to be insured”, this was not an indication that the value so stated would be agreed as the insured value by underwriters. It is again common in proposal forms to ask for the value to be insured so that the total sum insured can be calculated. In my view the proposal form did no more than this.

Thus, if the whole of the clauses are read together and the proposal form considered, there is, in my view, nothing that points to the intention of the parties that the sums stated in the schedule were to be the agreed value of the yacht and her equipment. The words “sum insured” ordinarily indicate a ceiling on recovery in an unvalued policy; there is, in my view, nothing which displaces this ordinary meaning and the policy does not specify, in accordance with s.27(2) of the Marine Insurance Act 1906, the agreed value of the yacht.

Conclusion

I therefore answer the question posed in the preliminary issue by holding that the policy was an unvalued policy.


 Zeus Tradition Marine Ltd v Bell

[2000] EWCA Civ 188  Potter LJ

THE ISSUES IN THE APPEAL

24.          Following his judgment, the Judge gave leave to appeal to the Plaintiffs confined to the issues arising in relation to the proper construction of the survey condition, excluding the question relating to the independence of the surveyor which was raised by, and resolved against, the Defendant but to which I have not troubled to refer. The sub-issues which have arisen and been argued in this field may best be approached thus:

(1)          Did the clause create a condition precedent to liability, or was it a mere innnominate term?

(2)          Did the provision merely require a valuation survey or did it require a condition survey which included a valuation of the vessel?

(3)          On its true construction, what kind of condition survey was required by the provision and, in particular, was it one which required to be entirely conducted and the results recorded by the same independent surveyor or surveying company and excluded reliance upon a government survey conducted by MMM.

ISSUE (1): CONDITION PRECEDENT

25.          Mr Ruttle has argued that the clause was not a condition precedent to in commission cover but an innominate term. The term appeared in the Certificate of Insurance under the heading “Conditions”, which, in the absence of an express statement that the clause was a condition precedent, indicated that it was no more than a general term of policy. He also relied on the decision in Re Bradley v Essex and Suffolk Accident Indemnity Society [1912] 1 KB 415 (which the Judge distinguished) as authority indicating that, in the case of what Mr Ruttle suggested was an ambiguity, the question whether or not the term was a condition precedent should be resolved against the insurer. In my view, these and certain other subsidiary arguments were doomed to failure. First Mr Ruttle failed to make clear how, if the disputed provision was an innominate term, it would operate. Second, in my view, the mere location of the clause under the printed head “Conditions” is in no way determinative of the status of the clause as a general term rather than a condition precedent. Third, the submission was contrary to the view of the experts on both sides. Fourth, he entirely failed to overcome the Judge’s finding that:

“… an experienced yacht insurance broker dealing with an experienced yacht underwriter could be expected to use “subject to” in this context to connote a condition precedent to the continuance of cover …”

Finally, the circumstances in which the provision came to be included in the cover militated in favour of a condition precedent. This was an elderly craft which had undergone a lengthy refit extending over a considerable period. She was covered under the policy while the refit continued, but known to the parties to be intended for commercial use when she eventually came into commission, the plaintiff requiring cover for such use. It was also the understanding on the part of the defendant, as the underwriter assessing the risk, that the refit had still not been completed by the time that negotiations for the period of cover commencing on 1st April 1993 were taking place. Accordingly, this ground of appeal fails.

ISSUE (2): CONDITION AND/OR VALUATION SURVEY?

26.          Mr Ruttle persisted on this appeal with his principal contention before the Judge that the survey was intended to be a valuation and not a condition survey. He accepted that more than a one-line valuation was required and that it should be supported by a survey justifying the valuation by reference to the condition of the vessel. However, he contended that the focus was primarily on the valuation, the insurers having already rated the risk.

27.          Whether or not the focus was primarily upon valuation, it does not seem to me that the Judge’s finding in this respect can be disturbed. Having reviewed the evidence as to the negotiations in previous years, and, having concluded that neither Mr Fraser nor the defendant, Mr Bell, knew prior to commencement of the period of insurance on 1st April 1993 that the refit had definitely been completed and the yacht was immediately ready to go into commission, the Judge concluded:

“The 1993 Certificate operated in a manner which differed from the previous years’ contract in one respect, namely the absence of a requirement for the justification of value if the vessel suffered a loss before a surveyor had valued her. This could be because Mr Bell and Mr Fraser both assumed that the survey would be conducted at latest soon after the commencement of the period of insurance. Nevertheless, the words “survey including valuation” are retained. As with the earlier years’ contracts, they clearly show that the survey was to cover the vessel’s condition as well as its value and that such survey was to be a pre-condition of the continuance of cover if the vessel went into commission at the commencement of or during the period of the insurance.” (p.713)

It seems to me that, in the light of the wording of the relevant phrase “survey including” valuation”, as well as the factual matrix to which the Judge properly had regard, such conclusion is unassailable. However, that still leaves open the question as to the level of detail required by the survey and, in particular, whether it required to be one carried out by a particular surveyor or company.

ISSUE (3) THE KIND OF CONDITION SURVEY REQUIRED/RELIANCE ON THE MMM SURVEY

28.          The Judge, held that, for the condition precedent to be satisfied, “a condition survey should have been satisfactory in the sense that it gave rise to no defects or recommendations in respect of seaworthiness or passenger safety”. The SVL survey clearly satisfied such a condition. However, the judge elaborated and supplemented that basic requirement by going on to hold also that the nature of the survey was one which required to be “no more stringent than in all the circumstances would reasonably be necessary to satisfy the underwriters of the vessel’s seaworthiness and safety” (p 718). In this respect he expressly held that the condition did not necessarily impose a requirement that there should be an out of water survey or the opening up of machinery or sea trials or stability tests after completion of the refit and before commencement of the in commission period. He contemplated that whether or not such obligation was imposed was likely to depend on whether an out of the water survey had taken place so long before the commencement of the refit that, unless it were once again inspected out of water, the seaworthiness might be in serious doubt, or whether there had been such survey “a relevantly short time previously to completion of the refit and commencement of the in commission period” (see paragraph 19 above). He also cited the example of further alterations having been made following sea trials which might affect the steering gear and thus require it to be tested again before it went into commission. In this connection, he accepted that the out of water survey and engine surveys carried out by MMM on 15th January and 14th March 1993 respectively covered all aspects of the vessel’s seaworthiness, including stability, and was most searching (see paragraph 20 above). In that context he posed the key question, on the answer to which his decision finally turned, namely whether, the vessel having “just previously satisfied the 1993 MMM survey, the underwriters reasonably required the same ground to be covered by a survey by another independent surveyor”, or whether it was sufficient for SVL to conduct its more limited survey afloat a few weeks later, reporting that the MMM had surveyed and approved the Yacht’s condition (see paragraph 21 above). As Mr Ruttle submitted, a reading of the judgment up to that point suggests that the Judge was poised to give the answer that, taken together, the two surveys were a sufficient fulfilment of the condition. In fact, he held to the contrary, stating as his pivotal reason that the clause required that any condition survey and valuation should be entirely conducted and the results recorded by the same surveyor or surveying company (see also paragraph 21 above).

29.          Mr Ruttle has attacked that conclusion, taken on its own, on the basis that it cannot be derived from the wording of the clause either on ordinary principles of interpretation, or on the basis of the Judge’s own earlier finding that an earlier out of water survey might avoid the necessity for anything more than a survey afloat, for the purpose of satisfying the clause. As to the construction of the clause, Mr Ruttle submits that there is no reason to suppose that the defendant intended to exclude the plaintiffs from relying upon two survey reports going to different aspects of the yacht’s performance and passenger safety, provided that together they constituted a reasonably satisfactory report. He tested this by submitting that there could be no reason in logic or as a matter of practice to exclude the ability of the plaintiffs’ surveyor (whether as an individual or a company) to sub-contract part of the survey in an area where he lacked expertise or was unable for some reason to carry out that part of the survey himself. The word “survey” should thus be interpreted as `survey or surveys’ whether as a matter of commercial good sense or on the basis that the singular includes the plural, save where the context otherwise demands. If that is correct, then the issue becomes whether the MMM survey, despite the judge’s finding that it was a most searching survey which covered all aspects of the yacht’s seaworthiness, including stability, is for some other reason to be excluded or disqualified from the category of additional survey able to be relied on.

30.          I accept Mr Ruttle’s submission as I have summarised it in paragraph 29. I also accept his submission that, in a case where uncertainty arises as to the meaning or scope of a provision in an insurance policy designed to exclude or diminish the liability of an insurer which would otherwise arise under the terms of the policy, a contra proferentem approach is appropriate. As observed by Staughton LJ in Youell -v- Bland Welch & Co Limited [1992] 2 Lloyd’s Rep 127 at 134:

“There are two well established rules of construction, although one is perhaps more often relied on with success than the other. The first is that, in case of doubt, wording in a contract is to be construed against a party who seeks to rely on it in order to diminish or exclude his basic obligation … . The second is that, again in case of doubt, wording is to be construed against the party who proposed it for inclusion in the contract: it was up to him to make it clear.”

In most insurance cases, the rule is employed in its second form and against the insurer. However, as it seems to me, both rules are applicable here to support a common sense reading of the clause so as to permit the insured, in appropriate circumstances, to rely upon inspections or findings of more than one surveyor or company to satisfy the `subject to survey’ provision. Thereafter, however, the question of whether or not the content of a survey or surveys relied on would reasonably be necessary to satisfy the underwriters of the vessel’s seaworthiness or safety is a matter to be determined on the evidence and in all the circumstances of the case.

31.          Miss Bucknall has been quite unable to persuade me that, in principle, the clause is to be interpreted so as to exclude plural surveys covering different aspects of the vessel’s seaworthiness, safety and performance provided that, taken together, they satisfy the reasonable requirements of the underwriters. As to the question whether a governmental survey such as that conducted by MMM is in principle capable of amounting to a survey on which the plaintiffs were entitled to rely, either standing alone or as incorporated into a single report as in this case, I again see no good reason to hold otherwise. All the clause requires is that the survey should be independent. Nor did the judge (or more significantly the witnesses) seek to criticise the quality of the MMM survey which the judge found was `most searching’ and which he contemplated could (if sufficiently recent) preclude the necessity for a repeated inspection by the reporting surveyor. Nor did he hold that the MMM survey was insufficiently recent to be relied on.

32.          I find myself unable to support the subsidiary reasons which the judge advanced for his view that the clause required that the survey and valuation be entirely conducted, and the results recorded, by the same surveyor, rather than, in part, by a government inspector. In this connection I remind myself that the question before the court is whether, in the circumstances, the report was sufficient to satisfy a reasonable underwriter as to the seaworthiness and passenger safety of the yacht for the purposes of the commencement of in commission cover and not what might appear reasonable to an underwriter who received and considered the report after the occurrence of the loss.

33.          The first reason stated by the judge was that the SVL report did not amount to a survey report covering or incorporating the results recorded by the MMM because it listed them as a matter of record but not by way of approval by the SVL surveyor. While it is true that the SVL surveyor did not expressly approve the results of the MMM inspections, it seems to me quite plain that by specifically referring to the MMM surveys and stating that no outstanding recommendations existed against the yacht’s seaworthiness for navigation, accompanied by an exhibition of the certificate issued by the MMM in the terms set out at paragraph 5 above, the SVL surveyor was adopting and incorporating the MMM survey and inspection of the relevant parts of the vessel and the statement of condition in the certificate as part of SVL’s own survey report. The judge’s second reason was that the MMM certificate is not itself expressed in the form of a survey report but rather as a list of those parts of the vessel as to which the MMM surveyors were satisfied. I do not find this a valid objection, given the form of the certificate and the judge’s express finding that the MMM survey covered all aspects of the vessel’s seaworthiness, including stability.

34.          As to the judge’s third reason, it may well be that, if the underwriter wanted to ask for further information about the condition of any underwater parts of the vessel inspected he would lack direct access to the surveyor concerned in the same way as if a sole independent surveyor had carried out the inspection and produced his own single report. However, he would not lack access to the insured’s representatives and the reporting surveyor who, if they could not themselves provide or procure the answers, would leave the insured at risk of lack of cover. In this connection, I note in any event that the underwriters’ rejection of cover was based upon their outright rejection of the adequacy of the SVL survey and was not based upon the narrow point raised by the judge.

35.          The judge’s fourth, and potentially more substantial, subsidiary reason was that it was the common understanding or assumption of the parties that an MMM inspection could not be relied on, because the parties did not appear to have regarded it as relevant to compliance with previous survey requirements under earlier certificates of insurance in respect of Zeusvessels. Mr Ruttle has informed us, and Miss Bucknall has not gainsaid, that this was essentially the judge’s own point, no evidence or cross-examination of the witnesses having been directed to it. It was based upon two incidents.

36.          In November 1991, when the “Zeus V” was shipped for various works to be carried out, Mr Venetopoulos, the President of the plaintiffs, took the opportunity to have the vessel surveyed by SVL because he said he knew for the purposes of the insurance it would have to be surveyed both ashore and afloat and for purposes of valuation before she could navigate. The vessel was also separately inspected in that month by MMM for the purposes of her annual certificate (see p.709 of the judgment). In those circumstances, it seems that the judge concluded that the duplication of inspection indicated the understanding or assumption of Mr Venetopoulos that the MMM inspection could not be relied on for insurance purposes. If so, Mr Ruttle submits (rightly in my view) that was not a legitimate conclusion to draw from Mr Venetepoulos’ evidence at least without further exploration. On any view, a survey had to be carried out for the purposes of insurance and valuation, and the occasion presented an ideal opportunity for such inspection. At the time the SVL inspection was arranged, the MMM survey had not yet taken place and its outcome was not known. Mr Venetepoulos was never asked whether, if he had been unable to arrange an out of water inspection, he would have felt entitled to rely on the MMM inspection as part of, or a supplement to, a survey report by his own surveyor.

37.          The second incident related to “Zeus II” another vessel in the Zeus fleet which, in 1989, was being re-built. The plaintiffs similarly required cover in respect of builders’ risks and thereafter in commission. The in commission cover was “subject to full survey and valuation” upon which Mr Bell insisted. On 1st June 1989, SVL produced a survey report, which Mr Bell accepted as satisfactory, treating in commission cover as having incepted (see pp 707-8 of the judgment). In that report, it was stated that the inspection had been carried out ashore and afloat. It also made reference, without more, to the fact that there had been an MMM inspection on the slipway some five weeks earlier. The judge appears to have concluded from this that it was accepted or appreciated by the parties that such an inspection could not be relied upon as a relevant survey for the purposes of the clause in this case. Again, I do not accept that reasoning. First, the obligation as stated in respect of Zeus II required a “full” survey and Mr Bell had already rejected a short “condition preliminary report”, stating that a “full” survey was required. This may well have affected the parties’ view as to what was necessary. Second, because the author of the full survey report had in fact conducted an out of water survey for himself, he had no need to seek and did not purport, to incorporate the MMM survey as part of his report for the purposes of reporting on seaworthiness and passenger safety.

38.          I would only add one further comment, in respect of the argument of Miss Bucknall that it would be commercially unreasonable to hold that the clause anticipated that an insurer could seek to rely upon the findings of a governmental body carrying out the survey, not for the purposes of insurance, but for some regulatory purpose. Her argument was that, if insurers did so, should there have been some error in the survey, neither the insured, nor (more importantly) the underwriters by way of subrogation, would have any recourse in contract or negligence in respect of errors made. This was a sophisticated argument not considered by the judge. More significantly, it was never raised, or apparently even considered, by the underwriters themselves when repudiating liability; nor was it an argument advanced or rehearsed with the defendant or the experts. In those circumstances I am not prepared to regard it as a matter which would have affected the thinking of a reasonable underwriter when considering the merits of the SVL survey.

39.          Since the judge predicated his conclusion (at p.721) that the survey by SVL was insufficiently comprehensive to satisfy the reasonable requirements of the underwriters for the purposes of the clause upon reasoning which I regard as incorrect, that conclusion seems to me to be irremediably flawed and I would allow the appeal on the issue of construction. It is not clear whether, had the judge taken the right approach to construction, he would or would not have decided that the survey was inadequate to satisfy a reasonable underwriter as to seaworthiness or passenger safety. In her submissions to us, Miss Bucknall raised a number of matters of detail which were not relied on by the judge as demonstrating the inadequacy of the survey for the purpose of satisfying a reasonable underwriter as to seaworthiness and passenger safety. However, these were not made the subject of any cross-appeal or notice of additional grounds upon which the judgment should be upheld, whatever the outcome on the construction issues. In those circumstances I would wish to hear further argument from the parties as to the appropriate form of order to be made consequent upon the success of the appeal.

40.          Subject to that observation, I would allow the appeal.

Sir Murray Stuart Smith I agree.


GE Frankona Reinsurance Ltd v CMM Trust No.1400 the “Newfoundland Explorer” 

[2006] EWHC 429 (Admlty) Gross J

DISCUSSION AND CONCLUSIONS

Natural and ordinary meaning: I take as my starting point the natural and ordinary meaning of the language of the warranty. A vessel is “crewed” by the crew (whatever its number) performing such duties as are required on board her. That is, naturally and ordinarily, how a vessel is crewed. Leaving to one side for the moment any particular crewing duties requiring performance otherwise than on board the vessel and any other necessary departures or emergencies, a vessel is not crewed if the crew is elsewhere; or, put another way, exceptional instances apart, if the crew is elsewhere it is not crewing the vessel. No implication is needed to reach this conclusion; it flows instead from the natural and ordinary meaning of the word “crewed” – and does not benefit from elaboration.

In terms of crew numbers, whether a vessel is “fully crewed” or not must depend on what she is doing; manifestly, a vessel undertaking an ocean voyage will have different crewing requirements to a vessel laid up alongside a berth. However, as already discussed (and exceptional instances apart), a vessel will not be crewed, let alone “fully crewed” if no crew members are on board. Accordingly, “fully crewed” must mean at least one crew member on board the vessel, whatever she is doing. As the Claimant does not contend that compliance with the warranty required the presence of more than one crew member on board the vessel, while laid up alongside a berth, it is unnecessary to consider the question of numbers further.

As a matter of natural and ordinary language, for the vessel to be “fully crewed at all times” while laid up alongside a berth, there must be at least one crew member on board her 24 hours a day; “at all times” means what it says – the whole time, not some of the time. At all events, that is how I would interpret the wording of the warranty, at least as a matter of first impression. Here, however, questions of context and practicalities require careful reflection and some qualification. To such matters, I turn next.

Context and practicalities: The context powerfully reinforces the impression, based on language alone, that the warranty ordinarily requires the presence of at least one crew member on board the vessel. This was a valuable yacht. It can readily be understood that the presence of a crew member on board affords some protection or safeguard against such risks as vandalism, fire, pollution, the onset of bad weather or theft. While it is true that there are circumstances in which human presence can increase some risks to a vessel (see The Moonacre [1992] 2 Lloyd’s Rep. 501, at p.507), I do not think that the tail should be allowed to wag the dog. The briefest consideration of the context serves to explain why the warranty should focus on the need for an on board “watchman”, a fortiori if and when machinery was running. Moreover, in the context of a valuable yacht, that a crew member should be required on board 24 hours a day is in no way surprising.

However, as foreshadowed, it seems to me that considerations of commercial commonsense also point to the need for some qualification of the literal meaning of the wording “at all times”. So:

i) Emergencies can arise, requiring the evacuation of the vessel or even the area. Take, for instance, a bomb scare or similar alert. It is inconceivable that the parties are to be understood as intending that the absence of crew from the vessel for the duration of such an emergency could place the Defendant in breach of warranty.

ii) It may be necessary for certain crewing duties to be performed ashore or otherwise than on board the vessel. For instance, adjusting moorings, working on a fouled propeller, or painting the outside of the hull. Given the Claimant’s acceptance that a one-man crew would be sufficient while the vessel was laid up alongside a berth, it could not sensibly be said that the absence of any crew member on board the vessel while such duties were performed, would result in a breach of warranty.

iii) On the premise that a one-man crew suffices, the context tells against certain other situations resulting in a breach of warranty. By way of example, consider the purchase of food or other supplies for the vessel. Necessarily, the single crew member will be absent while undertaking such tasks. I am not inclined to think that the parties could realistically have intended that in these circumstances there would have been a breach of warranty. To cater for such eventualities, I would amend Mr. Kendrick’s (alternative) formulation by adding the words “or other related activities” – lest it be said that these were not, strictly, crewing duties. Further and with respect to Mr. Kendrick’s formulation, I am unable to accept that such temporary departures must be within “the vicinity of the vessel”; could it, for example, make all the difference to insurance cover that the chandlery was in one part of the marina or another? To my mind, it is the purpose of the departure, rather than the distance travelled from the vessel, which is critical. I would therefore delete the words “within the vicinity of the vessel”.

Pausing here, I have anxiously considered but am unable to accept Mr. Eder’s submission that the focus of the warranty was on the employment of sufficient crew, rather than their location. Mr. Kendrick’s memorable retort to this submission was that on such a footing, the Marie Celeste would have complied with the warranty. I agree with Mr. Kendrick. To confine the warranty to matters of employment is, with respect, unreal. A warranty solely focused on employment does not begin to meet the commercial purpose underlying this contractual provision. While it is of course the case that a failure to employ a crew would place the Defendant in breach of warranty, the employment of sufficient crew will not, by itself, constitute compliance with the warranty. If once however it is accepted that the warranty is not confined to questions of employment, then it seems inevitable to me that its true focus must relate to the location of the crew; save for the qualifications already discussed, that location must be on board the vessel at all times. For completeness, this construction makes good practical sense, whether the vessel is laid up alongside a berth (the situation with which the contract is primarily concerned) or undertaking the other limited activities additionally contemplated by the contract; for example, it is difficult to envisage how the vessel could be “fully crewed at all times” when at sea, if the crew were anywhere other than on board the vessel.

Provisional Conclusion: Pulling the threads together so as to give effect to the wording of the warranty but allowing for the qualifications necessarily arising from the commercial context, my provisional conclusion is this:

For the purposes of Preliminary Issues (1), (2) and (3)(c) – (d): The warranty obliged the Defendant to keep at least one crew member on board the vessel 24 hours a day, subject to (i) emergencies rendering his departure necessary or (ii) necessary temporary departures for the purpose of performing his crewing duties or other related activities.

Remaining considerations: As indicated, this is a provisional conclusion. Before arriving at a final conclusion, a variety of other matters remain to be considered.

First, as it seemed to me, my task on the trial of these preliminary issues was to construe the warranty and, so far as appropriate, answer the questions posed. In the view which I take of the matter, expert evidence was neither required for nor relevant to, the performance of this task. It is, however, fair to Mr. Eder’s submissions to acknowledge that it is not for me to decide whether or not the warranty has been breached. I express no view as to the need for expert evidence in that regard; indeed all questions of breach of warranty are for another day, if (notwithstanding this judgment) they cannot be resolved between the parties.

Secondly, as noted, the question of whether the warranty was “delimiting” or “promissory” was addressed in argument. This distinction (notwithstanding some disapproval of the terminology which it is unnecessary to cite) is helpfully explained in Arnould’s Law of Marine Insurance and Average (Vol. II, 16th ed.), at para. 680:

” …the mere use of the word ‘warranted’ in a policy is not conclusive of the legal effect of what follows. Generally it is used in the sense defined in the Marine Insurance Act s.33…i.e. as equivalent to a condition precedent. But it is also used to indicate an exception to the  general cover provided by the policy, for example, ‘warranted free of capture and seizure’ or ‘warranted free of average’….It has been suggested that warranties in insurance policies fall into two classes, namely those which delimit or describe the risk, and are not of a promissory character, and promissory warranties, breach of which entitles the underwriter to terminate the risk…..”

For my part, I agree with the parties that in the present case it is unnecessary to resolve the question of whether the warranty was “delimiting” or “promissory” in nature. I therefore express no final conclusion on this topic. My inclination, however, would be to hold that this was a delimiting warranty; the Claimant would be off-risk in the event that a casualty occurred at a time of non-compliance with the warranty. That, to me, seems to meet the commercial purpose of the warranty. I can see no good commercial reason why, if the breach of this warranty was once remedied, the Claimant should not be liable for a subsequent casualty, causally unconnected to the prior breach. I would accordingly have been reluctant to go further and hold that this was a promissory warranty, so that any breach would discharge the insurer from liability automatically, as from the date of the breach.

Thirdly, also as noted, Mr. Eder argued that the “contra proferentem” rule was applicable, in the sense that the warranty should be construed strictly against the Claimant. As to this submission:

i) I am not, for my part, persuaded that there is any ambiguity in or doubt as to the wording of the warranty, so as to bring the maxim into play. In my judgment, the wording of the warranty is clear.

ii) However, assuming in Mr. Eder’s favour without deciding, that the maxim is applicable, even on a strict construction of the warranty as against the Claimant, I see no proper foundation for reconsidering my provisional view as to the true construction of the warranty. If it matters, then, as may be noted, that construction already allows for the need to qualify the literal meaning of the wording “at all times” – therefore giving to the Defendant the benefit of any ambiguity in this regard.

iii) Insofar as Mr. Eder’s submission involved the proposition that different wording could and should have been used if the Claimant required a crew member to be on board 24 hours a day, I am unable to accept it. As expressed in Clarke, The Law of Insurance Contracts, at para. 15-5C, this is tantamount to the “construction of hindsight”. See too, the observations of Mance LJ (as he then was) in Dodson v Dodson Insurance [2001] 1 Lloyd’s Rep 520, at 531 (cited in Clarke, ibid), where he said:

“It is almost always possible to say after the event that the point could have been put beyond doubt, either way, by express words.”

Fourthly, I have arrived at my provisional conclusion as to the true construction of the warranty without reference to authority. Two authorities were, however, cited, to which it is now right to refer.

Mr. Eder placed reliance on the decision in Simmonds v Cockell [1920] 1 KB 843. The headnote said this:

“By a policy of insurance the contents of premises used for business and residential purposes by the assured and his wife were insured against loss by housebreaking or theft. The policy contained a clause: ‘Warranted that the said premises are always occupied.’ [Italics added] During a temporary absence of some hours of the assured and his wife on a Sunday the premises were left unattended and were broken into and some of the contents were stolen. In an action on the policy,

Held, that the warranty did not mean that the premises should at no time be left unattended, but that they should be continuously occupied as a residence; that there had in the circumstances been no breach of the warranty, and that the assured was therefore entitled to recover the loss on the policy.”

Furthermore, Roche J went on to remark (at p.845) that if insurers had wanted a “continuous presence of some one in the premises”, they could have stipulated that “the premises were never to be left unattended”.

I do not, with respect, derive assistance from this authority. In the first place, the context is altogether too far removed from that of the present case. The considerations relating to the use or occupation of the property in Simmonds v Cockell are very different from those pertaining to the crewing of a £3 million yacht. See, for instance, the observations of Roche J (at p.845) as to the protection which the clause did provide, on the facts of that case. Secondly, as Mr. Kendrick rightly submitted, the language of the clause in that case must be considered with regard to the “spectrum” of clauses available in property insurance.

The second authority to which I should refer is The Milasan [2000] 2 Lloyd’s Rep 458. This was also a case of yacht insurance. The claim against insurers failed on a number of grounds. One of those grounds involved a breach of warranty, which was in these terms: “Warranted professional skippers and crew in charge at all times.” The claimants there accepted that this was a promissory warranty – there was no argument that it was a term simply delimiting or describing the risk. At p.467, para. 24, Aikens J held as follows:

“(1) I accept….that a practical construction must be given to the words of the warranty. I think it is clear that the insurers were concerned to ensure that the vessel was properly looked after all the time, both winter and summer, and wherever she was – whether cruising or in a marina for the winter months….

(2) ….The ‘skipper’ together with the ‘crew’ has to be ‘in charge’ of the vessel ‘at all times’. In my view the wording ‘professional skippers and crew to be in charge’ means that the skipper and the crew’ together are to take care of and manage the vessel; that is the sense in which they are to be ‘in charge’ of her. They are also to be ‘in charge’ of the vessel together ‘all the time’. The last phrase is …quite clear. It means that there must be a professional skipper and a crew that looks after the vessel the whole time, as opposed to intermittently or at intervals…..”

As the claimants had not employed anyone who was a “professional skipper” over a period of time, they were in breach of warranty. Later in the judgment, when summarising his conclusions, Aiken J said this, at p.498, para. 162(2):

“On the proper construction of the ‘professional skipper warranty’ the claimants were obliged to keep a suitably qualified skipper on board the yacht at all times…..”

Mr. Kendrick submitted that the decision in The Milasan was that a skipper and crew had to be on board at all times, not intermittently. Accordingly, it supported the Claimant’s case here. For his part, Mr. Eder submitted that the decision of Aikens J on this issue was to be found in para. 24 of his judgment; in that paragraph, the learned Judge had said nothing about the skipper and crew being “on board” at all times; Aikens J should not be read as going beyond this, when he came to summarise his conclusions in para. 162(2).

I am prepared to assume in Mr. Eder’s favour that the ratio of the decision of Aikens J (on this issue) is to be found in para. 24 and that, insofar as the Judge went further in para. 162, those later observations were obiter. That said, those later observations are instructive as to the learned Judge’s thinking; there is certainly no reason to suppose that they were anything other than carefully expressed. As such, with respect, they are of considerable persuasive force and, albeit dealing with a clause differently worded, do lend some support to Mr. Kendrick’s argument. I do not, however, base my decision on The Milasan. My decision is based on the wording of the warranty in the present contract, construed in context. But I take comfort from the fact that the view to which I have come is consistent with the observations of Aikens J in that case.

In all the circumstances, the provisional conclusion as to the true construction of the warranty, set out earlier, does not require revision and stands as my final conclusion.

Accordingly, I would answer the Questions posed by the Preliminary Issues as follows:

(1) Yes, subject to (i) emergencies rendering his departure necessary or (ii) necessary temporary departures for the purpose of performing his crewing duties or other related activities.

(2) As in (1).

(3) (c) and (d): As in (1).

I shall be grateful for the assistance of counsel in drawing up the order and on all questions of costs.


Handelsbanken v Dandridge & Ors

[2002] EWCA Civ 577  [2002] 2 Lloyd’s Rep 421, [2002] 2 LLR 421, [2002] 2 All ER (Comm) 39 Potter LJ

The operation of ordinary judicial process

It is plain that the scope of the words “ordinary judicial process” is confined to civil proceedings for the enforcement of private rights and it does not extend to judicial process for the purpose of enforcing public or criminal laws, even if taking place within the ordinary judicial system of the country concerned: see Arnould para 361. It was recognised for the underwriters before the judge and in this court that, at any rate as from its initial seizure until the arrest by the Admiralty Marshal following issue of the claimant’s forfeiture proceedings, the seizure and detention was the result of executive action under the FMA. However, it is argued for the underwriters that, once the claimants brought their mortgagees’ action and the vessel had been arrested by the Admiralty Marshal pursuant to those proceedings, following which the vessel was in the joint custody of the Marshal and the AFMA, the further detention of the vessel was by reason of ordinary judicial process.

Mr Meeson, for the twelfth defendants, who has principally argued this point, has relied upon the fact that in their claim, the claimants assert that, by reason of the length of its detention from 17 October 1997 to 21 December 1998 the vessel was a constructive total loss pursuant to Clause 3. He submits that, for the bulk of that time, i.e. from the time of its arrest, effective control of the vessel passed to the Admiralty Marshal and thereafter the authorities were powerless to sell the vessel other than through the court; on that basis the effective cause of the loss was ‘ordinary judicial process’. Like the judge below, we reject that analysis. In the proceedings before Ryan J, he was trying an issue as to whether the statutory rights of detention and control over the vessel enjoyed by AFMA would constitute a defect of title to the vessel which a purchaser would acquire upon the sale of the vessel ordered to be sold by the court in an action in rem. In answering that question in the negative, the relevant part of his judgment reads as follows:

“… the legislature has not provided that the general power of sale exercisable by a Court of Admiralty, including conveyance to a purchaser from the Marshal of a clean title of the vessel should, in all cases, override the right of detention under the Act and the inchoate right of the Crown to the forfeiture of the vessel.

In these circumstances, I consider that the legislature intended to leave to the Court of Admiralty, in the exercise of its discretion, the adjustment of the competing rights of the authorised officer under the Act on the one hand, and of the plaintiff in an action in rem and other persons concerned in the resolution of that action on the other. This interpretation allows the Court of Admiralty to make an order, for example securing the salvor’s reward for salvage of the vessel while she is under detention … it also permits the Court in an appropriate case, to defer the sale to preserve the utility of the detention of the vessel under the Act if those who would be entitled to claim on the fund in the event of a sale refused to allow an order for forfeiture, if made, to attach to that fund in lieu of the vessel.”

We find nothing in the judgment of Ryan J to suggest that, as between AFMA and the owners, no security having been provided, AFMA’s rights of seizure and detention were other than effective until the moment of sale pursuant to the order of the court. The original seizure and continuing detention remained operative to deprive the owners of the free use and disposal of the vessel until sale occurred. Arrest by the Admiralty Marshal superimposed a fetter upon the owners’ ability to use the vessel but had no significant causative effect upon it. It certainly did not prolong such deprivation. Ryan J referred to the vessel, following commencement of the claimants’ proceedings, as being in the joint custody of AFMA and the Admiralty Marshal. The reason the judicial process became extended was because of the stance of the FMA in asserting and seeking to protect its statutory rights of detention which only ended upon its sale. Had the claimants not invoked the court process, there is no reason to suppose that the detention of the vessel would not have continued indefinitely, and at least until the date of deemed constructive total loss provided for in Clause 3.

In this context (as below in relation to the non-provision of security) reliance has been placed by the defendants upon the principle that:

“If the loss is caused by two causes effectively operating at the same time and one is wholly expressly excluded from the policy, the policy does not pay”

per Roskill LJ in Wayne Tank and Pump Co Limited –v- Employers Liability Assurance Corporation Limited [1974] QB 57 at 75; see also P. Samuel & Co Ltd –v- Dumas [1924] AC 431 at 467 per Lord Sumner:

“Where a loss is caused by two perils operating simultaneously at the time of loss and one is wholly excluded because the policy is warranted free of it, the question is whether it can be denied that the loss was so caused, or if not the warranty operates.”

It is also submitted that, where two or more causes are operating concurrently, they do not have to be exactly co-extensive in time; thus a later cause may join with a previous and continuing cause so as to become concurrent.

Both propositions are correct. Nonetheless, whenever an argument as to causation arises in respect of rival causes contended for under a policy of insurance, the first task of the court is to look to see whether one of the causes is plainly the proximate cause of the loss. This of course means proximate in efficiency and not in time; what is frequently described as “the effective or dominant cause” (see per Lord Denning MR in the Wayne Tank case at p.66F-G and per Roskill LJ at 72A). If in a case where one of two rival causes is an insured peril and the other is the subject of an exception, it can be shown that the effective and dominant cause was the peril rather than the exception, that is decisive in favour of the insured. It is only if the court is driven to the conclusion that there was “not one dominant cause, but two causes which were equal or nearly equal in their efficiency in bringing about the damage”, one being a peril and the other an exception, that the exception prevails. (ibid at p.67). For the reasons which we have set out in paragraph 46 above, we would regard the detention by AFMA and its continuing assertion of its rights in that respect as the effective and dominant cause of the owner’s loss of use of the vessel and their consequent claim for constructive total loss, rather than the judicial process initiated by the claimants, the extended period of which was caused by AFMA’s continuing intervention to vindicate its rights of detention.

Failure to provide security … or any financial cause

These two exceptions may be considered together in this case. The essence of the underwriters’ and brokers’ case is that the failure of the owners to provide security in the form of the bonds proffered by the AFMA in the amount of some A$10 million falls within both exceptions. The steps in their argument can be shortly stated. (1) The bonds were described as, and were plainly in the nature of, a security; they were proffered with a view to the release of a vessel and its equipment which would otherwise be detained against the possibility of forfeiture orders following the trial of the Master and Fishing Master. (2) They were accompanied by a letter making clear that AFMA was prepared to ‘negotiate on the provision of reasonable bonds’ to be provided by the owners. (3) Had bonds been provided in the sum originally requested, or some negotiated lesser amount, the vessel would have been released. (4) Had that been done, no question of a constructive total loss (on which basis the owners claimed upon their underwriters) would have arisen. (5) Thus, to the extent that any loss suffered by reason of the original detention was extended and augmented by owners’ failure to provide security, that failure was causative of the owners’ loss. (6) The case could equally well be put as damage arising from ‘any financial cause’, namely the failure of the owners to put up the money for the security necessary to secure the ship’s release.

The judge rejected the defendants’ submissions below essentially for two reasons. First, in respect of the failure to provide security, he accepted that such a provision might apply in the context of criminal proceedings (as the reference also to ‘any fine or penalty’ also suggested). However, he said:

“I am inclined to accept Mr Hill’s argument that the businessman would have had in mind when considering a clause of this kind security as something relating to claims against the vessel. Here, the bond required was, among other things, a form of surety for the attendance of defendants. I think that it is an over-wide interpretation of security in such a clause to treat it as extending to a requirement to put up recognisances for an individual charged with a criminal offence. On that ground, I would accept Mr Hill’s argument that this part of the clause is not applicable in the present circumstances.”

Second, in respect of ‘any financial cause’, he referred to the decision of this court in “The Wondrous” [1992] 2 Lloyd’s Rep 566, in which Lloyd LJ stated at 573:

“The financial cause must, of course, affect the ship. Otherwise there would be no detainment. But assuming the ship is detained by a failure to pay money on the part of the cargo interest, it comes within the ordinary meaning of the words ‘financial cause’. I accept that the ordinary meaning of the words is ‘very wide. But they are the words which the parties have chosen. In the context of a War Risks policy the words can and should be given their ordinary meaning.”

The judge observed that in that case it was easy to see that the primary reason for the vessel’s inability to leave Banda Abbas was a financial cause given that port dues had not been paid, nor a tax on freight. However, he continued:

“Wide as the words ‘any financial cause’ are, it seems to me they must have some limitation. Suppose that a vessel was seized by a terrorist organisation wanting to raise money, a ransom demand was made for a million pounds and the owner declined to pay the money: could it be said that the detention of the vessel thereafter was through a financial cause? In a literal sense, it could, but no one would suggest that such a conclusion would accord with the spirit of the policy. The perils insured against include seizure of vessels by terrorist organisations and a common major procedure would be to make a monetary demand. It is easy to say as a matter of instinct that the exclusion under 4.1.6 would not apply in those circumstances, but as a matter of construction, I ask the question why it would not? It seems to me that, in any given case, the court has to ask itself as a matter of fact whether the real or effective or dominant cause of the seizure and detention is a financial cause or something else. In the case of “THE WONDROUS”, the reason for the deemed detainment was financial. In the present case, it seems to me that the dominant reason for the detainment of the vessel by the AFMA was that it had been caught fishing in the Australian Fishing Zone, and the fact that its release might have been procured by the payment of money should not lead to the conclusion that the cause of the detainment was financial.”

Deciding the point on those grounds, the judge observed that it was unnecessary for him to decide whether or not the editors of Arnould were correct in their view expressed as follows in relation to the exceptions contained in Clause 5 of the Institute War and Strikes Clauses, which is in identical terms to Exception 4.1.6 in this case:

“The structure of Clause 5 pre-supposes that the loss (which would otherwise be insured) is one “arising from” the various exceptions. Failure to provide security, or to pay a fine or penalty may in some circumstances prevent restoration of the vessel, after there has already been an operation of insured perils and after there is therefore either already a loss, or a situation has already arisen which (if not remedied) will develop into one of total loss. It is open to question whether these exceptions in 5.1.5 should apply in such circumstances; the wording of the clause can more aptly be applied where the failure to provide security or effect payment is what brings about the operation of an insured peril.”

The suggested limitation upon the application of the exceptions as advocated in that passage was urged upon the judge below and has been repeated by Mr Persey in this court.

Dealing first with the failure to provide security, like the judge we accept that, when considering a clause of this kind, one is contemplating a clause relating to claims against the vessel, and not a form of recognisance or surety for an individual charged with a criminal offence. However, unlike the judge, we consider that, despite the circumstances in which it was demanded, the security was one which, on a businesslike interpretation, was in respect of a claim or (more accurately) a potential claim against the vessel, in the sense that the FMA authorised its detention against the event of its forfeiture following conviction of the Master and Fishing Master (i.e. in assertion of what Ryan J described as the “inchoate right” of the Crown to forfeiture of the vessel).

We therefore proceed to consider the question raised in Arnould in the passage quoted at paragraph 48 above.

We agree with the broad point made that the structure of Clause 4 pre-supposes that the loss which would otherwise be insured is one ‘arising from’ the various exceptions and thus that the wording of the clause is most obviously apt for application where the failure to provide a security or effect payment is what brings about the operation of the insured peril and not vice versa. That was certainly the position in “The Wondrous”, in which a wide meaning was accorded to ‘financial cause’, the exception there under consideration.

We also consider that it is plainly reasonable for insurers to seek to exclude from cover a seizure or detention precipitated (i.e. originally caused) by financial weakness or default of the insured, whereas it is less obviously so where the assured is placed in a financial difficulty or dilemma as result of a seizure made or detainment initiated in circumstances which fall within the perils insured. That is because, if the insured unreasonably fails in such circumstances to provide the security or otherwise expend money to secure the release of his detained vessel, the insurer may plead that the insured is in breach of his obligation to sue and labour, whether under s.78(4) of the Marine Insurance Act 1906 or (as in this case) by reason of Clause 13.1 of the InstituteTime Clauses Hulls (see paragraph 9 above). In deciding whether or not such a breach amounts to a defence to the claim of the insured, the test of proximate cause as between the occurrence of the peril and the breach of the assured will in practice be applied as the touchstone of liability: see generally Arnould at para 770 p.617-20 and State of Netherlands –v- Youell [1998] 1 Lloyd’s Rep 236 at 244-5 per Phillips LJ. That is, of course, a point which, had the war risks underwriters not repudiated liability for breach of warranty, they might have sought to take by way of defence against the owners; it is not, however, a point which the MII underwriters could take against the claimants since, upon that basis, there would be prima facie coverage in respect of the peril under the owners’ policy even if, by reason of the insured’s breach of Clause 2 of the Institute War Clauses, their claim for constructive loss might be defeated.

The broad question raised is whether or not the exceptions are intended to co-exist with, or be read subject to, other defences available under the terms of the policy. The editors of Arnould do not answer that question beyond suggesting that, if and insofar as the exceptions extend to circumstances other than those where a prior failure to provide security is what causes the operation of the insured peril in the first place, a ‘reasonableness limitation’ should be imposed on its operation. In particular, they suggest that the exception should not:

“be construed so as to afford a defence in circumstances where it would have been unreasonable to provide the security etc demanded in order to recover the vessel, or where the amounts involved would otherwise enable her to be treated as a total loss.”

See also Stringer –v- English & Scottish Marine Insurance Co (1869) LR 4 QB 676 at 691-2, affirmed on appeal at LR 5 QB 599 at 603, a case in which the court held it to be no answer to a claim for total loss that the vessel could have been recovered by provision of bail to its full value. We agree that such a limitation is indeed appropriate, and would hold that the exception in respect of a failure to provide security should be read as inoperative in a case where the amount and circumstances of such provision would otherwise enable the vessel to be treated as a total loss.

In our opinion (subject to such limitation) the exclusion in respect of failure to provide security does not fall to be read as applying only to the situation where the failure to give security itself gives rise to the operation of the original seizure or detention. We consider that it is the contractual intention that the exceptions in 4.1.6 fall to be considered independently of other defences available to the insurers. In this case it appears to us that Exception 4.1.6 is different in nature from the preceding Exceptions 4.1.1 to 4.1.5 and the Exception which follows (4.1.7). Those other exceptions are defined by reference to the particular circumstances in which physical damage, seizure or detainment occur, whereas the terms of Exception 4.1.6 are not so constrained and appear to us to me to make clear that, losses arising from the causes listed are intended to be excluded in any event. In this context, use of the phrase “Loss … or expense arising from” the various exceptions does no more than import the usual test of causation as between peril and exception, namely that of proximate cause, primacy being attached to the exception over the peril in any case where competing causes are equal or nearly equal in bringing about the damage.

Further, we consider that Exception 4.1.6 falls to be construed against the background that the owners’ policy is one in which the relevant peril is defined as “loss of or damage to the vessel” (Clause 1). In that context, the burden rests upon the insured to establish its actual or constructive total loss. The policy plainly contemplates, as indeed is the position in this case, that following seizure and/or detainment, the deeming provision contained in the detainment clause (Clause 3) is likely to be relied on by the insured as the mode of proof of loss. Clause 3 requires that, in the event of seizure, detainment etc “the assured shall thereby have lost the free use and disposal of the vessel for a continuous period of twelve months”. If a claim is made under Clause 3, this seems to us to import a test of causation which must be applied not simply to the cause of the original seizure (not enough in itself to amount to loss of the vessel) but to the full 12 month period of the detainment relied on as constituting the loss of the vessel.

That being so, in this case, where the loss of the vessel relied on is a constructive total loss accruing as a result of a detainment of at least twelve months, it is the task of the court to consider whether the insured peril is indeed the proximate cause of that loss or whether that loss equally falls within the exclusion. In this connection, however, if it be shown that it was not reasonable for the owners to provide the surety demanded in respect of the vessel because the sum required exceeded the full value of the ship and would otherwise enable her to be treated as a constructive total loss, the exclusion should be treated as inapplicable.

Mr Meeson’s submissions have run as follows. He rightly points out that, in considering whether the claimants are able to show that the loss was prima facie covered by the owners’ policy, the agreed statement of facts records, and the parties have accepted, that the claim of the owners was for constructive total loss of the vessel pursuant to Clause 3 (Detainment). No argument has been advanced or addressed to the effect that the owners might have claimed on the basis of a partial loss, so as to justify any assertion by the claimants that such partial loss at least was prima facie covered by the owners’ policy. He submits therefore that the claimants must prove detention for twelve months as a result of an insured peril. That, he submits, cannot be demonstrated because, for the bulk of the twelve month period under Clause 3 (i.e. February 1998-October 1998) the proximate cause of the detention, effective and concurrently operative, was the failure of the owners to provide security for the release of the vessel, either in the sum originally required or in some lesser amount following the offer of negotiations which was never taken up.

Subject to the question of the value of the vessel as against the amount of the security demanded we consider that Mr Meeson is right. Upon the agreed facts, as supplemented by the documents before us, as from mid-January the owners had the clear opportunity to secure the release of the vessel from detainment by AFMA by putting up the security requested or by agreeing some lesser sum in response to the invitation in the government solicitor’s letter. However, the owners did not do so and thus the detention continued.

In those circumstances, subject only to argument upon the value of the vessel in relation to the security demanded, we consider that, as from January 1998, the failure of the owners to provide security to AFMA for the release of the vessel was an effective cause operating concurrently with AFMA’s original seizure and detention so as to deprive the owners of their use of the vessel.

The point upon value which Mr Persey has raised is simply this. He submits that, in the light of the claimant’s eventual purchase of the vessel for US$ 4.5 million from the Australian Admiralty Marshal, it is plain that the amount demanded as security by AFMA (in total some A$ 10 million) was far in excess of the value of the vessel and he therefore asserts that the exception in 4.1.6 is not applicable. Mr Meeson, on the other hand, submits that it is not open to the court to draw any such inference. First, he points out that there is no agreement between the parties as to the value of the vessel or her machinery and equipment; nor as to the basis or circumstances of the sale to the claimants by the Admiralty Marshal. Second, he relies upon the fact that the owners’ policy was a valued policy under which the vessel was insured for an insured value of NOK 65 million, approximately equivalent to A$ 13.5 million at the relevant time. He says that this is of significance because in his submission it is the insured value rather than the actual or market value of the vessel which is relevant in relation to the owners’ claim.

In this connection Mr Meeson submits as follows. He acknowledges that s.27(4) of the Marine Insurance Act 1906 provides:

“Unless the policy otherwise provides, the value fixed by the policy is not conclusive for the purposes of determining whether there has been a constructive total loss.”

However he submits that in this case the policy does otherwise provide. Clause 2 of the Institute War Clauses incorporates Institute Time Clauses Hulls 1/10/83 (with certain exceptions which are not relevant). Clause 19 of the Institute Time Clauses Hulls (“Constructive Total Loss”) provides:

“19.1      In ascertaining whether the Vessel is a constructive total loss, the insured value shall be taken as the repaired value and nothing in respect of the damaged or break-up value of the vessel or wreck shall be taken into account.

19.2        No claim for constructive total loss based upon the cost of recovery and/or repair of the vessel shall be recoverable hereunder unless such costs will exceed the insured value. In making this determination, only the cost relating to a single accident or sequence of damages arising from the same accident shall be taken into account.”

Mr Meeson relies upon the words which we have italicised in Clause 19 and submits that the use of the word ‘recovery’ in the first line of Clause 19.2 is plainly intended to refer back to s.60(2)(i)(b) of the 1906 Act which provides:

“There is a constructive total loss where the assured is deprived of possession of his ship … by a peril insured against and … (b) the cost of recovering the ship … would exceed their value when recovered.”

We do not consider that Clause 19 is of assistance to Mr Meeson in the context of this case. Clause 19.1 appears to be concerned with a claim for constructive total loss based on an accident to the vessel involving the need for salvage and/or repair. So far as Clause 19.2 is concerned, while its provisions appear apt to a claim for constructive total loss under s.60(2)(i)(b) of the 1906 Act, its terms are not applicable to the claim for constructive total loss in this case, which was made under the deeming provisions of Institute War Clause 3 (Detainment), which simply requires proof of deprivation of possession for a continuous period of twelve months in order to establish a constructive total loss. The claim of the owners was not one ‘based upon the cost of recovery’ within the meaning of ITC Hulls Clause 19.2. It follows that insofar as it is necessary to consider the value of the vessel for the purpose of deciding whether there has been a constructive total loss, the insured value of the vessel is not conclusive.

Accordingly, we consider that the matter turns upon whether or not, the vessel having been detained, it would have been reasonable or unreasonable for the owners to have provided security as required by AFMA, having regard to the size of the security demanded and the likelihood of its recovery as against the actual value of the vessel. That is an issue which, if it arose as between the owners and their underwriters, would require considerable investigation not only as to the actual (as opposed to the insured) value of the vessel, the prospects of negotiating a reduction in the security, the likelihood of the Master and Fishing Master attending their trial and (if they were to attend) the likely outcome of the proceedings against them. Those are not however matters on which agreement has been reached or evidence adduced on the hearing of this preliminary issue which arises between the claimants and their underwriters under the MII Policy and is concerned with the question whether or not the loss was prima facie covered by the owners’ policy. For that purpose, we are obliged to resolve the matter on the basis of the Assumed Facts and the sparse contents of the documents in evidence before us.

So far as the value of the vessel is concerned, it seems clear that AFMA were demanding surety in the sum of some A$ 10 million which they regarded as at least sufficient to cover the full value of the vessel. It is also apparent from the judgment of Ryan J that in April 1998 the Admiralty Marshal procured a valuation on the basis of the price obtainable from a willing buyer at that time of US$ 6 million. Finally, it is clear that the claimants subsequently purchased the vessel in November 1998 in a sale by sealed bid tenders for US$ 4.5 million. On the face it, therefore, it would appear clear that AFMA were on any view demanding, and in any subsequent negotiations would have required, a sum by way of surety substantially greater than (or at least equal to) the value of the vessel and, given the view of Ryan J that there was no reasonable prospect of the Master and Fishing Master attending their trial in Australia, the owners were entitled to take the view that it would not be reasonable to provide a sum by way of security which would exceed the value of the vessel thereby recovered and would inevitably be lost.

CONCLUSION

In those circumstances, we hold, on the Assumed Facts, that the claimants have established that they have suffered a loss which was prima facie covered by the owner’s policy within the meaning of Clause 6 of the MII Clauses and that the loss was not prima facie excluded by the exclusions contained in Clauses 4.1.5 and 4.1.6 of the Owners’ War Risks Cover. We therefore allow the appeal and dismiss the cross-appeal of the defendants under their respondents’ notices.

Order:

Appeal allowed, cross appeal dismissed

1st – 11th Defendants to pay the costs of the appeal

No Order for costs of hearing 30.04.02

(Council to provide minute of Order)

(Order does not form part of the approved judgment)


Manifest Shipping Company Limited v. Uni-Polaris Shipping Company Limited and Others

[2001] UKHL 1; [2001] 1 All ER 743; [2001] 2 WLR 170  [2001] Lloyd’s Rep IR 247, [2003] AC 469, [2001] 1 LLR 389, [2001] 1 All ER (Comm) 193, [2001] 2 WLR 170, [2001] UKHL 01, [2001] CLC 608, [2001] 1 Lloyd’s Rep 389, [2001] 1 All ER 743, [2001] Lloyds Rep IR 247, [2001] UKHL 1, [2003] 1 AC 469

LORD SCOTT OF FOSCOTE

My Lords,

    81.      There are two issues of some general importance that arise in this appeal. The first point arises under section 17 of the Marine Insurance Act 1906:

“17.        A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party.”

Sections 18, 19 and 20 of the Act spell out in some detail the content of the duty of disclosure owed by the assured to the insurer before the contract is concluded and the yardstick for assessing whether a representation made by the assured to the insurer is material and is true. It might have been possible at one time to treat section 17 as merely an introduction to sections 18, 19 and 20. But if that were ever possible it is so no longer. The duty of utmost good faith has been held to apply where an assured is obliged under an existing policy to give notice of entry into a war risk zone (The Litsion Pride [1985] 1 Lloyd’s Rep 437) and to the obligation of an assured to give notice when seeking to take advantage of a “held covered” clause in an existing policy (Overseas Commodities Ltd v Style [1958] 1 Lloyd’s Rep 546; Liberian Insurance Agency Inc v Mosse [1977] 2 Lloyd’s Rep 560). It has been held, also, to give rights of inspection under re-insurance treaties (Phoenix General Insurance Co of Greece SA v Halvanon Insurance Co Ltd [1985] 2 Lloyd’s Rep 599). And the section 17 duty has repeatedly been held to be owing in the context of claims. A dishonest claim constitutes a breach by the assured of section 17 and entitles the insurers to avoid the insurance contract.

    82.      The present case involves a claim. The respondent on this appeal, Manifest Shipping Company Ltd (Manifest), made a claim under policies of marine insurance in respect of which the appellant insurers have been sued as representative underwriters. The vessel insured was the Star Sea. It was insured against marine perils, including fire, for US $ 3.2 million. As a result of a fire in the engine room workshop on 29 May 1990, the Star Sea became a constructive total loss. A claim was made and on 3 August 1990 a writ was issued. The writ was served on 4 September 1990. It has not been suggested that the claim was not honestly made nor that the continued prosecution of the claim was or is dishonest. What is complained of is, first, that two accident reports into the causes of a fire on a vessel, the Kastora, which, like the Star Sea, was part of a fleet of over 30 vessels beneficially owned by the Kollakis family, had not been disclosed to the insurers. Both reports had been made by Dr Atherton, the shipowner’s expert. As to the first report, privilege was claimed for it. Privilege would have been claimed for the second report as well, but the second report had been accidentally mislaid and overlooked and was not re-discovered until the second day of the trial. Privilege was eventually, during the trial, waived in respect of both reports. The insurers’ complaint, however, is that the claim was formally made and persisted in for a considerable period without disclosure of these reports. The failure to disclose them is categorised as a breach of the section 17 duty of utmost good faith and the insurers claim to be entitled, as a consequence, to avoid the insurance contract. The insurers complain, also, that a Mr Nicholaidis, a director of Kappa Maritime Ltd, an English company that managed the Kollakis fleet, gave certain evidence which the trial judge, Tuckey J disbelieved. Mr Nicholaidis had particular responsibility for technical matters and his giving of the disbelieved evidence is represented as constituting a breach by the assured of its continuing section 17 duty of utmost good faith. The trial judge, Tuckey J, concluded that the section 17 duty owed by the assured came to an end once court proceedings had been commenced. At that point, in his view, court procedures and court sanctions, embodied in Rules of Court and practice directions, would supersede and replace any statutory obligations under section 17. He said, [1995] 1 Lloyd’s Rep 651, 667 (rt. col):

“I think, as a matter of principle, that the English courts should hold that once insurers have rejected a claim, the duty of utmost good faith in relation to that claim comes to an end. There is a logic to this which was well summarised by the court in Connecticut.”

    83.      The judge’s reference to the Connecticut court is a reference to the judgment of the Supreme Court of Connecticut in Rego v. Connecticut Insurance Placement Facility ((1991) 593 A2d 491). Callahan AJ, in whose opinion the other Justices concurred, said this:

“If the insurer denies liability and compels the insured to bring suit, the rights of the parties are fixed as of that time for it is assumed that the insurer, in good faith, then has sound reasons based upon the terms of the policy for denying the claim of the insured. To permit the insurer to await the testimony at trial to create a further ground for escape from its contractual obligation is inconsistent with the function the trial normally serves.” (p 497)

    84.      The Court of Appeal, in the present case [1997] 1 Lloyd’d Rep 360, did not endorse Tuckey J’s conclusion that the section 17 duty came to an end where court proceedings began, but arrived at the same result via a different route. The Court of Appeal held that at the claim stage, and after the claim had been made, the section 17 duty required no more than that the claim should not be made, or persisted in, fraudulently:

“When the assured makes his claim, the duty of utmost good faith requires that it should not be made fraudulently; and we are prepared to contemplate that the duty not to present a fraudulent claim subsumes a duty not to prosecute a claim fraudulently in litigation. There is no need to demand more of the assured than that, if the Draconian remedy is to apply.” (p 371).

    85.      So, on this first point, the issues for your Lordships are, first, the duration of the section 17 duty – does it continue beyond the making of the claim and the issue of court proceedings prosecuting the claim? – and, second, the content of the duty at the claim stage and thereafter – was the Court of Appeal right in confining the duty to a duty to refrain from the fraudulent presentation or prosecution of a claim and, more particularly, can the matters on which the insurers rely suffice to constitute a breach of the assured’s section 17 duty?

    86.      The second important point for decision arises under section 39(5) of the 1906 Act:

“39 (5)  In a time policy there is no implied warranty that the ship shall be seaworthy at any stage of the adventure, but where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthiness.”

    87.      The policies under which the Star Sea was insured were time policies. Tuckey J., at trial, found that the Star Sea was unseaworthy in two relevant respects. First, he found that the master was incompetent in not knowing the manner in which the vessel’s CO2 fire extinguishing system should properly be used. Secondly, he found that the condition of the port and starboard engine room dampers was such that when operated they did not provide an effective seal, thereby reducing the efficacy of the CO2 system. He found that both these matters were causative in enabling the fire to spread and to render the vessel a constructive total loss. But for the combined effect of these failures, the indemnity to which the assured would have been entitled would have been limited to US $1.7 million – as opposed to US $3.2 million, the insured value of the vessel.

    88.      The critical issue was whether the assured knew of the two matters in respect of which unseaworthiness was found. This issue required an examination of the concept of “privity”. It was not alleged that any of the individuals whose state of mind might be taken to be that of the assured for section 39(5) purposes had actual knowledge that the Star Sea was unseaworthy in either of the two respects found. What was said, however, was that there was “blind-eye” knowledge. It was common ground that each of the two Kollakis brothers, Mr Pantelis (Lou) Kollakis and Mr George Kollakis, could be treated as the assured for section 39(5) purposes. Tuckey J concluded that, in addition, a Mr Faraklas should be so treated. Mr Faraklas was one of the two directors of Charterwell Maritime SA, a Greek company based in Piraeus and the registered managers of the Star Sea. He was also the sole director of the assured. Tuckey J considered the position of Mr Nicholaidis but concluded he did not qualify for inclusion. On this point, the Court of Appeal disagreed. So there are, in the end, four individuals, namely, the Kollakis brothers, Mr Faraklas and Mr Nicholaidis, whose state of mind has to be considered. Tuckey J, addressing himself to the states of mind of the Kollakis brothers and Mr Faraklas, made a finding of “blind-eye” knowledge on the part of the assured in respect both of the incompetence of the master regarding the CO2 fire-fighting equipment and of the defective state of the Star Sea’s dampers. He reached this conclusion by the following route. There had, within the period of 15 months or so before the Star Sea embarked upon its disastrous voyage also, been a fire leading to a constructive total loss on two other vessels in the Kollakis fleet, namely the Centaurus and the Kastora. The accident reports that followed these fires had revealed a degree of ignorance on the part of the master of each vessel of the proper use to be made of CO2 firefighting equipment and of the possibility (in the case of the Centaurus) and the near certainty (in the case of the Kastora) that the faulty state of the vessel’s dampers had prevented, or would have prevented if the CO2 equipment had been properly used, the effective sealing of the site of the fire. Tuckey J found on the evidence that the accident report relating to the Centaurus had come to the attention of the assured. Two reports on the fire on the Kastora had been made, both by Dr Atherton. Tuckey J found that the assured, via one or other of the Kollakis brothers or Mr Faraklas, had become aware of the master’s excessive delay in ordering the CO2 firefighting equipment to be used and of the defective state of the vessel’s dampers.

89.          He then posed the question, at p 663: “So much for what the assured learned from the two earlier fires. What did they do about it?” and answered the question by saying “I am in no doubt that the assured’s response to the earlier fires was completely inadequate.” In the following passage, at p 664, the judge expressed his conclusion on the critical issue of privity:

“I do find that there was blind eye knowledge on the part of the assured. The inadequate response to the earlier fires and the state of the Star Sea on 27 May [1990], demonstrate in my judgment that the assured did not want to know about her unseaworthiness in the relevant respects.”

Tuckey J reduced the assured’s recovery from the US $3.2 million to US $1.7 million. He did so on the footing that the Star Sea was, “with the privity of the assured”, sent to sea in May 1990 with a master incompetent in the use of CO2 firefighting equipment and with faulty dampers incapable of sealing off the engine room. The Court of Appeal disagreed that the requisite privity had been demonstrated. The court concluded that the judge’s findings relevant to this issue “[come] down simply to a finding of negligence, albeit negligence in a high degree” (p 377). The court, therefore, allowed the assured to recover the full US $3.2 million. Accordingly, the question of principle for your Lordships is what, short of actual knowledge, has to be shown for a section 39(5) finding of “privity” to be made.

    90.      Before your Lordships the allegations on the back of which a breach of the section 17 duty is sought to be constructed are levelled against Mr Nicholaidis and against the assured’s solicitors, Hill Taylor Dickinson, whose partner, Mr Mallin, had charge of the case. As against Mr Nicholaidis, the allegation is that he dishonestly included in his witness statement a passage which to his knowledge was untrue. As against the solicitors, the allegation is that Mr Mallin resorted to underhand and unconscionable, albeit not dishonest, tactics in suppressing the Atherton reports for as long as possible. Mr Jonathan Sumption QC, for the assured, has taken us through the relevant facts in order to submit that they simply do not sustain the weight that the insurers need them to bear. The importance of the section 17 issue in your Lordships’ House relates to law and principle. But charges against Mr Mallin of underhand or unconscionable conduct and against Mr Nicholaidis of dishonesty are, I am sure, of more importance to them than the state of marine insurance law. It would not, in my opinion, be right to decide the section 17 issue in favour of the assured on grounds simply of legal principle. The solicitors and Mr Nicholaidis are entitled, in my opinion, to have your Lordships’ view as to whether, on the evidence the serious allegations made against them are sustainable.

91.          In my opinion, the allegations are not sustainable. Let me take first the allegations against Mr Mallin. He was, I will assume, responsible for the decision not to disclose to the insurers the existence of privileged documents, namely, the two Atherton reports until such time as the privilege had been waived. This is not surprising. It was common ground before your Lordships that the reports were privileged. Solicitors do not disclose in litigation documents which are entitled to privilege. They would risk being sued if they did. Mr Gordon Pollock QC, counsel for the insurers, suggested to your Lordships that Mr Mallin’s motive in withholding the first report (the second was missing until the second day of the trial) was to improve the assured’s chances of obtaining a favourable settlement before trial. There was, however, no evidence at all to support that suggestion. It had apparently never been put to Mr Mallin that that had been his motive. Mr Pollock explained that his suggestion was based upon an inference that that had been the motive. My Lords, I do not think an imputation of a discreditable motive can be properly so based. Mr Mallin was entitled to have the imputation put to him so that he could deal with it. The inference is neither an obvious one nor an inescapable one. The obvious inference, and the one that in the absence of any other evidence I would myself draw, is that the withholding of a privileged document is no more than the instinctive action of a solicitor experienced in litigation. Mr Pollock drew our attention to the judge’s description of passages in Dr Atherton’s witness statement as being “disingenuous” in that no reference was made in the statement to the contents of his two reports (see pp 670/671). Mr Pollock invited us to infer that Mr Mallin had asked Dr Atherton to draft his witness statement omitting any reference to his reports. But this, too, was not put to Mr Mallin. Moreover Tuckey J expressly exonerated Mr Mallin from criticism arising out of the contents of Mr Atherton’s witness statement (p 671).

    92.      In my opinion, the evidence in the case does not warrant any imputation of underhand or unconscionable behaviour against Mr Mallin. I am prepared to assume, without deciding, that the conduct of solicitors in conducting litigation can be attributed for section 17 purposes to the assured, their client. The insurers’ section 17 case, however, in so far as it is based upon the conduct of Mr Mallin in the conduct of the litigation, is based upon conduct that it is accepted was not dishonest and that cannot, for the reasons I have given, be characterised as underhand and unconscionable.

    93.      As to Mr Nicholaidis, it is true that Tuckey J preferred other evidence to that given by Mr Nicholaidis. But in doing so he did not say that he thought Mr Nicholaidis had given dishonest evidence. A charge of giving dishonest evidence made against a witness requires, in my opinion, something more than that the judge has not accepted his evidence and has preferred the evidence of someone else. Leggatt LJ in the Court of Appeal used the word “dishonesty” when referring to Mr Nicholaidis’ state of mind (p 367). But in the passage in question, Leggatt LJ was addressing the question whether Mr Nicholaidis’ knowledge and state of mind could be taken to be that of the assured for section 17 purposes. He held that it could not. He was not, as I read the judgment, adding a finding of the giving of dishonest evidence to the findings about Mr Nicholaidis that Tuckey J had made.

    94.      Leggatt LJ went on to say that Mr Nicholaidis’ evidence about what he knew of the defective state of the fire dampers on the Kastora – the evidence that had been disbelieved by the judge – could not be attributed to the assured. I respectfully agree with that conclusion. It follows that Mr Nicholaidis evidence and state of mind does not constitute a route whereby a section 17 breach of duty can be brought home to the assured. I now turn to the section 17 point of principle.

    95.      It is accepted that the section 17 duty of the utmost good faith continues to apply after the conclusion of the insurance contract. It does not follow, however, that the content is the same after the contract as before. Indeed it cannot be. Sections 18 to 20 prescribe the contents of the pre-contract duty in terms which are inapplicable thereafter. It is very possible for the duty that pre-contract is owed by an assured to be broken by an act or omission which would not in ordinary language be described as a breach of good faith at all. Under section 18(1) the assured is deemed to know, and is therefore under an obligation to disclose, “every circumstance which, in the ordinary course of business, ought to be known by him” (see also section 19(a)). So an honest failure to disclose something of which the assured was in fact unaware may constitute a breach of duty. Consider also the concept of materiality. The duty to disclose extends to “every material circumstance” known to the assured (s. 18(1)) or to the assured’s agent (s. 19(a)). The test of what is material is an objective one. An honest belief by the assured, or the agent, that a particular circumstance is not material, or an honest oversight of the materiality of a particular circumstance, will not assist the assured if, objectively viewed, the circumstance was material. I need not, perhaps, labour the point that a breach of section 18 or section 19 duty may arise notwithstanding the good faith of the assured. The addition of the adjective “utmost” does not affect the point.

    96.      It seems to me clear, therefore, that the content of the duty of “utmost good faith” post-contract must be examined afresh and is not coloured by the extent of the duty owed by the assured pre-contract. That this is so is demonstrated also by authority. Cory v Patton (1872) 7 QB 304 establishes the general proposition that the duty on the assured to disclose a fact material to the risk being undertaken by the insurer does not continue after the insured has become bound by the insurance contract.

    97.      Niger Co Ltd v Guardian Assurance Co Ltd (1922) 13 LlLR 75 concerned a continuing policy terminable by three months notice. It was held in your Lordships’ House that no duty lay on the assured to disclose to the insurers post-contract facts which, if known, might have induced the insurer to exercise its right to terminate the contract. Viscount Sumner said this:

“The object of disclosure being to inform the underwriter’s mind on matters immediately under his consideration, with reference to the taking or refusing of a risk then offered to him, I think it would be going beyond the principle to say that each and every change in an insurance contract creates an occasion on which a general disclosure becomes obligatory, merely because the altered contract is not the unaltered contract, and therefore the alteration is a transaction as the result of which a new contract of insurance comes into existence. This would turn what is an indispensable shield for the underwriter into an engine of oppression against the assured.” (p 82)

    98.      In the same case in the Court of Appeal, Bankes LJ had commented “if people enter into contracts of insurance for long periods, it would be a wise precaution to insert some provision requiring notice to be given them if the nature of the risk does alter or vary appreciably.” ((1921) 6 LlLR 239, 245).

    99.      Plainly enough, neither in the Court of Appeal nor in this House was it regarded as a breach of the section 17 duty for the assured to fail to disclose facts within his knowledge which, if disclosed, might have induced the insurer to terminate the policy.

    100.   Cory v Patton and Niger Co Ltd v Guardian Assurance Co Ltd were followed in New South Wales by Rogers J in NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1985) 4 NSWLR 107. Rogers J held that it was not a breach of the continuing duty of good faith for an assured to fail to volunteer to the insurer information material to whether the insured would exercise a right to give notice terminating the contract.

    101.   Finally on this point I should refer to New Hampshire Insurance Co v MGN Ltd [1997] LRLR 24. Counsel for the insurer had submitted that where under a policy there was continuing cover subject to a right on the insurers to cancel on notice, an obligation of disclosure lay on the assured and extended to facts relevant to a decision by the insurer whether or not to cancel. The Court of Appeal rejected this submission. Potter J, at first instance, described it as “an unwarranted extension of the principle of disclosure” (p 47).

    102.   These authorities make clear that the content of the duty of good faith owed by an assured post-contract is not the same as the duty owed in the pre-contract stage. So what is the content of the duty owed at the claim stage? It is, at least, that of honesty in the presentation of a claim.

    103.   In Britton v Royal Insurance Co (1866) 4F&F 905, 909 Willes J told a jury that:

“The law is, that a person who has made such a fraudulent claim could not be permitted to recover at all. The contract of insurance is one of perfect good faith on both sides, and it is most important that such good faith should be maintained…. It would be most dangerous to permit parties to practise such frauds, and then, notwithstanding their falsehood and fraud, to recover the real value of the goods consumed.”

    104.   Views to the same effect were expressed in Orakpo v Barclays Insurance Services [1995] LRLR 443 and in Galloway v. Guardian Royal Exchange (UK) Ltd [1999] Lloyd’s Rep IR 209. The Michael [1979] 2 Lloyd’d Rep 1 was a case in which a claim under a policy of marine insurance had been presented honestly. But after the claim had been presented the assured became aware, or had grounds to suspect, that the loss of the insured vessel had been caused not, as had been thought, by perils of the seas, but by scuttling. This information had not been passed on to the insurers. The insurers’ reliance on this non-disclosure to avoid the policy failed on the facts. The court was not prepared to find or infer that the claim, honestly presented, had subsequently been dishonestly maintained. Roskill L.J. dealt with this issue in the following passage, at p 22:

“As to the allegation of subsequently maintaining a fraudulent claim, Piermay and Mr Pierrakos are not to be found guilty of fraud merely because, with the wisdom of hindsight, they had information which might, if appreciated at its true value, have led them to the truth at an earlier date. A plaintiff in litigation is not maintaining a fraudulent claim merely because during interlocutory proceedings he or his solicitors become aware of evidence which may militate against the correctness of the plaintiff’s case and its likelihood of ultimate success. The relevant test must be honest belief.”

    105.   The Michael is, in my opinion, a very important case for present purposes. It seems to me that in order to succeed on the section 17 issue Mr. Pollock must persuade us that it was wrongly decided. It is true, as Mr. Pollock pointed out, that the insurer’s case in The Michael was presented as one of fraud on the part of the assured. It was not argued that a lower degree of culpability would suffice. There is, however, no hint in Roskill LJ’s judgment in The Michael that the insurer’s were trying to jump a hurdle higher than was necessary.

106.        Mr Pollock, in support of the submission that the section 17 duty attending the presentation and prosecution of a claim might be broken by culpable conduct falling short of fraud, relied on remarks made by Hirst J in The Litsion Pride [1985] 1 Lloyd’s Rep 437. The Litsion Pride was insured against war risks but, in the event of the vessel sailing to certain specified destinations, the insurers could exact an additional premium at their discretion. The time was the Gulf War. Bandar Khomeini in the Persian Gulf was, it was agreed, the most dangerous port in the Gulf. A voyage there would be bound to attract an additional premium at a very high rate. The vessel sailed to Bandar Khomeini without notification being given to the insurers. It came under attack and sank. A letter purporting to pre-date the voyage and to give notice of the vessel’s destination was concocted by the assured in order to deceive the insurers into believing that the failure to give notice of the voyage before its commencement was due to an innocent oversight. Hirst J. held that the falsely dated letter was a fraud directly connected to the claim and a breach of the section 17 duty of utmost good faith. I do not think anyone would dissent from that conclusion. But Mr Pollock, counsel for the insurers before Hirst J had submitted that a breach of the duty “… might be established for instance by proof of deliberate non-disclosure [or] misrepresentation, albeit negligent or even innocent, by either the owners or the brokers.” (p 507). Mr Kentridge QC, counsel for the assured, had submitted that, once the contract had been concluded, “the sole duty of the assured was not to act vis-à-vis the underwriter in a fraudulent manner … (p 508)” But Hirst J did not accept that the post-contract duty was so confined and held, at p 512, that:

“…the duty in the claims sphere extends to culpable misrepresentation or non-disclosure.”

Before us, Mr Pollock has resiled from the contention that, post- contract, merely negligent or innocent misrepresentation or non-disclosure could constitute a breach of the continuing section 17 duty. But he has maintained his submission that fraud or dishonesty is not essential and that conduct which can fairly be described as unconscionable could suffice.

    107.   Two recent cases in which this issue has been considered merit attention. The first is the judgment of Rix J. in Royal Boskalis Westminster NV v Mountain [1997] LRLR 523. Rix J was troubled by the notion that the post-contractual duty of good faith could extend beyond fraud to some unspecified degree of culpability (p 597). He found, on the facts of the case that “non-fraudulent but culpable and deliberate misrepresentation and non-disclosure have been proved, albeit they were subsequently repented of and remedied” (p 601). He held that the insurers had failed to establish that the misrepresentations and non-disclosures had been material and that the insurers were not entitled under section 17 to avoid the policy.

108.        Mance J. in Standard Steamship Owners’ P & I Association (Bermuda) Ltd v. Oceanfast Shipping Ltd, (unreported) in which judgment was handed down on 6 March 1996, described as “extravagant …. [the] proposition that mere negligence in the presentation of a claim could lead to avoidance of the whole contract of insurance”. (p 13).

    109.   In my opinion, the ambit of the post-contract section 17 duty cannot be considered without account also being taken of the difficulties of materiality that troubled Rix J in the Royal Boskalis case. Let it be supposed that Mr Pollock is right and that non-disclosure not involving any dishonesty may entitle an insurer to avoid the policy. Materiality becomes highly relevant. It can only be the non-disclosure of material facts or information that can lead to the Draconian remedy of avoidance. But what is to be the yardstick by which materiality is measured? A decision to disclose or not to disclose would have to be taken at an early stage. Delayed disclosure would expose the assured to similar charges to those being made in the present case where disclosure of the two Kastora reports was made in the course of the trial. The assured will often not know where, in the spectrum that runs from ‘interesting’ at one end to ‘issue determinative’ at the other, the facts or information in question should be placed. A similar problem in connection with the discovery of documents led to the rule that “a document, which, it is not unreasonable to suppose, may tend either to advance the case of the party seeking discovery, or to damage the case of his adversary” should be disclosed (Compagnie Financiere et Commerciale du Pacifique v Peruvian Guano Co (1882), 60 11 QBD 55, 60). If Mr Pollock is right, what other test of materiality is proposed? None has been suggested. In the present case, let it be supposed that nothing in either of the two reports is determinative of any issue in the claim. Nonetheless, it is submitted that a decision not to give early disclosure of them constitutes a section 17 breach and entitles the insurer to avoid the contract. If that were right, an assured would have to be advised to swamp his insurer with a mass of facts and information which might have some conceivable relevance to an issue in the case. This duty of disclosure could not logically be limited to information contained in documents. It would, if Mr. Pollock is right, extend also to information imparted orally. A duty that required such massive disclosure at the claim stage lacks any commercial justification or sense.

110.        These difficulties make clear, in my opinion, that Mr Pollock’s submission cannot be accepted. The presentation of a dishonest or fraudulent claim constitutes a breach of duty that entitles the insurer to repudiate any liability for the claim and, prospectively at least, to avoid any liability under the policy. Whether the presentation of such a claim should be regarded as a breach of a continuing duty under section 17 that entitles the insurer to avoid the policy with retrospective effect, enabling any payments made in satisfaction of previous unimpeachable claims to be recovered by the insurer, is more debatable. It is not necessary in the present case to decide that point. Nor is it necessary to decide what the position would be, if a claim that had been honestly begun were dishonestly continued. I have in mind a claim for the loss of goods that, post-claim, were found or otherwise restored to the insured owner. I can see a great deal of force in the argument that the section 17 duty does not apply to conduct in the prosecution of litigation, as to which the Rules of Court that govern litigation constitute the regulatory code. A decision as to that, too, is best left for a case where the point is critical to the result.

111.        I would, however, limit the duty owed by an insured in relation to a claim to a duty of honesty. If the duty derives from section 17, nonetheless this limitation does not, in my opinion involve a judicial re-writing of section 17. On the contrary, it would be the creation out of section 17 of a duty that could be broken notwithstanding that the assured had acted throughout in good faith that would constitute a re-writing of the section. Unless the assured has acted in bad faith he cannot, in my opinion, be in breach of a duty of good faith, utmost or otherwise. For these reasons, I agree with Tuckey J and the Court of Appeal in concluding that the insurers’ section 17 claim cannot succeed.

The section 39(5) issue

112.        Did the assured have blind-eye knowledge of the unseaworthiness of the Star Sea? It is as well to return to the language of the sub-section. What is required is “privity” on the assured’s part of the unseaworthiness. “Privity” in its ordinary meaning connotes knowledge. “Blind-eye” knowledge approximates to knowledge. Nelson at the battle of Copenhagen made a deliberate decision to place the telescope to his blind eye in order to avoid seeing what he knew he would see if he placed it to his good eye. It is, I think, common ground – and if it is not, it should be – that an imputation of blind-eye knowledge requires an amalgam of suspicion that certain facts may exist and a decision to refrain from taking any step to confirm their existence. Lord Blackburn in Jones v. Gordon (1877) 2 App Cas 616, 629 distinguished a person who was “honestly blundering and careless” from a person who “refrained from asking questions, not because he was an honest blunderer or a stupid man, but because he thought in his own secret mind – I suspect there is something wrong, and if I ask questions and make farther inquiry, it will no longer be my suspecting it, but my knowing it, and then I shall not be able to recover”. Lord Blackburn added “I think that is dishonesty”.

    113.   In The Eurysthenes [1977] 1 QB 49, Lord Denning MR gave the following description of ‘blind-eye’ knowledge:

“If a man, suspicious of the truth, turns a blind eye to it, and refrains from inquiry – so that he should not know it for certain – then he is to be regarded as knowing the truth.” (p 68)

    114.   Roskill LJ, in the same case, made clear that ‘privity’ in section 39(5) “must mean that he is privy to the unseaworthiness and not merely that he has knowledge of facts which may ultimately be proved to amount to unseaworthiness” and then turned to ‘blind-eye’ knowledge. He said:

“If the facts amounting to unseaworthiness are there staring the assured in the face so that he must, had he thought of it, have realised their implication upon the unseaworthiness of his ship, he cannot escape from being held privy to that unseaworthiness by blindly or blandly ignoring those facts or by refraining from asking relevant questions regarding them in the hope that by his lack of inquiry he will not know for certain that which any inquiry must have made plain beyond possibility of doubt.” (p 76)

I have some difficulty with Roskill LJ’s inclusion in the cited passage of the qualification “had he thought of it.” If the assured had not “thought of it” he would, presumably, not have realised the implications of the facts. His refraining from inquiry would not then have been attributable to the hope that he would not know for certain. I do not, myself, see how a failure to think about the facts, and hence a failure to realise their implications, can afford the basis for a finding of blind-eye knowledge. I respectfully prefer the formulation by Geoffrey Lane LJ:

“Knowledge of what? Again the subsection is clear. It says ‘unseaworthiness’, not ‘facts which in the upshot prove to amount to unseaworthiness’. Accordingly it seems clear to me that if this matter were res integra, the section would mean that the assured only loses his cover if he has consented to or concurred in the ship going to sea when he knew or believed that, it was in an unseaworthy condition. I add the word ‘believed’ to cover the man who deliberately turns a blind eye to what he believes to be true in order to avoid obtaining certain knowledge of the truth.” (p 81)

Geoffrey Lane LJ’s formulation was very similar to that of Branson J in The Gloria (1935) 54 LlLR 35:

“I think that if it were shown that an owner had reason to believe that his ship was in fact unseaworthy, and deliberately refrained from an examination which would have turned his belief into knowledge, he might properly be held privy to the unseaworthiness of his ship. But the mere omission to take precautions against the possibility of the ship being unseaworthy cannot, I think, make the owner privy to any unseaworthiness which such precaution might have disclosed.” (p 58)

Leggatt LJ in the present case, after referring to The Eurysthenes and The Gloria, concluded that:

“what the defendant underwriters had to establish was a suspicion or realisation in the mind of at least one of the relevant individuals that Star Sea was unseaworthy in one of the relevant aspects, and a decision not to check whether that was so for fear of having certain knowledge about it”. (p 377).

    115.   Save that, having regard to the judge’s findings on causation, I and the insurers’ concession (referred to by my noble and learned friend Lord Hobhouse of Woodborough), the suspicion or realisation of unseaworthiness had to be of both, and not simply of one, of the relevant aspects, I agree with that formulation. There must be a suspicion of the relevant unseaworthiness, and a decision not to check. Unless there is a decision not to check, not to obtain confirmation of what is suspected, there will, in my opinion, be no privity, no blind-eye knowledge, however seriously negligent the failure to check may be. It is in this respect that, in agreement with Leggatt LJ, I think Tuckey J was in error. He made no finding of a deliberate decision not to enquire on the part of any of the individuals who, for this purpose, could constitute the assured. Such a finding was, in my view, an essential condition of a conclusion of blind-eye knowledge. It is not acceptable, in my opinion to assume, from the judge’s conclusion of blind-eye knowledge that he did find that one or other of the individuals had made a deliberate decision not to enquire.

    116.   In summary, blind-eye knowledge requires, in my opinion, a suspicion that the relevant facts do exist and a deliberate decision to avoid confirming that they exist. But a warning should be sounded. Suspicion is a word that can be used to describe a state-of-mind that may, at one extreme, be no more than a vague feeling of unease and, at the other extreme, reflect a firm belief in the existence of the relevant facts. In my opinion, in order for there to be blind-eye knowledge, the suspicion must be firmly grounded and targeted on specific facts. The deliberate decision must be a decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe. To allow blind-eye knowledge to be constituted by a decision not to enquire into an untargeted or speculative suspicion would be to allow negligence, albeit gross, to be the basis of a finding of privity. That, in my opinion, is not warranted by section 39(5).

    117.   In the present case, on the facts, I can see no sufficient basis for attributing to any of the four individuals blind-eye knowledge of either of the two respects of unseaworthiness. The incompetence of the masters of the Centaurus and the Kastora did not put the Kollakis brothers, Mr Faraklas or Mr Nicholaidis in a position in which they were bound to enquire into the competence of every other master in the Kollakis fleet. The master of the Star Sea, although recently appointed to the Star Sea, had been with the fleet for over 11 years and there was no evidence of any previous incompetence on his part. He had held a master’s certificate since 1978.

    118.   As to the dampers, outside contractors had been hired to overhaul the Star Sea’s fire dampers while the vessel was laying-up in Piraeus before commencing its final voyage. Tuckey J expressed the opinion that:

“It was not enough merely to instruct outside contractors to overhaul dampers. The evidence shows that the decision as to what dampers to overhaul was effectively made by the contractors’ foreman. In view of the state of the dampers on Star Sea after the fire, it is quite clear, I think, that work should have been done to her dampers in lay-up which was not done.” (p 663)

    The judge went on to say that some system should have been in place to ensure that the necessary work had been done.

    119.   These findings go to negligence, perhaps gross negligence, but they are, in my opinion, no basis for a finding of blind-eye knowledge. The judge made no finding against either of the Kollakis brothers or against Mr Faraklas of a suspicion or belief that the dampers were defective. And, as Leggatt LJ in the Court of Appeal pointed out, “there is no reason to suppose that the finding would have been made on this aspect fixing Mr Nicholaidis with a suspicion or belief where others were not” (p 378). I agree that the evidence did not justify a finding that these four individuals, whether viewed individually or collectively, sent the Star Sea on its voyage in an unseaworthy state believing or suspecting that that might be so.

    120.   I therefore agree with the Court of Appeal’s conclusion that Tuckey J’s finding in favour of the insurers on the section 39(5) issue cannot be sustained. For these reasons and those given by Lord Hobhouse of Woodborough in his opinion, which I have had the advantage of reading in draft, I would dismiss the appeal.


Strive Shipping Corp & Anor v Hellenic Mutual War Risks Association “Grecia Express”

[2002] EWHC 203 (Comm) [2002] 2 LLR 88, [2002] Lloyds Rep IR 669, [2002] 2 Lloyd’s Rep 88, [2002] EWHC 203 (Comm), [2002] Lloyd’s Rep IR 669 Colman J

The issues may be summarised as follows.

It is alleged by the claimant owners of the car ferry, the Grecia Express, that during the night of 4th/5th March 1994, when the vessel was moored for the winter closed season at Aegion on the southern shore of the Gulf of Corinth, it was sunk by unknown persons acting maliciously, one of the risks insured by the war risks cover provided by the defendant Association. The sinking occurred because somebody cut each of the vessel’s eight mooring ropes by which she was attached to two shoreside bollards. Somebody also opened one of four seawater drencher valves located in the vessel’s auxiliary engine room. It is common ground that the consequence of these two acts was that the vessel, being still restrained by her anchors, drifted round in an arc, moving from a distance of about 30 metres from the shore at the stern to about 150 metres broadside to the shore. Water entering the auxiliary engine room through the open valve caused her to develop a trim by the stern in consequence of which her stern vehicle ramp, which had been left open throughout her time at the mooring, sank below the surface, thereby admitting the sea to the garage deck. By calculations by the expert witnesses it is estimated that water entry through the valves began at 0100/0200 on 5 March. At between 10.30 and 10.50 the same day the vessel capsized and sank in the shallow water 150 metres off shore. The first of two tugs only arrived from Patras over two hours later. It is common ground that in consequence of that sinking she became a constructive total loss.

Mr. Vangelis, the sole watchman, is said by the claimants not to have been on board during that night, but, in dereliction of his duty, to have spent the night in his car with a woman friend and only to have discovered that the mooring ropes had broken at about 0715 the following morning and only to have discovered that the vessel was developing a trim by the stern, and therefore admitting water, at about 0900.

The claimants contend that the vessel sank in spite of efforts on the part of Mr. Kouratolos, their port captain, to get crew members from Drapetsona, near Piraeus, to Aegion to help with re-mooring her and to procure two tugs from Patras to manoeuvre the vessel back to the shore.

The defendant’s case is that Mr. Vangelis assisted in sinking the Grecia Express and that Mr. Ventouris was complicit. It is contended that Vangelis was not a witness of truth. He had admittedly lied to the Greek maritime enquiry about his movements on the night in question. Only he would have been sufficiently acquainted with the vessel’s valve system to have admitted just the right amount of water, by opening just one valve, to allow the vessel to drift into deeper water before it was so substantially trimmed by the stern that it capsized and was substantially submerged sufficiently to become a constructive total loss.

It is alleged that Mr. Ventouris had strong motives for disposing of the vessel. It was 28 years old, relatively slow and of limited passenger and vehicle capacity. It would also require structural modifications to enable it to comply with SOLAS requirements in the following October. The owners’ accounts were completely unreliable in as much as they showed that the vessel was trading profitably. The vessel was insured for US$8 million, whereas its true market value was about US$2 million. Mr. Ventouris was not a witness of truth. He had made a fraudulent claim in respect of the loss of the

Coha II.

The defendants advanced an alternative case, namely that the claimant assured was in breach of the duty to take reasonable steps to avert or minimise the loss under the Association’s rules (Rule 3.14) and/or under section 78(4) of the Marine Insurance Act 1906. In particular Vangelis ought to have re-boarded the vessel at about 0900-0915 on 5th March and to have closed the watertight doors, thereby sealing off the auxiliary engine room, and/or the claimants by Captain Kouratolos and/or their agents at Patras ought to have taken steps to get tugs from Patras earlier than they did or ought to have arranged to put a crew on board and so for the vessel’s mooring ropes to have been attached to a shore-based winch so that the vessel could have been winched ashore.

The defendants advance a further alternative case based on their right to avoid cover for non-disclosure of material facts up to the time of renewal of the vessel’s entry in the defendant Association. There is no issue as to whether any of the facts relied upon were disclosed: none of them were. There are, however, major issues as to whether some of the facts alleged to be material did indeed exist and, if so, whether they were material. All the facts are said to be material because they go to moral hazard or to the magnitude of the risk of sabotage.

The facts relied upon as material are:

(i) the connection which Mr. Ventouris had previously had with a passenger ferry called the Italia Express which, some six years before the loss of the Grecia Express, sank at its moorings at Drapetsona, following an explosion caused by limpet mines attached to its hull;

(ii) the circumstances of the sinking on 23/24 May 1992 of the Star One, a passenger ferry, which had been bareboat chartered by Mr. Ventouris’s company a week earlier for use as a floating casino off the Italian coast and which sank due to its engine room having been flooded when the sea valves were opened;

(iii) the circumstances of the disappearance of Mr Ventouris’s luxury power boat, the Coha II, which I shall outline below;

(iv) the fact that the vessel was very substantially over-valued for the purpose of the insurance.

(v) the circumstances of the sinking of the St. Nicholas, a power boat which Mr. Ventouris had sold to his brother in law, who was also a business associate, some two months before it was stolen from a marina near Piraeus and which was later found in a seriously damaged condition, although this loss was not relied upon as a separate fact disclosable in its own right but one which, taken together with the other four allegedly material facts, ought to have been disclosed as a part of a pattern of losses of vessels with which Mr. Ventouris had been associated.

In relation to the loss of the Coha II the claimant’s case is that this was an unfortunate accident which very nearly cost Mr. Ventouris and his crew and employee, Mr. Architectonides, their lives. They are both said to have fallen overboard in the course of a voyage from Piraeus to Tinos, in the Aegean, in October 1993. The power boat continued on automatic pilot and was never seen or heard of again and no wreckage was ever found. Mr.Ventouris, having fallen overboard, managed to grab hold of a balloon fender which had broken loose. Mr. Architectonides joined him, both of them hanging on to the fender and keeping themselves afloat by swimming or treading water for 10 hours in deteriorating sea conditions until, following a substantial air-sea rescue operation, they were pulled out of the sea with some difficulty by the crew of a passenger ferry which had joined the rescue search.

The defendants allege that the disappearance of Coha II was a fabricated loss organised by Mr. Ventouris, which involved a rendezvous between the power boat and a fishing boat, the transfer of Mr. Ventouris and Mr. Architectonides to the fishing boat and their subsequently being set down into the sea off the coast of Siros to make it look as if they had fallen overboard. It is alleged that something went wrong with the plan and they were left in the water longer than had been planned, with the result that, although they had not spent anything like as much time in the sea as the 10 hours they claimed to have spent, they were on the point of drowning when they were rescued .

The defendants say that the circumstances of this loss were disclosable whether or not Mr. Ventouris procured the Coha II to be fraudulently cast away: if he did so, the fraud went to moral hazard (and that is common ground) and, if it was in truth an accident, the circumstances were nonetheless disclosable because they were highly suspicious in as much as they suggested dishonesty and would have influenced a prudent insurer in deciding whether to renew the cover for Grecia Express,

In view of the defendants’ reliance on two of the other losses individually and in combination with the loss of the St. Nicholas as material because they cast a suspicious light on the integrity of Mr. Ventouris and/or because they suggested an enhanced risk of sabotage of vessels with which he had some connection, it has been necessary to investigate to what extent circumstances that are suspicious are, by reason of that fact alone, capable of being material to be disclosed even where, on the underlying facts before the court, the suspicion proves to have been in truth unfounded.

Finally, the claimants challenge the defendants’ entitlement to avoid the cover solely on the grounds of non-disclosure of the loss of the Star One. They contend that in respect of that loss the defendants elected to affirm the contract of insurance by invoking their rights to call for further information and disclosure of documents and to interview witnesses under an express term of the Association’s Rules, notwithstanding that by the time they did so they knew all facts relevant to their entitlement to avoid for non-disclosure of that particular loss.

The Scope of Cover

The vessel was insured under a war risks policy in respect of the period of 12 months from 1st January 1994. The insured value was US$8 million. The cover was on the terms of the Rules 1994 and By-laws of the defendant Association.

The Rules provided as follows.

“Part A – HULL MACHINERY AND FREIGHT

2A.1       RISKS INSURED

2A.1.1   Unless the Terms of Entry provide otherwise, every Owner of the Entered Ship is insured against loss of or damage to its Hull and Machinery when caused as specified in Rule 2A.2.

2A.2       CAUSES OF LOSS

The Owner of an Entered Ship is insured as provided in Rule 2A.1 if the loss, damage or expense as the case may be is caused by:

2A.2.1   war, civil war, revolution, rebellion, insurrection, or civil strife arising therefrom, or any hostile act by or against a belligerent power;

2A.2.2   capture, seizure, arrest, restraint or detainment, and the consequences thereof or any attempt thereat;

2A.2.3   mines, torpedoes, bombs or other weapons of war (whether any of the aforesaid are derelict or otherwise);

2A.2.4   strikers, locked-out workman, or persons taking part in labour disturbances, riots or civil commotions;

2A.2.5   any terrorist or any person acting maliciously, or from a political motive;

2A.2.6   piracy and violent theft by persons from outside the ship;

2A.2.7   confiscation or expropriation;

2A.2.8   save in cases where the Entered Ship is insured for marine risks on the terms of the Standard Form of American Hull Policy with the American Institute Hull Clauses attached, the risks excluded from the Standard Form of English Marine Policy (Hulls) by Clauses 23 (the War Exclusion Clause), 24 (the Strikes Exclusion Clause) and 25 (the Malicious Acts Exclusion Clause) of the Institute Time Clauses – Hulls;

2A.4.2   Exclusion of risks insurable under Marine (non-war) Policies

2A.4.2.1 Subject to Rules 2A.4.2.2 and 2A.4.2.3, the Association shall not be liable to the Owner of an Entered Ship for any loss, damage, or expense wholly or partially covered by the Standard Form of English Marine Policy (Hulls), or which would have been wholly or partially covered thereby if, at the time of the incident giving rise to such loss, damage or expense, the Entered Ship had been insured under such a policy.”

The vessel was also insured by the defendants in respect of Protection and Indemnity risks in the event of the liability having been incurred or the cost or expense caused by war risks perils also including at Rule 2C.2.5. “Terrorists or any person acting maliciously or from a political motive”. P& I risks included wreck removal and pollution risks. The “standard form of English Marine Policy (Hulls)” is defined in Appendix A as follows:

“The form of Lloyd’s Marine Policy (Code MAR) and/or the Institute of London Underwriters’ Companies Marine Policy issued as from 1st October 1991, with the Institute Time Clauses – Hulls (edition of 1st October, 1983, or any subsequent edition thereof) attached.”

The Institute Time Clauses (Hulls) 1983 include amongst the insured perils “barratry of Master Officers or Crew”

It is common ground that

(1)          the vessel was deliberately sunk by somebody;

(2)          if it was deliberately sunk with the complicity of the owner, including in particular Mr Ventouris, the person in control of the owning company, the claim fails;

(3)          if the vessel was deliberately sunk by the master, officers or any member of the crew so as to amount to barratry, the claim fails, because that is an excluded peril.

The Burden of Proof

It is submitted by Mr Anthony Boswood QC, on behalf of the defendants, that in order to establish a claim for loss or damage caused within Rule 2A.2.5 it is necessary for the claimant owner to prove not only that the vessel was deliberately sunk but also that this was done without the complicity of the owner. One possible basis for this argument is that the words “acting maliciously” mean “for the purpose of harming the owner”. In other words, it is necessary for the owner to prove that the motive for the sinking was directed at him and not by him.

In Nishina Trading Co Ltd v Chiyoda Fire and Marine Insurance Co Ltd [1969] 2 QB 449 there was a claim under a marine cargo policy incorporating the old Institute Strikes, Riots and Civil Commotions clauses. The insured cargo owners claimed against underwriters in respect of the loss of cargo commandeered by the master of the carrying vessel on the owners’ instructions in purported exercise of a lien for charter hire. It was held by the Court of Appeal that this was a “taking at sea” within the wording of the SG form and not “loss of or damage to the property …. insured caused by …. persons acting maliciously”. Lord Denning MR held, at page 462, that “maliciously” meant “spite or ill will or the like”. Edmund Davies LJ. held at page 463 that the “persons acting maliciously” peril was inapplicable on the facts, as did Phillimore LJ. at page 467, observing that the clause was “obviously intended to deal with damage effected in the course of some civil disturbance”.

In Shell Petroleum Ltd v. Gibbs [1982] 1 QB 946 there was a claim for loss of cargo arising out of a complex fraud aimed at evasion of the oil embargo on South Africa. One consequence of the fraud was the destruction of part of the cargo when the carrying vessel was scuttled by conspirators as part of the overall fraudulent adventure. Mustill J. held, at page 966, that this was not loss caused by “persons acting maliciously”. Having referred to the judgment of Lord Denning MR in Nishina Trading, supra, that the words connoted “spite or ill will or the like”, he observed:

“Giving the words this meaning, they are plainly not appropriate to the present loss. The conspirators were not inspired by personal malice against Pontoil; they simply wished to steal the cargo, the identity of the owner being immaterial. The same is the case as regards the destruction of the cargo remaining on board when the vessel sank. Perhaps there may, consistently with the decision in The Mandarin Star, be a right to recover where the insured property is damaged by an act of wanton violence, the malice being directed, so to speak, at the goods rather than their owner. But it is unnecessary to decide this here, for the cargo was not lost because the conspirators desired to harm either the goods or their owner. The loss was simply a by-product of an operation carried out for the purposes of gain. On the reasoning of the Court of Appeal this is not within the scope of the peril.”

In the Court of Appeal Lord Denning MR referred to the decision of Mustill J. on this point, which was not challenged in the Court of Appeal, and did not suggest that the suggested wider application of this part of the cover might be wrong.

Since the factual basis upon which the Court of Appeal reached its conclusion in both cases was such that the “persons acting maliciously” cover was inapplicable whether it had either of the meanings considered by Mustill J. in Shell Petroleum the point is at large in this court.

The insured perils covered by the Causes of Loss clause are essentially war risks eventualities, the purpose being to protect the insured owner from loss or damage to the vessel caused otherwise than by the ordinary marine perils. Most of these war risks perils are necessarily wholly unrelated to the identity of the insured, for example civil war, revolution, mines, torpedoes, bombs, riots of civil commotions, terrorist attacks, piracy and so on. There are included, however, other perils which could be directed at the assured: for example arrest, restraint or detainment or the activities of strikers or persons taking part in labour disturbances or, possibly, confiscation or expropriation. In none of these cases would it necessarily be required to establish that the peril was aimed at or directed against the owners personally as distinct from the vessel itself. Indeed, there would seem to be no overall indication that the identity of the assured or the purposeful causing of loss or damage to such person is a relevant characteristic of war risks perils.

Accordingly, when considering the meaning of “persons acting maliciously” it is necessary to ask whether it is necessary to adopt a meaning which is so limited that it will cover loss or damage caused for the purpose of injuring the particular insured but will not cover random vandalism. That the word “maliciously” is quite capable of covering wanton damage is clear from its use and the meaning accorded to it under the Malicious Damage Act 1861. Section 58 provides that where malice is an ingredient of an offence under that Act it is immaterial whether the offence was committed “from malice conceived against the owner of the property in respect of which it shall be committed or otherwise”. That opens up the meaning to cover any conduct whereby the property in question is intentionally caused to be lost or damaged or is lost or damaged in circumstances amounting to recklessness on the part of the same person.

In my judgment, there is no reason why the meaning of “person acting maliciously” should be more narrowly confined than the meaning which would be given to the word “maliciously” under The Malicious Damage Act 1861. Provided that the evidence establishes that the vessel was lost or damaged due to the conduct of someone who was intending to cause it to be lost or damaged or was reckless as to whether such loss or damage would be caused, that is enough to engage the liability of war risks underwriters. The words therefore cover casual or random vandalism and do not require proof that the person concerned had the purpose of injuring the assured or even knew the identity of the assured.

The argument advanced by Mr Boswood, on behalf of underwriters that, because “person acting maliciously” cannot include the assured or anyone acting on the instructions of the owner, it is for the assured to disprove his own complicity is, in my judgment, unsound.

It is said that the phrase must implicitly require that the person said to have acted maliciously must be someone other than the assured or anyone acting on his instructions. In other words, proof of the peril involves proof of non-complicity in addition to proof of the intentional or reckless causing of loss or damage to the vessel. This in substance would require the assured to disprove a fraud on the underwriters because, were he complicit in the conduct concerned, no honest claim could be advanced. Yet this in substance is precisely the point which, in the context of barratry, has long been the subject of decisions of the Court of Appeal binding on this court.

The point arises in relation to barratry because of the statutory definition of barratry to be found in the Marine Insurance Act 1906, Schedule 1 rule 11, – “every wrongful act wilfully committed by the master or crew to the prejudice of the owner, or, as the case may be, the charterer”. In Elfie A Issaias v. Marine Insurance Co Ltd (1923) 15 Lloyd’s Rep 186, where the vessel was scuttled by the master and engineer, it was argued that it was for the owner to prove his non-complicity. The Court of Appeal rejected this argument. Atkin LJ. discussed the point most fully at pages 191-192. In outline his reasoning was that, if the assured were complicit with the scuttling, that would be a criminal offence and as a matter of principle it was for the party who alleged criminality, namely the underwriters, to prove it. Lord Sterndale MR and Warrington LJ. expressly agreed. The wording of the definition of barratry was thus held not to require proof of non-complicity by the owner.

This approach to the burden of proof in barratry cases was referred to without disapproval, for indeed it was binding, by Roskill LJ. in The Michael [1979] 2 Lloyd’s Rep 1 at page 13. He drew attention to the distinction between cases such as Compania Martiatu v. Royal Exchange Assurance [1924] AC 650 where a fortuitous loss is relied upon by the assured and where the burden of proving the fortuity rests on him and cases such as Elfie A Issaias, supra, where the vessel was found to have been deliberately sunk and the issue of complicity was raised by the underwriters who had the burden of proof on that issue. This distinction is clearly one which is binding in this court and in the Court of Appeal and can only be reconsidered by the House of Lords. And so, as the law now stands, where it is proved that there has been a deliberate sinking by the master or crew, the hull and machinery underwriters will be liable for a loss by barratry, since it is presumed that the sinking was both wrongful and to the prejudice of the owner or charterer, unless the underwriters prove that the loss was “attributable to the wilful misconduct” of the assured “within section 55(2)(a) of the Marine Insurance Act.

It would be strange indeed if there were a distinction between the incidence of the burden of proof of complicity in cases where the vessel was proved to have been intentionally sunk by the crew and in cases where it was proved to have been intentionally sunk by vandals. Such an inconsistency cannot be justified by the wording of the Act and would be inconsistent in principle with the reasoning in those decisions of the Court of Appeal to which I have referred. It has been held that where the vessel is lost by fire deliberately commenced, the burden of proof of complicity rests upon the underwriters. That was the decision of Evans J. in The Captain Panagos DP [1986] 2 Lloyd’s Rep 470 at page 510. There is, in my judgment, no material distinction for this purpose between a case where the vessel is lost by fire deliberately caused and a case where it is lost by a sinking caused by the conduct of a person acting maliciously. In both cases the assured is presumed not to have been complicit until the underwriters prove that he was. The practical effect of this conclusion is that if, at the end of the trial, it is not shown to the requisite standard of proof that the assured was complicit, the underwriters will be liable.

In the present case, it is necessary for the assured to establish that the admittedly deliberate sinking fell within the scope of cover which did not include barratry, for this was a war risks policy and barratry was a peril insured under the hull and machinery policy. For this purpose the assured must prove on the balance of probabilities that the sinking was not caused or procured by the master or crew and in particular by the watchman, Vangelis.

……

Non-Disclosure: Analysis of the relevant Principles

In the present case the basis of materiality relied upon is twofold:

(i)            facts going to the magnitude of the risk and

(ii) facts going to moral hazard.

In category (i) the defendants rely on the events relating to the Star One (23/24 May 1992) and, in aggregate, that event together with the events relating to the St Nicholas (September 1990).

In category (ii) the defendants rely on each of Mr Ventouris’s connections with the Italia Express, the events relating to Star One, the loss of the Coha II (29 October 1993) and in aggregate those three losses with the loss of the St Nicholas, as well as over-valuation of the Grecia Express.

In each case, save for the Coha II, the defendants do not set out to prove positively that Mr Ventouris was implicated in the loss or that the loss had a particular or specific relationship with the loss of the Grecia Express but rather that the circumstances were intrinsically suspicious such as to suggest either that Mr Ventouris might not be honest or that vessels with which he was associated might be vulnerable to sabotage by persons acting maliciously.

Before turning to consider the issues of materiality of the specific facts relied upon, it is necessary to investigate the basis upon which contracts of marine insurance can be avoided for non-disclosure of material facts and whether the suspicious nature of a particular fact can render it material so as to entitle the insurer to avoid the policy regardless of the true state of facts.

Although the starting point for the principle that a contract of insurance is a contract uberrimae fidei is usually taken to be the judgment of Lord Mansfield in Carter v. Boehm (1766) 3 Burr 1905, there had been several earlier cases in which the courts had concluded that, in the event of non-disclosure by the assured, he should for one reason or another be disentitled to enforce the contract of insurance. Thus, in De Costa v. Scandret (1723) 2 P Wm 169 Lord Macclesfield LC in the Court of Chancery ordered that the policy be delivered up and the premium be repaid. In Seaman v. Fonereau (1723) 1 Str 1183, tried at the Guildhall, the jury was directed in effect that the insurers could be discharged from liability if they accepted the evidence of materiality. The head note describes the policy as “void”.

Whatever the conceptual explanation for the entitlement of the insurers to treat the contract as wholly unenforceable against them, the position had been arrived at by 1872 that it was open to the party to whom disclosure ought to have been made to elect to avoid the contract or to affirm it: see the decision of the Courts of Exchequer and Exchequer Chamber in Morrison v. The Universal Marine Insurance Company (1872) LR 8 Ex 40 and 187. In Chalmers & Owen, Digest of the Law of Marine Insurance, (1901) p.22 it is stated:

“The contract is often said to be rendered void by concealment or misrepresentation, but it is clear that it is only voidable at the option of the party prejudiced, and that the ordinary rules of law as to voidable contracts apply to insurance.”

In Blackburn, Low & Co v. Vigors (1886) 17 QBD 553 at 562 Lord Esher MR observed:

“This seems to me to be the true doctrine. The freedom from mis-representation or concealment is a condition precedent to the right of the assured to insist on the performance of the contract, so that on a failure of the performance of the condition the assured cannot enforce the contract.”

Lindley LJ put the principle in similar terms at p.578.

“It is a condition of the contract that there is no misrepresentation or concealment either by the assured or by anyone who ought as a matter of business and fair dealing to have stated or disclosed the facts to him or to the underwriter for him.”

That there was a condition precedent of full disclosure of material facts was also accepted by Lord Watson in the House of Lords at (1887) 12 App 535 and 539. Lord Fitzgerald said at page 542 that he was prepared to accept substantially the judgment of Lord Esher.

It was against this background that Sir Mackenzie Chalmers drafted clause 17 of the Marine Insurance Bill in 1894, which became section 17 of the Marine Insurance Act 1906, in these terms:

“A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party”.

In a note at page 24 of the First Edition of his Digest of the Law of Marine Insurance (1901) Chalmers stated:

“The duty of the assured to disclose material facts is a positive, not a negative, duty. Mere silence, and even innocent silence, as to a material fact may entitle the insurer to avoid the contract.”

It is to be observed that section 17 refers not to a condition precedent to enforceability but to the contract being “based upon the utmost good faith”. Quite clearly the concepts of what the contract is “based upon”, the “condition precedent” and the concomitant “positive duty” reflect the fact that it is the policy of the law in relation to such contracts that, absent such disclosure, they may not be enforced at the suit of the party failing to disclose if the opposite party elects that they should not be.

In Bell v. Lever Brothers [1932] AC 161 Lord Atkin said at p227:

“Ordinarily the failure to disclose a material fact which might influence the mind of a prudent contractor does not give the right to avoid the contract. The principle of caveat emptor applies outside contracts of sale. There are certain contracts expressed by the law to be contracts of the utmost good faith, where material facts must be disclosed; if not, the contract is voidable. Apart from special fiduciary relationships, contracts for partnership and contracts of insurance are the leading instances. In such cases the duty does not arise out of contract; the duty of a person proposing an insurance arises before a contract is made, so of an intending partner.”

In March Cabaret Club & Casino v. The London Assurance [1975] 1 Lloyd’s Rep 169 May J. observed at 175:

“Bearing in mind the basis of the rule, however, which is, as Lord Justice Scrutton pointed out, the fact that there is a disparity in negotiating position between the intending assured and insurers, in my judgment the duty to disclose is not based upon an implied term in the contract of insurance at all; it arises out the contract; it applies to all contracts uberrimae fidei and is not limited to insurance contracts; it also applies, for instance, to contracts of partnership, contracts of surety, certain family settlement contracts and other similar types of contractual relationship.”

In Container Transport International Inc v. Oceanus Mutual Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd’s Rep 476, Stephenson LJ. explained the underlying policy of the law in these words:

“In considering questions of waiver and affirmation it seems to me essential to bear in mind two things, each of which stems from the need for equality between those bargaining in the marine insurance market, as was stressed by Lord Justice Scrutton in adopting the statements of Mr Justice Park in his Marine Insurances in Greenhill’s case (1927) 24 L1 L Rep. 383; [1927] 1 KB at pp 388 and 76-77. The first is that the insured is the one who knows most of what the underwriter needs to know but does not know; the second that, though the underwriter must trust the insured to give it him, he in his turn must be trusted not to abuse the help and protection given him by the duty the law imposes on the insured to disclose and represent truly all that a prudent underwriter needs to know, and so turn the duty into a means of avoiding a contractual liability which he ought in fairness to honour. This the statute recognises by making the duty to observe the utmost good faith mutual in s.17 and by providing the exceptions of circumstances which need not be disclosed that are to be found particularly in s.18(3)(b) and (c).

The matter was taken further by the Court of Appeal in Banque Keyser Ullmann SA v. Skandia (UK) Insurance Co Ltd [1990] 1 QB 665. This complex litigation primarily raised at Court of Appeal level the issue whether damages could be recovered for breach of the so-called duty of the utmost good faith. In concluding that there was no right to recover damages, Slade LJ. in giving the judgment of the Court said with reference to Lord Esher’s judgment in Blackburn Low v. Vigors, supra:

“In our judgment it is clear that Lord Esher, in using the phrase ‘condition precedent,’ was using it in the sense of a contingent, rather than a promissory, condition and was rejecting Duer’s suggestion that in the case of a contract of insurance uberrimae fidei the parties are to be treated as having promised that full disclosure has been or will be made.

In our judgment, support for this view may also be derived from a consideration of the origin of the powers of the court to give relief in the cases of innocent pre-contractual misrepresentation by a party to a contract uberrimae fidi. In Merchants and Manufacturers Insurance Co. Ltd v. Hunt [1941] 1 KB 295, 318, Luxmore LJ. (with whom Scott LJ. agreed on this point, at p312) said:

‘Whatever may be the position with regard to non-disclosure, as to which I say nothing, I am satisfied that in a case of positive misrepresentation the right to avoid a contact, whether of insurance or not, depends not on any implied term of the contract but arises by reason of the jurisdiction originally exercised by the courts of equity to prevent imposition’.

Through Luxmore and Scott LJ. found it unnecessary to decide this further point, we think that the right to avoid a contract uberrimae fidei in the case of non-disclosure must be founded on the same jurisdiction. Scott LJ. pointed out, at p313:

“Even the common law duty of disclosure I find difficult to explain fully on the theory of its resting only on an implied term of the contract. If it did, it would not arise until the contract had been made; and then its sole operation would be to unmake the contract.”

When that case went to the House of Lords under the name Banque Financiere de la Cite SA, the decision of the Court of Appeal was upheld on other grounds. However, although not necessary for the decision of the House of Lords, Lord Templeman, with whom a majority of the other members agreed, referred at [1991] 2 AC p280 with approval to the analysis of the legal basis for avoidance for non-disclosure referred to by Slade LJ. in the passage cited.

Finally, in Pan Atlantic Insurance Ltd v. Pine Top Ltd [1995] 1 AC 501 Lord Mustill (at page 544) treated as unresolved the controversy over the source of the power to avoid a contact of insurance for non-disclosure.

In my judgment, it can confidently be concluded that, whatever the conceptual origins of the substantive requirements of section 17 of the Marine Insurance Act, the remedy for non-compliance with the requirement of the utmost good faith is one derived from the equitable jurisdiction of the court to avoid contracts for misrepresentation in cases where it could not be said that the contract had been rendered void ab initio as distinct from voidable. Accordingly, that jurisdiction is to be exercised consistently with the policy of the law as regards the insured which underlies section 17, but it has to be exercised in such a way as to take into consideration countervailing policies. Thus, if it would be unconscionable for there to be avoidance because, for example, the insurer had affirmed the contract, the contract will be enforced. The policy of permitting the underwriter to rely on non-compliance with the duty of the utmost good faith would be superseded by the unconscionability of doing so after he had represented to the insured that the contract was continuing in force. The court’s jurisdiction to avoid for misrepresentation or non-disclosure therefore cannot be exercised without regard to whether the insurer has acted consistently with his duty of the utmost good faith. If he has failed to do so, the court must decide whether such failure should disentitle him to avoidance of the policy.

The Materiality of Allegations against the Assured and Suspicious Circumstances

Against that background I turn to consider the disclosability of allegations of wrong-doing and of suspicious circumstances. In the present proceedings the case advanced by the defendants deploys the suspicious nature of the relevant events primarily to support the assertion by underwriters that disclosure would have raised such doubts as to the integrity of the assured that they would either have declined the risk or at least made further enquiries. The most prominent events relied upon are the circumstances in which the Coha II disappeared. However, the same submission is made in relation to the association of Mr Ventouris with the Italia Express and the Star One. The circumstances surrounding the loss of those vessels and additionally of the St Nicholas are also relied upon in aggregate.

Further, the suspicion argument is also advanced in relation to the magnitude of the risk. That is to say it is suggested that one possible explanation for the circumstances of the loss of the Italia Express and Star One as well as the St Nicholas is that someone was aiming to damage or destroy vessels in which Mr Ventouris had an interest.

In each case, at the time when the renewal of the entry with the defendant Association was effected at the beginning of 1994, the motive for the destruction of those vessels was a matter of speculation, Mr Ventouris having consistently denied his involvement.

There is little authority on this specific point.

In March Cabaret Club & Casino Ltd v. The London Assurance [1975] 1 Lloyd’s Rep 169, a claim under a fire policy, one of two directors and sole owners of the claimant company had been arrested and charged and committed for trial in relation to receiving stolen property to the value of over £20,000. Although he had initially admitted his guilt to the police, he subsequently pleaded not guilty. In the meantime, between his committal for trial and the trial taking place, the policy was renewed. The insurers sought to avoid for non-disclosure of the commission of the offence. Before May J. the plaintiff assured alleged that the owner was wrongly convicted and sought to establish his innocence, May J. found on the evidence that he had committed the offence and been rightly convicted – and the commission of the offence was a material fact non-disclosure of which entitled the insurers to avoid the policy. However, at page 177R of the report May J. went on consider obiter the position that would have arisen if the owner, Mr Skoulding, having been arrested, charged with the offence and committed for trial, which was still pending at the date of renewal, was in truth innocent, but, presumably had not yet been tried when the matter was before the court. May J. held that the facts of the arrest, charge and committal ought to be disclosed. May J. also expressed the view that if the owner had been acquitted before renewal he would not have to disclose those facts unless he had in truth been guilty, if the insurers were prepared so to allege and to prove it. He stated:

“There is one thing, however, which I would like to add. Had it been material I would have been prepared to hold in this case that in any event Mr Skoulding ought to have disclosed the fact of his arrest, charge and committal for trial at the date of renewal, even though in truth he was innocent. What I do not agree with and would not be prepared to accept, although Mr Edmunds in his evidence sought to say to the contrary, is that if, prior to renewal, Mr Skoulding had been acquitted, there would then have been any duty on him to disclose his arrest, committal and acquittal – unless that acquittal was unjustified because he had in fact committed the offence and insurers were prepared so to allege and to prove it. To suggest that a proposer should disclose an acquittal when insurers do not propose to challenge it is in my judgment erroneous and seeks to point a path which, as at present advised, I firmly decline to tread.”

I observe that whereas the second proposition is clearly right, the first proposition is hardly consistent with it: viz step 1 there is no duty to disclose that the proposer for insurance has been charged with, tried and correctly acquitted of a criminal offence; step 2 there is a duty to disclose that he has been charged with and committed for trial on a criminal offence of which he is in truth innocent. Given that the acquittal does not operate as an estoppel against the insurers, it would appear that withholding from underwriters the information as to the trial would be to deny them the opportunity to investigate the allegation and acquittal in the same way as if the trial were still outstanding and the facts of the arrest charge and committal had not been disclosed. The judge’s emphasis in the last two sentences on the necessity for the insurers to prove that the acquittal was wrong strongly suggests that it would not be open to them to avoid the policy on the basis of mere suspicion of the correctness of the acquittal of the proposer unless they could prove that the offence had indeed been committed. Assuming that the fact of the acquittal had the effect of shifting the burden of proof of guilt to the insurers, absent the acquittal, one would have expected that, faced with a conviction, it would be open to the assured to disprove his guilt and thereby to disentitle the insurers to avoidance of the policy. Indeed, but for the step 1 comment, that appears to have been the basis on which the trial proceeded.

The only judgment which decides conclusively whether an assumed has a duty to disclose an allegation of criminal activity of which he claims to be innocent is that of Forbes J. in Reynolds and Anderson v. Phoenix Assurance Co Ltd [1978] 2 Lloyds’ Rep 440. That also was a fire claim and amongst other defences the insurers claimed to avoid the policy for non-disclosure of a fraud said to have been perpetrated by Reynolds. The allegation (“the Colne allegation”) had been made in civil proceedings against Reynolds and another which had not been pursued and had then been the subject of a criminal trial which had resulted in Reynolds’s acquittal. Forbes J. rejected the proposition that ……. “any allegation of fraud made against a proposer must be disclosed even though it had no foundation; the reason being that it must be for the insurer to investigate such allegations and decide on their truth …..”

His reasons appear at page 460L. Having cited the passage from the judgment of May J. in March Cabaret Club, supra, which is cited above, he continued:

“With the greatest respect to Mr Justice May I must decline to follow him in this suggestion. The object of requiring disclosure of circumstances which affect the moral risk is, to borrow Mr Deyes’ words, to discover whether the proposer is a person likely to be an additional risk from the point of view of insurance. The most relevant circumstance for disclosure is therefore that he has actually committed an offence of a character which would in fact influence the insurer’s judgment. The proposer is bound to disclose the commission of that offence even though he has been acquitted or even if no one other than he has the slightest idea that he committed it: the material circumstance is the commission of the offence. A conviction of a criminal offence is itself, it seems to me, also material (if the commission of the offence is itself material) even though the proposer may protest his innocence or in fact has not committed the offence; for a responsible insurer is himself entitled to assume that prima facie the proposer was rightly convicted and has therefore in fact committed the offence. If therefore an allegation of a relevant criminal offence is made and the allegation is true the proposer must disclose it not because the allegation has been made but because the offence has in fact been committed; it is not then the allegation which must be disclosed but the underlying fact that a crime has been committed. This seems to me to be trite law. It follows, if Mr Wilmers is right, that the only occasion on which the allegation, as an allegation, must be disclosed is when it is not true. This appears to me to be a conclusion so devoid of any merit that I do not consider that a responsible insurer would adopt it and nor do I. In my view the Colne alleagtion, which the defendants made no attempt to suggest had any basis in fact, was not a material fact to be disclosed.”

The last decided case in this series is The Dora [1989] 1 Lloyd’s Rep 69. That was a claim for the total loss of a yacht by fire at sea. Amongst the defences raised was failure to disclose that at the time of the placing of the risk there were pending charges of smuggling against members of the crew. Amongst the submissions advanced on behalf of the assured were that the charges were ill-founded and therefore of no materiality. Phillips J. found that the charges were well-founded but went on to consider, obiter, what would have been the position had they been ill-founded. Having referred to the judgments in March Cabaret Club, supra, and Reynolds v. Phoenix Assurance, supra he observed at page 93R:

“I prefer the reasoning of Mr Justice May. When accepting a risk underwriters are properly influenced not merely by facts which, with hindsight, can be shown to have actually affected the risk but with facts that raise doubts as to the risk. A number of proposal forms were adduced in evidence to indicate the areas of concern to yacht insurers. Some sought disclosure of charges of dishonesty, others simply of convictions. Mr Price was quite firm that the existence of pending charges for smuggling at the time of placing of the risk was material. I accept this evidence. Subject to the points that remain to be considered, the charges should have been disclosed, whether or not they were well founded.”

In my judgment, it is quite clear from section 18 of the Marine Insurance Act 1906 that the attribute of materiality of a given circumstance has to be tested at the time of the placing of the risk and by reference to the impact which it would then have on the mind of a prudent insurer.

In this connection it is for present purposes necessary to distinguish between three types of circumstances:

(1)          allegations of criminality or misconduct going to moral hazard which had been made by the authorities or third persons against the proposer and are known to him to be groundless;

(2)          circumstances involving the proposer or his property or affairs which may to all outward appearances raise a suspicion that he has been involved in criminal activity or misconduct going to moral hazard but which he knows not to be the case;

(3)          circumstances involving him or his business or his property which reasonably suggest that the magnitude of the proposed risk may be greater than what it would have been without such circumstances.

As to case (1), if an allegation of criminal conduct has been made against an assured but is as yet unresolved at the time of placing the risk and the evidence is that the allegation would have influenced the judgment of a prudent insurer, the fact the allegation is unfounded cannot divest the circumstance of the allegation of the attribute of materiality. For example, if the proposer had told the insurer of the allegation and also that it was unfounded, the insurer might well have preferred not to trust the word of the assured or might have preferred to conduct his own investigation before agreeing to underwrite the risk.

As to the case (2), it is, in my judgment, quite unrealistic for underwriters to require disclosure of facts, which the proposer knows to have no bearing on his honesty or integrity, on the basis that a suspicious person when told of those facts might believe that it did have such a bearing. Unlike case 1 where a third party has made a specific allegation against the proposed assured, case 2 involves that the assured should evaluate for himself perfectly innocent facts to see whether they might be misconstrued by an underwriter as indicating his dishonesty. I do not consider that the duty of the utmost good faith involves as rigorous an approach as this. Nor, indeed, did the defendants’ expert, Mr Hunt. When he was asked in cross-examination, if a claim had been made on the underwriters of the Coha II which had been paid by them, without their suggesting that it was a suspicious or fraudulent loss, how the proposer was to know that it was suspicious and therefore disclosable, he said that if the claim had been paid, there was no reason for him to raise the suspicion. This is clearly correct. Provided that there has been no outward allegation material to the proposer’s integrity and that he is in truth innocent, the mere suspiciousness of the facts does not render them disclosable.

As to case (3) by parity of reasoning, if the assured knows of facts which, when viewed objectively, suggest on the face of it that facts might exist (“the suggested facts”) which would increase the magnitude of the risk and the known facts would have influenced the judgment of a prudent insurer, the known facts do not cease to be material because it may ultimately be demonstrated that the suggested facts did not exist. That which invests the circumstances with materiality is emphatically not the existence of the suggested facts, but the existence of the known facts, for the underwriter is entitled to take into account the risk that the suggested facts may be true and the proposer is not entitled to deprive the underwriter of that opportunity because he personally believes albeit he does not know for certain that the suggested facts are untrue.

An analogous point which supports this conclusion and is not discussed in the other authorities to which I have referred is the materiality which can attach to a mere rumour prevalent when the risk was placed on the existence of a fact, notwithstanding that the rumour later turns out to have been untrue: see Morrison v. Universal Marine Insurance Co (1872) Lloyd’s Rep 8 Ex at p197 and Arnould, Law of Marine Insurance 16th Edn para 645 and 646 and the older cases there cited.

However, the authorities suggest that the rumours have to have at least some real substance and reliability when objectively viewed. Thus, in Durrell v. Bederley (1816) Holt NP 283 in the Court of Common Pleas at Nisi Prius insurers sought to avoid a time policy on a privateer which they had underwritten several days after she had sailed from Jersey. It was alleged that there had been non-disclosure of reports in Jersey that French frigates were off the coast and that a capture had been made the day after the insured vessel sailed and that a  ship’s binnacle had been afloat at sea. Gibbs LJ. concluded that the reports ought to have been disclosed. At page 285 he observed:

“The question is, did the plaintiff know any facts injurious to the adventure, which ought, in common honesty, to have been communicated to the underwriters; I mean substantial facts, which were likely to change their opinion as to the magnitude of the risk.

Loose rumours which have gathered together, no one knows how, need not be communicated. Intelligence, properly so called, and as it is understood by mercantile men, ought to be disclosed when known. The materiality of the facts known and suppressed are for the decision of the jury. If the concealment be of a material fact, whether a rumour, report or an article of intelligence, it ought to be communicated; if immaterial, it may be withholden.”

And at page 286 be continued:

“In the present case, the reports cannot be called loose; the plaintiff knew the frigates had been off the island; a capture was reported to have been made; a binnacle had actually been seen floating with a compass upon it: this latter circumstance was a fact; it was intelligence in its proper mercantile sense.”

As it is stated in Arnould, para 653:

“Loose rumours, indeed, which have gathered together, no one knows how, need not be communicated and intelligence may be so general, and its application to the subject insured so doubtful and remote, that the assured need not communicate it, though it may possibly turn out to have related to the subject insured.”

That, however, is far from being the end of the matter. I refer at the outset to the judgment of Staughton LJ. in Kausar v. Eagle Star Insurance Co Ltd [2000] Lloyd’s Rep 154 at page 157:

“Avoidance for non-disclosure is a drastic remedy. It enables the insurer to disclaim liability after, and not before, he has discovered that the risk turns out to be a bad one; it leaves the insured without the protection which he thought he had contracted and paid for. Of course there are occasions where a dishonest insured meets his just deserts if his insurance is avoided; and the insurer is justly relieved of liability. I do not say that non-disclosure operates only in cases of dishonesty. But I do consider that there should be some restraint in the operation of the doctrine. Avoidance for honest non-disclosure should be confined to plain cases.”

However, one should not lose sight of the fact that were the evidence before the court, upon which underwriters rely to avoid the policy, to establish that, although the known facts were not disclosed, the suggested facts did not in truth exist, underwriters would be seeking to avoid liability in respect of a risk which, had they been in possession of the true facts, as distinct from the allegations of suggested facts, they would have written without hesitation. In so doing they would, in effect, be utilising loss of the opportunity of forming an unfounded suspicion of non-existent facts in order to avoid paying a loss under a policy which, had the truth been made known to them when they wrote the risk, they would not have hesitated to underwrite. To persist in such a course in the face of evidence before the court that the suggested facts never existed would, in my judgment, be quite contrary to their duty of the utmost good faith. Such a course would be so starkly unjust that I would hold that in such a case it would be unconscionable for the court to permit the insurers to avoid the policy on the grounds of non-disclosure. Having regard to the equitable origin of the jurisdiction to avoid a policy for breach by the assured of the duty of the utmost good faith, the court should not be inhibited from giving effect by appropriate orders to the insurers’ countervailing duty of the utmost good faith to the assured. The breach of that duty by the insurers would be so unconscionable as to disentitle the insurers from invoking the equitable jurisdiction of the court to avoid the contract on the grounds of non-disclosure by the assured.

The procedural and evidential consequences which flow from this conclusion are, in my judgment, as follows:

(1)          In the field of moral hazard, a failure by the assured to disclose an existing allegation against him of dishonesty or relevant criminal conduct or a criminal charge will normally be non-disclosure of a material fact which prima facie entitles the insurer to avoid the policy.

(2)          If, in proceedings in which the insurer seeks to avoid the policy for such non-disclosure, the assured proves that the allegation or charge was unfounded and that there has been no dishonesty or criminal conduct on his part, the insurers will not normally be entitled to avoid the policy. For example, where the assured has been charged with a criminal offence and subsequently acquitted at a trial, he can deploy his acquittal as some evidence, but not conclusive evidence, of his innocence. Similarly, if he has been charged but not yet convicted, he can prove his innocence in order to displace the entitlement of the insurers to avoid for his failure to disclose the charge against him.

(3)          If I am wrong in concluding that an assured is under no duty to disclose facts merely because they are objectively suspicious as to his own wrong-doing when he knows that the suggested facts do not exist, it must by parity of reasoning be open to the assured to displace the underwriters’ entitlement to avoid for non-disclosure of circumstances because they are objectively suspicious by proving that the suspicion was misplaced and that the facts of the existence of which there was suspicion never in truth existed.

(4)          If the facts objectively raise suspicions going to the magnitude of the risk, the assured is under a duty to disclose them but if at the trial he establishes that there was in truth no basis for those suspicions it is not open to the insurers to invoke the court’s equitable jurisdiction to avoid the policy.

I therefore agree with the conclusion as to the duty to disclose allegations of misconduct going to moral hazard arrived at by Phillips J. in The Dora, supra, and I am unable to accept the analysis of Forbes J. in Reynolds, supra. However, for reasons which were not argued or considered in either case, I do not consider that failure to disclose allegations which on the evidence before the court are proved to have been false entitles the underwriters to avoid the policy.

I must now consider how the application of this approach works out in the present case with regard to the various suspicious circumstances relied upon as material to be disclosed.

In approaching the issues on materiality it is important to bear in mind two matters which emerge in relation to the evidence. First, the fact that an experienced underwriter may not have encountered disclosure of a particular kind of fact by proposers for a particular kind of insurance does not necessarily justify the conclusion that the particular kind of fact is not material. One only has to state the obvious proposition that disclosure of the commission of a crime undetected by the police would be highly unlikely to occur notwithstanding the obvious materiality of that fact. Mr Outhwaite’s evidence often proceeded on the basis that if he had never experienced disclosure of certain matters they could not be material. Second, whatever an expert witness may say about a particular fact being or not being material must be logically justifiable. Thus, the court need attach no weight to evidence that a particular fact would influence the mind of a prudent insurer if there is no logical justification for that influence and vice versa.


Seashore Marine SA v Phoenix Assurance Plc (The Vergina) (No2)

[2001] EWHC 536 (Comm)  AIkens J

C.            The ITC Terms relied on and the burden of proof argument

The relevant ITC terms in the policies that the Claimant relies on are as follows:

“6.          PERILS

6.1          This insurance covers the loss of or damage to the subject – matter insured caused by

6.1.1      perils of the seas……

……

6.2          This insurance covers loss of or damage to the subject – matter insured caused by

6.2.3      negligence of Master Officers Crew or Pilots

……

provided that such loss or damage has not resulted from want of due diligence by the Assured, Owners or Managers”

“11.        GENERAL AVERAGE AND SALVAGE

11.1        This insurance covers the Vessel’s proportion of salvage, salvage charges and/or general average……

……

11.4        No claim under this Clause 11 shall in any case be allowed where the loss was not incurred to avoid or in connection with the avoidance of a peril insured against”.

It was agreed that the word “salvage” in Clause 11.1 includes contractual remuneration that is recoverable by a salvor under an LOF 1990 salvage agreement. It was also agreed that the words “the loss” in Clause 11.4 must mean the liability of the insured for the types of payments that are identified in Clause 11.1.

However there was an issue between the parties on the proper construction of Clauses 11.1 and 11.4 of the ITC. Mr Hofmeyr QC, for the Claimant, contended that once the assured had proved that the insured vessel had incurred salvage, then the assured was, in the first instance, entitled to recover the sum paid. It was then up to the insurers to prove that “the loss” was “not incurred to avoid or in connection with the avoidance of a peril insured against”. Mr Hofmeyr contended that as the Defendant insurers had not advanced any positive cases that the salvage liabilities claimed in this case were “not incurred to avoid or in connection with the avoidance of a peril insured against”, then once the salvage liabilities had been proved, the Claimant must succeed in this action.

I cannot accept this argument. In my view Clause 11.4 is an integral part of the definition of the cover granted by Clause 11. There is no express wording to suggest that Clause 11.4 is intended to be an exception to the general cover given in Clause 11.1.[11] There is no reason why it should be implied that Clause 11.4 was to be an exception, which underwriters would have to prove. On the contrary, the general rule of insurance is that the insured must prove a proximate link between the loss that the insured has incurred and at least one of the perils that are covered under the insurance policy. Here the “perils” include loss or damage to the vessel by perils of the seas and loss or damage to the vessel by negligence of the Master Officers and Crew of the vessel. Clause 11 enlarges the cover provided by the policy so as to entitle the insured to an indemnity for certain types of payments made to avoid a loss or damage to the subject matter insured. But, in my view and in accordance with general principle, Clause 11 requires that the insured proves that the “loss” for which an indemnity is sought was proximately linked to the avoidance of one of the “perils” covered by the policy wording in Clause 6.

Accordingly, in my view a Claimant assured has to prove the following in order to recover under Clause 11.1 and 11.4 of the ITC wording: (i) payment or the liability to pay salvage, salvage charges or general average; and (ii) that such liability or payment was incurred to avoid loss or damage to the vessel by one of the matters set out in the sub-clauses of Clause 6.1 and 6.2 of the ITC; or (iii) that such liability or payment was incurred “in connection with” the avoidance of loss or damage to the vessel by one of the matters set out in those sub-clauses.

In the present case there is no dispute (save in minor respects) that the Claimant assured was liable to make the salvage payments. Therefore it is up to the claimant to prove, on a balance of probabilities, that: (i) the liability to the salvage was incurred to avoid or in connection with the avoidance of the loss of the “Vergina”; (ii) the loss of the vessel, if it had occurred, would have been proximately caused by one or both of the two particular insured perils relied on by the Claimant, ie. “perils of the seas” or “negligence of the Master or [Chief Engineering] Officer”.

D.            The parties’ case on the facts and the Issues to be decided

The Claimant’s pleaded case:      The Claimant pleaded that (i) the vessel’s ballast system was operated negligently by the crew and developed a starboard list of 23°; (ii) later, after water was discovered in the stabiliser transverse tanks, the crew abandoned ship (iii) the salvage agreements to provide the salvage services (referred to above) were concluded “for the purpose of averting a loss which would have been recoverable under the contract of insurance, namely the loss of or damage to the vessel caused by perils of the seas and/or negligence of the officers and/or crew of the vessel”.[12]

The Defendants sought Further and Better Particulars of the allegation that the ballast system had been operated negligently by the crew, so causing the list to starboard. The answer given was that the vessel left Abidjan with plenty of stability; the Chief Engineer became concerned about the stability of the ship; he did not have sufficient knowledge to operate the ballast system but did so negligently “in a way to cause an imbalance of ballast water between the port and starboard side ballast tanks”. The Claimant pleaded that this was done between 1700 hours on 10 February and 0030 hours on 11 February 1994. The claimant asked the Court to infer that the Chief Engineer wholly deballasted No 3 DB tank, port; partly deballasted No 4 DB tank port and introduced water into the centre stabiliser tank. No further particulars were given of what exactly the Chief Engineer did with the ballast system to remove or add ballast water as alleged.

At the trial this case was expanded and modified. The Claimant’s case, as finally advance, was: (i) the vessel was stable but with a 1° starboard list up to the afternoon of 10 February 1994; (ii) the list increased initially because of a F.O. transfer to the settling tank or by the Chief Engineer deliberately or inadvertently pumping ballast into No 2 or 3 starboard upper wing tank; (iii) the Chief Engineer deliberately or inadvertently pumped water into the centre stabiliser tank and out of the No 3 DB tank port; (iv) he may also have pumped some water out of No 4 DB tank port and into No 2 and 3 starboard upper wing tanks; (v) the actions of the Chief Engineer were negligent and they resulted in an increase of the starboard list to more than 10.5°; (vi) once the vessel reached that degree of starboard list then water got into the No 3 hold via an open scupper valve which was either faulty or stuck in the open position; (vii) once the ship’s list increased beyond 13.6° further water entered the Nos 2 and 3 starboard upper wing tanks through submerged air vent pipe vinel valves;(viii) the starboard list then increased to 23.5°, which was the state of the vessel when the salvors began their work; (ix) if the salvors had not been engaged the vessel would have capsized in just over 4 days’ time; (x) the salvage liability was incurred to avoid a loss that would have been proximately caused by the negligence of the Chief Engineer in operating the ballast system, alternatively by the negligence of the Master in allowing the Chief Engineer to operate the system or continue to do so, when the latter lacked the necessary experience; (xi) alternatively the salvage liability was incurred to avoid a loss that would have been proximately caused by the fortuitous incursion of seawater into the vessel via the defective scupper valve; (xii) in the further alternative the salvage liability was incurred to avoid a loss that would have been proximately caused by both the list (whatever caused that) and the entry of seawater through the defective scupper valves. The Claimant relied upon the principle that there can be two proximate causes of a loss and that it is sufficient that one proximate cause is an insured peril under the policy terms: The Miss Jay Jay.[13]

The Defendants’ case: The Defendants submit that: (i) the Claimant must show (on a balance of probabilities) that if the salvage agreements had not been concluded and the salvage not performed then the vessel would have been lost (or damaged) by one or more insured perils identified in the ITC Clause 6; (ii) the only proximate cause of the loss (had it occurred) would have been the list of the vessel; (iii) the Claimant cannot adduce direct evidence to show that the list was caused by the negligent acts of the Chief Engineer in operating the ballast system; (iv) nor can the Court infer, on a balance of probabilities, that the cause of the list was the negligent actions by the Chief Engineer; (v) if the only proximate cause of the loss of the vessel (had it occurred) would have been the list, then as the Claimant cannot prove that the list was caused by the negligent acts of the Chief Engineer, so it cannot prove the precondition of recovering under Clause 11.1 and 11.4 of the ITC; (vi) therefore the claim must fail.

The Defendants accepted that the vessel was stable on leaving Abidjan. They also accepted that if the salvage services had not been rendered, then the vessel would have capsized in about 4 days. Therefore, at least by inference, they accepted that the salvage liabilities were incurred by the Claimant to avoid, or in connection with the avoidance of the loss of the vessel. Thus the main issue at the trial was whether the vessel would have been lost as a result of one of the insured perils relied on: ie. negligence of the crew or perils of the seas. Because the Defendants did not plead any positive case on the cause of the list or what would have been the cause of the loss of the vessel, they could only attack the Claimant’s case in an attempt to weaken or demolish it. This attack was mounted at almost every point. Occasionally when making his final submissions, Mr Thomas QC for the Defendants appeared to be advancing a positive case that the cause of the vessel’s list was the defective condition of the vessel’s ballast system and the valves in particular. However he accepted that, ultimately, he could only suggest that and other “possibilities” for the list as a means of undermining the Claimant’s own case: ie. crew negligence.

The Issues on the Facts: In the light of the above, I think that the following issues of fact have to be resolved in order to decide whether the Claimant has proved its case and so can succeed in principle on its claim under Clause 11.1 and 11.4 of the ITC. I emphasise once again that, in the absence of a positive case from the Defendants, the principal issue is whether the Claimant has proved its case:

(1)          Is it proved that the vessel did not have any stability problems between leaving Abidjan and 10 February 1994?

(2)          When and how did the vessel’s list increase during 10 February 1994 and to about 2030 hours?

(3)          What conclusions can be drawn (if any) about the timing and the cause of the increase in the vessel’s list after about 2030 hours on 10 February 1994?

(4)          What would have been the cause of the vessel capsizing, but for the salvage operations?

E.            Findings on the Cause of the List

Assessment of the Evidence generally:   Only two witnesses of fact gave oral evidence and both were called by the Claimant. The Defendants submitted that the Chief Officer, Mr Anagyros Angelides, was not frank and honest, but was disingenuous and, in parts of his evidence, untruthful. I found that he was generally trying to assist the Court, but he found it very difficult to recall events of seven years previously. This inability lead to defensiveness and evasiveness on occasions. As far as Captain Filipis was concerned, he too was trying to assist the Court, but also found it difficult to remember the details of events so long ago. He had very little independent recollection of events and had to rely on his statements and documents.

Mr Angelides gave a contemporaneous statement which was taken on 24 February and 3 March 1994. Captain Filipis’ statement was taken on 28 September 1994. My approach has been to see if those contemporaneous statements are demonstrated to be unreliable by cross examination of both men at the trial or statements of other witnesses or other documentary material.

In general there were no challenges to the accuracy of the contemporary documents. However the Defendants did criticise the fact that some documents were missing or that there was no contemporaneous record of some actions by the crew.[14] Both sides criticised parts of the contemporaneous statements of various members of the crew as being either inaccurate or incomplete. In a case which came to trial so long after the events I have often had to try to reconcile these inconsistent statements without any particular help from the oral evidence. Again my approach has been to see how the oral evidence of Mr Angelides and Captain Filipis throws light on those statements, rather than taking their oral evidence as the chief source of the facts.

Issue One:           Has the Claimant proved that the vessel did not have any stability problems between leaving Abidjan and 10 February 1994?

The Claimant’s case is that there were no stability problems. It is submitted by the Claimant that there is no evidence to lead to a conclusion that there were stability problems. The Defendants tried to cast some doubt on this view, whilst being unable to assert a positive case. The Defendants relied on a statement of Captain Artemios Dracoutos, the Master of the “Seaford” (made in the Salvage Arbitration proceedings) that Captain Dimitrious Vassiliou of the “Vergina” had told him that the vessel had a stability problem and had sailed from Abidjan with a 6° to 8° list to starboard.[15] This indirect evidence could not be tested as Captain Dracoutos was not called and Captain Vassiliou could not be called because he had died before the trial. The Defendants also relied upon evidence of the replacement Chief Engineer Ntokouzis that there was an 8° list to port after dropping the pilot on leaving Abidjan and also evidence of the Radio Officer and the Cook concerning a list on leaving Abidjan. That evidence was untested. In my view it probably refers to a list when the vessel altered course after dropping the pilot and before the forward DB tanks had been refilled.

Against this there is overwhelming evidence that the vessel was stable, but had a small, ie. 1° to 2°, list during this period. The Master’s own statement says that was the list. That is confirmed by the Chief Officer’s statement, which he reiterated in oral evidence. There is further confirmation from the contemporaneous statements of the second and third officers and second and third engineers.

The Defendants relied upon three further pieces of evidence. First, the rough engine room log entries, which shoed that the ballast pump had been used during this period. It was put to Mr Angelides that this indicated that tanks had to be pressed up or emptied during this period. Mr Angelides did not record any use of the ballast pump in his contemporaneous statement. In cross examination he said that was because he was not asked about it at the time.[16]

Secondly they rely on the Master’s evidence that the Chief Engineer stated to him on 9 February that he was concerned about the vessel’s stability. Although the Master did not share these concerns, he ordered that the ballast valves should be opened up to allow gravitation filling of the lower tanks from the No 5 upper wing tanks to ensure the lower tanks were pressed up. Then the upper tanks were topped up with sea water. The Master’s evidence, which I accept, was that this had no appreciable effect on the vessel’s stability.

The Defendants say that the fact that some topping up was needed indicates the possibility that there was a problem with the ballast system’s valves. The third piece of evidence they rely upon is that of the Chief Officer that he was instructed by the Master to take two sets of ballast tank soundings on 9 February 1994. Two sets of soundings are recorded in the Chief Officer’s Soundings Book. However, both sets of soundings show that the vessel was ballasted as she had been after the No 2 DB tanks had been refilled after navigating the canal leaving Abidjan. This indicates that there was no substantial problem with the ballast system valves.

It was suggested to the Chief Officer in cross examination that one of the set of soundings recorded for 9 February was undertaken in fact on 10 February. Mr Angelides would not agree to that suggestion. In their final submissions the Defendants appear to accept that two sets of soundings were conducted on 9 February.

I am satisfied that there were ballast transfers between 7 and 10 February 1994. But there is no evidence to show that these transfers were from the No 3 DB tanks or from the centre stabiliser tank. It is likely[17] that they were routine transfers between the vessel’s heeling tanks, the upper wing tanks Nos 4 and 5, port and starboard. These were made necessary by the transfer of F.O. and other fluids.

Issue Two: When and how did the Vessel’s list increase during 10 February 1994 up to about 2030 hours?

The Master’s evidence was that before 0830 hours on 10 February the Chief Officer and the Bosum inspected the holds and the three stabiliser tanks as usual. They reported routinely that everything was satisfactory.[18] I accept this and the fact that it must mean that the holds and the transverse stabiliser tanks were dry at that time. That would confirm that there were no problems with stability caused by leakage through the ballast valve system.

The Chief Engineer’s own statement, given on 24 February 1994, was that the vessel’s list was between 1° and 3° from the time of leaving Abidjan until before lunchtime on 10 February. His contemporaneous statement does not say that he expressed concern about the vessel’s stability up until 10 February.[19]

The Chief Officer’s evidence was that the list began to increase from 2° to about 5° after the noon meal. The Claimant’s principal case is that this increase was probably caused by a transfer of F.O. into the F.O. settling tank (No 19) in the engine room. However, transfers were usually done twice a day and only about 20 tons at a time was usually transferred.[20] Such a transfer would not produce a list of 5°. It would take a 40 ton transfer to do so. But there was no direct evidence to suggest that such a large F.O. transfer had been made or why it should have been made.[21]

I would accept that a 20 ton transfer probably was made (from around 1300 hours) and that this would have increased the starboard list to about 3°.[22] That does not explain the further increased in list during the afternoon of 10 February reported by the crew.

The other explanation that is still advanced by the Claimant is that the Chief Engineer negligently pumped water into one or both of the starboard Nos 2 and 3 upper wing tanks.[23] In order to investigate that allegation it is necessary to consider the evidence on how the Chief Engineer became involved at all with the ballast system on 10 February 1994 and what he did.

The Master’s evidence was that when he was on the bridge at about 1400 hours the Chief Engineer came to him and expressed anxiety about the ship’s stability. The Chief Engineer requested that the DB tanks be pressed up, using the ballast pump, to ensure that they were full. The Master’s evidence was that he did not wish to do this but the Chief Engineer was so insistent that he agreed to the plan.[24]

The Chief Engineer does not give the same version of events in his contemporaneous statement. He says that it was the Master who approached him after lunch, told him that there was water in the stabiliser tank and requested the Chief Engineer to go to the ballast control room. He says that at this time the list was 8 to 10° to starboard.[25]

There is no corroboration for the Chief Engineer’s reported statement of the Master that there was water in the stabiliser tank. The Master could only have learned that fact from a sounding, but there is no record of such a sounding. Nor is there any such statement from the Master. Therefore I reject the Chief Engineer’s version of events and I accept that of the Master. His version is also consistent with what happened next, at which time there was no immediate attempt to remove water from the stabiliser tank.

It is clear that the two men went to the ballast control room and the Chief Officer met them there. The Chief Officer was told of the plans to press up all the ballast tanks and he was asked to check the soundings as that was being done. The Chief Officer detailed other members of the crew to do this, under the direction of the Bosun.

The Chief Engineer took charge of operations in the ballast control room. It is unclear why this was permitted, given that ship’s stability is normally the preserve of the Chief Officer rather than the engineers. The evidence is that prior to the afternoon of 10 February, only the Chief Officer had operated the ballast system.[26] There is no evidence that the Chief Engineer had any previous experience in running the ballast system on board the vessel, but I accept that the actual operation of the system should have been within the grasp of anyone with engineering knowledge. The Master’s evidence is that “for the sake of certainty” the Chief Officer showed the Chief Engineer the operations of the ballast system.[27] But the Chief Officer did not remain in the ballast control room whilst the pressing up operation was performed.

The Chief Engineer began the exercise of pressing up the lower ballast tanks at some time during the late afternoon. The precise time of this exercise is impossible to identify. The result of the exercise was that each ballast tank was recorded as full. But the Chief Engineer was not satisfied and wished to repeat the exercise, with the Chief Officer watching the tanks overflow as they were pressed up.

The Chief Engineer also wanted to check individually the tightness of the ballast system valves to each tank. Quite how this could be done remains obscure. In cross examination, Captain Bliault accepted that individual valves could not be tested in this way, because the valves to the tanks are all in one line. Therefore any test using suction against closed valves would show that either all the valves were tight or that one of tem in the line was leaking. It would not be possible by this method to identify which particular valve was leaking.

It is the evidence of the Chief Officer that after the second pressing up exercise, at some time between 1700 hours and 2000 hours, he took another asset of soundings. Those indicated that the DB tanks and lower side tanks were full. He said that he also checked the stabiliser tank visually and it was dry.[28] He also stated that he checked the holds and they were dry.

The Defendants challenged this evidence of taking soundings, saying that: (i) there is no contemporaneous record of it; (ii) the results attested to are inconsistent with the other evidence of an increasing list; and (iii) it is inconsistent with evidence that there was water in the stabiliser tank from midday on 10 February 1994.

Point (i) is correct, but is not a strong argument. There was a great deal going on in these last hours before the vessel was abandoned at 0030 hours on 11 February. I am not surprised that there was no official record or that any unofficial record has been lost. Point (ii) is correct, but the evidence of the precise amount of the list varies considerably, both as to its amount and its timing. So the inconsistency is not surprising. Point (iii) depends on the Chief Engineer’s evidence for the position at lunchtime. I have rejected that evidence. Mr Fraser Coombes, the reefer engineer, gave evidence in a statement[29] that the Master had told him that between 1700 and 1730 hours the crew were filling the centre stabiliser tank. But this is not reliable, being untested double hearsay. It is contrary to the tested evidence of the Chief Officer and also that of the Chief Engineer himself, who says that the Master instructed him to pump water out of the centre stabiliser tank.[30]

I have concluded that the Chief Officer did perform the soundings and inspections at about 2000 hours and made the findings of which he gave evidence. Captain Bliault states[31] that if all the DB tanks and the lower side tanks were full by the time the Chief Officer did his second round of soundings, then the only way to account for the increase in the vessel’s list is that the Chief Engineer pumped water into either or both the No 2 and 3 starboard upper wing tanks during the pressing up/valve tightness exercise. But Captain Bliault can only advance this as a possibility and in my view there is no evidence to turn that possibility into a probability. I also note that the Chief Officer did not report that water had got into those tanks at any stage before the vessel was abandoned.

Furthermore, the Claimant asks the Court to find that when the salvors and crew returned to the vessel on 14 February 1994, the Nos 2 and 3 upper wing tanks were empty. But if the Chief Engineer had filled them to some extent during the evening of 10 February, then that water would either have had to stay there or he would have had to empty them later in the evening of 10 February. There is no evidence of the latter action.

So I find that it is not proved that the Chief Engineer did put water into the Nos 2 and 3 upper wing tanks. As I am not satisfied that the Claimant has proved either of the two suggested reasons for the increase in the list from 1 to 2° to 5 to 8°, the cause of the initial increase in the list to 5 or 8° therefore remains uncertain.

Issue Three: what caused the increase in the list after 2030 hours on 10 February 1994?

The Master’s evidence is that at about 2030 hours when he was on the bridge he noticed that the list was about 8° to starboard. He says that shortly before this the Second Engineer had stated that he had been to the ballast control room and “corrected” the Chief Engineer’s operation of the ballast valves.[32] There is no elaboration of the nature of this “correction”. The Second Engineer does not mention it in his statement as recorded by Mr Mallin of Hill Taylor Dickinson, solicitors for the Claimant.[33] The Master’s record of what he was told by the Second Engineer is not, by itself, sufficiently weighty evidence on which to base a finding that the Chief Engineer had negligently operated the ballast system in some way.

Shortly after 2030 hours the Master sent the Chief Officer to investigate the list again. At about 2100 hours the Chief Officer discovered that there was water in the centre stabiliser tank. He said that the water did not extend across the tank to the port side. Mr Thomas QC accepted that there would have been water in the centre stabiliser tank by that time. He submitted that water would have been present in that tank at an earlier, but unspecified time. However the evidence of the Chief Officer was that when he had made his visual examination earlier at about 2200 hours, he removed the manhole covers on each side of the tank and shone a torch into the tank. His evidence was that the centre stabiliser tank was dry at that time. Mr Thomas challenged this evidence, but the Chief Officer confirmed it.[34] I am satisfied that the centre stabiliser tank was dry at the time of the first visual inspection around 2000 hours on 10 February.

The Claimant submits that the water observed at 2100 hours could only have got into the centre stabiliser tank through the ballast system. That must be correct. Mr Hofmeyr submits that this ingress could only have occurred as a result of the operation of the ballast control system by the Chief Engineer at some time after 2000 hours on 10 February because there was no other feasible means by which the water could get there. Mr Abel (the Defendants’ expert) accepted that a competent person would not put water into the centre stabiliser tank intentionally as it would endanger the vessel. He also accepted that, in the circumstances, to put water in that tank inadvertently would be negligent, for the same reason.

The Defendants submit that the operation of the ballast system console was so simple that it is inconceivable that the Chief Engineer should have made a mistake so as to admit water to the centre stabiliser tank after 2000 hours. I accept that this may be so when circumstances are normal and a person is acting rationally. However by 2000 hours there was a worrying list to the vessel and the Chief Engineer had been so concerned about the list that he had insisted on taking over control from the Chief Officer and the Master. His subsequent acts[35] show how agitated he was, if not panic striken.

I infer, on a balance of probabilities, that water was pumped into the centre stabiliser tank at some stage after 2000 hours as a result of the acts of the Chief Engineer in the ballast control room. I make this inference on the basis of the following facts: (i) the Chief Engineer was the only person operating the ballast control system at the time; (ii) no one suggests that water had deliberately been put into the centre tank during the voyage until this time; (iii) the centre stabiliser tank was found to be dry at 2000 hours, so its ballast valves had remained tight up until that time; (iv) if the vessel had a list of about 8°, then the centre stabiliser tank could contain about 102.5 tonnes of unpumpable water on the starboard side. [36] That is consistent with the observation of the Chief Officer; (v) Captain Bliault’s calculation was that it would take about 5 minutes to adjust the valves and about 17 minutes to pump 100 tonnes of water into the centre stabiliser tank,[37] therefore the pumping could have been done after 2000 hours and before the Chief Officer’s second inspection at 2100 hours; (vi) lastly, there is the makeweight evidence of the Master, reporting the Second Engineer, that he had “corrected” an action of the Chief Engineer in the operation of the ballast system.

After the Chief Officer’s inspection at 2100 hours he immediately reported to the Master that there was water in the centre stabiliser tank. The Master ordered the Chief Engineer to pump out the centre stabiliser tank. The Chief Engineer attempted to do this at first with the ballast pump. The attempt to pump out may have been partially successful, but because of the list this could not be completed by the ballast suction, which was on the port side. Therefore a portable submersible pump was placed in the stabiliser tank to pump it out. However it seems that it took between one and two hours to rig this up.

By 22000 hours the vessel’s list had increased to 12° to starboard. It is the Claimant’s case that during the period 2100 to 2200 hours, the Chief Engineer pumped ballast water out of the No 3 DB port. Again there is no direct evidence for this. I am invited to infer this from the facts that: (i) all the DB tanks were found to be full when sounded by the Chief Officer at 2000 hours; (ii) the vessel’s list increased even when attempts were made to pump water out of the centre stabiliser tank; (iii) the Chief Engineer was the only person operating the ballast control console during the period 2000 hours to 2200 hours; (iv) during that time he was attempting to empty the centre stabiliser tank, whose controls are next to those for the No 3 DB port tank; (v) when soundings were made on 14 February by the salvors and the Chief Officer, the No 3 DB port was found empty.

The Defendants submit that it is even less likely that the Chief Engineer would compound his first mistake (filling the centre stabiliser tank) with the mistake of emptying the No 3 port DB tank. They submit that this allegation is based only upon speculation. And they point out that in order to pump water into the centre stabiliser tank and then pump it out of the No 3 DB port, it is necessary to reverse the ballast/deballasting valves for the pumping exercise. They submitted that it was highly unlikely that this would be done in the time available.

As to the four points listed above, I have already found that points (i) and (ii) were the case. On point (iii), there is no evidence that any other officer operated the ballast control console after 2100 hours, whereas there is evidence that the Chief Engineer continued to stay in the ballast control room during this time and that he was the only person to operate the ballast valves.[38]

On point (iv) it is common ground that during the period 2100 to 2200 hours the Chief Engineer was attempting to do various things with the centre stabiliser tank. It is unclear whether he was trying to deballast it or press it up. The Master states[39] that the Chief Engineer told him that he must pump ballast into the stabiliser tank to top it up and reduce free surface. He said that this resulted in an argument between the two men. The Chief Engineer does not refer to this matter in his statement. Nor does the Chief Officer. The general tenor of this evidence was that he believed that the Chief Engineer was trying to deballast the centre stabiliser tank during this period.

On point (v) the Claimant submits that the evidence supports a conclusion that the No 3 DB port was found empty or largely empty by the Chief Officer and salvors on 14 February 1994.[40] The Defendants point out that there is no written record of any sounding on 14 February. They also rely upon two telexes sent by the Master of the “Leopard” to Tsavliris in Greece, recording soundings in the ballast tanks.[41] The first telex (of 14 February) apparently reports on starboard side soundings, but the Defendants accepted that they must be port side soundings.[42] The telex states that the sounding pipes were absent for the Nos 3 and 4 DB tanks. The Defendants say that this, together with the difficulty of taking accurate soundings with the vessel then listing at 28°, suggests strongly that no soundings of No 3 DB tank were made that day. The telex of 15 February appears to muddle port and starboard.

I have concluded that I should accept the evidence of the Chief Officer and Captain Filipis that the sounding of No 3 DB was done on 14 February and that it was found to be empty. This is corroborated by one piece of contemporary documentary evidence: a telex from Tsavliris in Greece to the Master of the “Leopard” timed at 1722 hours on 14 February.[43] It is clear that this was sent in reply to the telex of 1547 hours, because it refers to “yr tlx dd 14.02.94 regarding soundings readings”. The reply telex instructs the Master of the “Leopard” to try the following actions on port tanks: “remove vent head of DB Nr 3 port; fill up DB Nr 3 port…Caution: please stop ballast actions when list reaches 15 degr then report soundings on all tanks (port and strd)”. In my view that suggests strongly that Tsvaliris had sufficient information to know that No 3 DB port was empty (or at least substantially so) and that it was necessary to fill it up to assist in reducing the list.

I also accept the evidence of Chief Officer, as set out in his contemporaneous statement[44] that the state of the vessel’s tanks on taking soundings on 14 February was as follows: (i) the centre stabiliser tank was almost full on the starboard side, but because of the list (then 28°) it was below the ballast suction on the port side; (ii) No 4 DB was slightly slack; (iii) all the other port lower side tanks and DB tanks were full; (iv) Nos 2 and 3 port upper wing tanks were empty; (v) all the starboard side ballast tanks were full. This state of affairs is consistent with a list of 23° when the crew abandoned ship, according to Mr Levy’s calculations,[45] which were not challenged on this point.

Having concluded that the No 3 DB port tank was empty when the Chief Officer took soundings on 14 February, it must follow that this was the state of that tank when the vessel was abandoned. This is because the Chief Engineer’s own account is that when he left the ballast control room he put all the ballast valves in the closed position and stopped the ballast pump.[46] Therefore the position on the evidence that I have accepted is that: (i) the No 3 DB tank (together with all the other DB tanks) was full at 2000 hours; (ii) between that time and the abandonment of the vessel at 0030 hours on 11 February the only person who operated the vessel’s ballast system was the Chief Engineer; (iii) he was attempting to empty (or perhaps at some stage press up) the centre stabiliser tank; (iv) the switches for that tank are adjacent to those for the No 3 DB tank port on the console; (v) at the time the vessel was abandoned the No 3 DB port had been emptied of ballast water. I find, on a balance of probabilities, that the No 3 port DB tank was emptied as a result of the deliberate or accidental actions of the Chief Engineer.

Mr Abel’s evidence was that a deliberate action by the Chief Engineer to empty No 3 DB port would be a very dangerous thing to do.[47] He believed that it would be very very unlikely for an operator of the ballast console to open the valve for the No 3 DB port rather than the centre stabiliser tank.[48] I am prepared to accept both opinions. But in the circumstances on board this vessel after 2100 hours, I have concluded that it cannot be assumed that the Chief Engineer was acting rationally. In this regard I accept the Master’s evidence in his statement that the Chief Engineer wanted to fill the centre stabiliser tank at about 2200 hours;[49] later the Chief Engineer attempted to seek advice from other ships by using the VHF to call them;[50] and when the Master gave the order (at about 2330 hours) to prepare the boats in case it was necessary to abandon ship, the Chief Engineer jumped into a life raft before the order to abandon ship was actually given.[51]

There is no dispute that at about 2200 hours the Master obtained permission to put seawater ballast into the No 9 fuel tank. The evidence of both the Master and the Chief Officer is that after that exercise had been organised, the Chief Officer was ordered to inspect the holds. This was at about 2300 hours. The Chief Officer performed a visual inspection of all the lower holds. Nos 1, 2, 4 and 5 were reported as dry. The Chief Officer’s evidence was that he went into the No 3 hold and saw water had accumulated at the forward end.[52] He could not see how the water was getting into the hold; it was not coming from the bilge well. The Chief Officer reported this to the Master and orders were given to pump out the bilge and then the hold itself. At the same time the Chief Officer reported that there was some water on the Ro-Ro deck.[53]

The Claimant’s technical case is that the water found in the No 3 hold had entered through an open scupper valve which was either faulty or stuck in the open position. The Claimant says that water could get in through an open scupper valve once the vessel had assumed a list of about 10°.[54] Therefore the ingress of seawater into the No 3 hold was the result of the list, not an initial cause of it. However, the Claimant submits that once water entered the No 3 hold, that would contribute to the list, albeit to a small extent only, but it would also lead to the eventual capsize of the vessel. Mr Abel does not deal with this issue in his report. He was asked whether he had considered it at all; he said he had but he did not elaborate on this.[55]

The Master’s statement says that he forgot to order the closure of the screw down valves on the “overside drains” from the Ro-Ro deck hatch cover gutters. He also says that he access hatches from the Ro-Ro deck to the holds were open and he had forgotten that fact also.[56] This would explain the entry of seawater into both spaces as observed by the Chief Officer when he inspected the holds at about 2300 hours.

It was agreed that, given the vessel’s loads on this voyage, the vinel vents fitted to the ballast tanks and situated in the void spaces above the main deck level would become submerged on the starboard side when the vessel was at a list of about 13.6°. It is Captain Bliault’s evidence that once this happened, water would have entered the Nos 2 and 3 starboard side upper wing tanks through those valves and that would have increased further the vessel’s list.[57] Captain Bliault was not challenged on that opinion in cross examination.

However, Mr Abel said in evidence that he thought it unlikely that water would get into those tanks via the air vent vinel valves because he thought that would mean there was quite a considerable quantity of water on the Ro – Ro deck.[58] I am not sure how relevant that comment was, because the air vent pipes went horizontally overboard once they had passed the vinel valves. They did not vent vertically through the Ro – Ro deck. However, even if his comment is relevant, it is clear on the evidence that there was water on the starboard side of the Ro – Ro deck. The Master reports that the observed this when he returned to the vessel on 11 February.[59] Therefore I find that water could have got into the Nos 2 and 3 starboard side upper wing tanks and had done so via the vinel vent pipes.

F.            What would have been the cause of the vessel capsizing but for the salvage operations?

As I have already noted, it is accepted by the Defendants that the vessel would have capsized in about 4 days, but for the intervention of the salvage teams. I have concluded that the actions the Chief Engineer in the operation of the ballast control system during the period after 2000 hours on 10 February resulted in an increase in the list of the vessel beyond 10°. I have specifically concluded that his actions resulted in water being pumped into the centre stabiliser tank and out of the No 3 DB tank port. His actions were either deliberate or unintentional. In either case it was accepted by Mr Abel[60] that they would be negligent in the circumstances that prevailed in the evening of 10 February 1994. I therefore next have to consider whether the actions of the Chief Engineer would have been a proximate cause of the vessel capsizing, but for the intervention of the salvage teams.

It was the Defendants’ case that, as a matter of law, whatever actions caused the vessel’s list never lost their “grip” on the vessel, so that the particular cause(s) of the list would have been the proximate cause(s) of the loss of the vessel, had it occurred.[61] I have concluded that the actions of the Chief Engineer in operating the ballast system were the main, if not the only, cause of the list increasing to more than 10°, at which point water would enter the open scuppers valve. I have also concluded that the actions of the Chief Engineer were negligent. It must follow on those findings that the Claimant has proved that, but for the salvage operations, the vessel would have been lost by negligence of the Master, Officers and Crew within Clause 6.2.3 of the ITC. Therefore the Claimant must succeed in principle in its claim under Clause 11.1 and 11.4 of the ITC. The salvage liability was incurred in order to avoid the loss of the vessel by an insured peril, that is “negligence of Master,Officers and Crew” within Clause 6.2.3 of the ITC.

The Claimant’s “alternative” cases: As I have already noted, the Claimant had two subsidiary ways of putting its claim. First it said that the Master had been negligent in allowing the Chief Engineer to work the ballast system because he had no knowledge or experience to do so competently. Secondly, that in any event the Court should hold that one proximate cause of the loss of the vessel (had it capsized) would have been the incursion of seawater through the open scupper valve and that event constituted a “peril of the seas”.

Master’s Negligence:      On the first of those arguments I agree with the Defendants’ submission that any negligence of the Master in allowing the Chief Engineer to operate the ballast system could not have been causative of the loss (had it occurred) unless the Chief Engineer himself had acted negligently. So the is argument adds nothing to the primary case.

Loss by “peril of the seas”:           The second argument raises different issues, which are both legal and factual. On the law the position is that if, as a matter of fact, a Court finds that there are two proximate causes of a loss, then provided that one of those proximate causes falls within a peril covered by a policy of marine insurance and the other is not excluded by the policy terms, the Claimant will be entitled to recover under the policy. However, in order to recover, the court must conclud on the facts that the cause that is covered by a policy peril constituted a proximate cause of the loss: JJ Lloyd Instruments Ltd v Northern Star Insurance Co Ltd: The “Miss Jay Jay”.[62]

Thus, in this case, the Claimant must satisfy me that the ingress of seawater via the open scupper valve would have been a proximate cause of the loss of the vessel, but for the intervention of the salvors.

But if I was satisfied on that, then the Defendants say there is a further difficulty in the way of the Claimant. The Defendants submit that the ingress of seawater would not have been a “peril of the seas” within Clause 6 of the ITC. It was simply “the inevitable action of the wind and waves” rather than a fortuitous accident or casualty of the seas. Therefore, in accordance with Rule 7 for the Construction of a Policy,[63] it cannot come within the expression “perils of the seas”. The Defendants submit that the passage of water through a hole has never been held to be a” peril of the seas”.[64]

Would entry of seawater into the open scupper valve have been a proximate cause of the capsizing if there had been no intervention by the salvage team?

Mr Levy performed calculations which showed that the vessel would have capsized as a result of an increase of floodwater in hold No 3. Once the floodwater amounted to about 2500 tons, the angle of heel would have increased until the vessel capsized at 31° with 3500 tons of floodwater.[65] Therefore the entry of seawater into the No 3 hold via the defective scupper valve would have been necessary for the vessel to capsize.

So would the entry of seawater into the No 3 hold via the open scupper valve have been a “proximate” cause of the loss, but for the intervention of the salvors? In my view it would have been. The effect of Mr Levy’s unchallenged expert evidence and calculations is that the entry of water into No 3 hold would have led to the capsize and without it there would have been no capsize. As the sequence of events would have been: (i) the list, leading to (ii) the incursion of seawater via the open scupper valve into No 3 hold, leading inevitably to (iii) the capsize; and as I am satisfied that without (ii) then (iii) would not have occurred, that must make the incursion of seawater through the open scupper valve a “proximate” cause of the loss, had it occurred.

That does not mean that the list would have ceased to be a “proximate” cause of the loss. That would only be so if the incursion of seawater had obliterated the effect of the list. But it is clear that the effect of the list would have continued to act on the casualty, so that eh two factors would have been equally operative causes of the eventual capsize had it occurred.

Was the entry of seawater a “peril of the seas”?

The reasons why seawater entered through an open scupper valve were: (i) it was either defective or had been accidentally left open; (ii) the vessel had developed a list of over 10°, (iii) the reason for the list was that, for whatever reason, the vessel’s ballast arrangements were not as they were intended to be; they were abnormal. Therefore, in my view the entry of seawater was a fortuitous accident because it resulted from a state of affairs that was accidental, unintended and not inevitable. The occurrence was not something that was inevitable when the vessel left Abidjan or even on the morning of 10 February 1994.

This case is easily distinguishable from the first of the two cases relied upon by the Defendants. In the Sassoon case[66] the Privy Council[67] upheld the trial judge’s finding that the sole cause of the damage to the opium cargo was the weakness of the wooden hulk in which it had been stored. Lord Mersey, giving their Lordships’ advice, stated that, as this was the case, it would be “an abuse of language to describe this as a loss due to perils of the seas”.[68]

In the second case relied on, Mountain v Whittle,[69] the House of Lords upheld the concurrent findings of fact of the trial judge and the Court of Appeal. They held that the unusual size of a breast wave created during the tow of the insured house boat caused water to flood into the vessel. Because the wave was exceptional, the incursion of seawater was fortuitous and so constituted “perils of the seas”.[70]

Accordingly, I have concluded that the incursion of seawater into the No 3 hold via an open scupper valve was a fortuitous accident in the circumstances of this case. It was a peril that was peculiar to the seas and so constituted “perils of the seas” within the terms of Clause 6.1 of the ITC.

Therefore the Claimant would be entitled to succeed on its claim on the basis that the salvage liability was incurred in order to avoid the loss of the vessel by an insured peril, ie. “perils of the seas”.

G.           Quantum Issues

By the end of the trial there were few remaining issues on quantum. Thus:

(1)          The Defendants accepted that the Claimant had paid the owners of the “Seaford” the sum of US$ 34,000;

(2)          The Defendants accepted that the whole of the Salvage Award in favour of the owners of the “Happiness II”, which was agreed as a compromise between the parties, was recoverable by the Claimant;

(3)          The Defendants accepted that the amount paid to Tsavliris was recoverable by the Claimant. However there may be some outstanding issues on interest which remain to be resolved.

The only issue that was not agreed related to the costs liabilities that the Claimant incurred in the salvage proceedings and its own costs in defending those proceedings. If those cannot be agreed then they will have to be referred to the Admiralty Registrar for assessment.

H.            Conclusions

My conclusions are as follows:

(1)          The salvage liabilities paid by the Claimant were incurred to avoid the loss of the vessel.

(2)          The salvage liabilities constitute a “loss” within the meaning of Clause 11.4 of the ITC.

(3)          If the vessel had not be salved, then she would have capsized and been lost. There would have been two “proximate” causes of that loss of the vessel. They would have been: (i) the increase in the vessel’s list caused by the negligent acts of the Chief Engineer in operating the switches on the ballast control console during the evening of 10 February 1994, resulting in ballast water being introduced into the centre stabiliser tank and being emptied from the No 3 port DB tank; and (ii) the fortuitous incursion of seawater into the No 3 hold via an open scupper valve after the vessel had achieved a starboard list of about 10°, which would have constituted “perils of the seas” within Clause 6.1.1 of the ITC.

(4)          Accordingly the vessel would have been lost (but for the salvage operations) by a “peril insured against” within the meaning of Clause 11.4 of the ITC. In the context of that clause the phrase “peril insured against” refers to the perils set out in Clause 6 of the ITC. Those include the loss of the insured vessel by (i) “Negligence of Master Officers [and] Crew…” (Clause 6.2.3); and (ii) “perils of the seas…” (Clauses 6.1.1).

(5)          In principle the Claimant is entitled to recover all the salvage liabilities claimed.

I am very grateful to counsel, their solicitors and the experts for all the help they have given me in this case.

Note 1   Clause 11 is set out at para 30 below.    [Back]

Note 2   These are both insured perils under Clause 6 of the ITC.    [Back]

Note 3   There was a dispute as to which witness statements or parts of them the Claimant was entitled to rely upon, in the light of a ruling I made on the second day of the trial, to which I refer below.     [Back]

Note 4   Of Marine Consulting Ltd     [Back]

Note 5   Of Brookes, Bell, Jarrett, Kirman.     [Back]

Note 6   The vessel was scrapped in September 2000.    [Back]

Note 7   As will become plain, and as the experts agreed, these tanks did anything but provide stability.    [Back]

Note 8   As the Defendants had eschewed pleading a positive case they could not put the point any higher.    [Back]

Note 9   Ruling given on Day 2: 6 February 2001.    [Back]

Note 10   GM: as the metacentric height is positive this meant that the vessel had positive stability. There was no dispute that the vessel was stable on departure from Abidjan.    [Back]

Note 11   Compare the wording at the end of Clause 6.2.5 and at Clause 8.4 of the ITC.    [Back]

Note 12   Points of Claim paras 12; 13 and 14.    [Back]

Note 13   [1987] 1 Lloyd’s Rep 32 (CA).    [Back]

Note 14   Most importantly soundings in the evening of 10 February 1994 and soundings taken when the Chief Officer returned to the vessel on 14 February 1994.    [Back]

Note 15   Bundle P/page 184 para 23    [Back]


Gan Insurance Company Ltd. v The Tai Ping Insurance Company Ltd.

[2002] EWCA Civ 248 [2002] Lloyd’s Rep IR 612, [2002] CLC 870,  Mance LJ

Issue (B) – failure to act in a proper and businesslike manner

We turn to issue (B), whether Gan has a real prospect of showing a failure by Tai Ping to act in a proper and businesslike manner in settling Winbond’s claim. The judge started his judgment on this issue, by saying:

“Mr Railton’s insistence that Gan should not be permitted to depart from their pleaded case is particularly relevant to [this] issue …..”

Earlier in his judgment, the judge made clear that Gan’s solicitors’ letter dated 5th December 2000, suggesting certain amendments, did not touch on this issue. The pleading position was (and remains) as follows. In paragraph 7(12) of its defence, Tai Ping had pleaded that its settlement with Winbond at the end of July 1997 was reasonable and businesslike. In its reply, paragraph 22, Gan denied this. As a matter of law, however, the onus lay upon Gan to plead and prove any failure by Tai Ping to act in a proper and businesslike manner in settling Winbond’s claim: see eg Insurance Company of the State of Pennsylvania v Grand Union Insurance Co [1990] 1 Ll.R 208. Mr Fisher, in his affidavit, suggested that the onus must be reversed under a reinsurance where paragraph (b) of the CCC is incorporated and/or broken. But the incorporation and any breach of paragraph (b) give rise to independent rights and remedies. We do not see that they affect the onus regarding any residual duty to ensure that any settlement is made in a reasonable and businesslike manner, and Mr Edelman did not argue the contrary before us.

In response to Tai Ping’s request for further information in respect of Gan’s denial, Gan pleaded failures by Tai Ping in seven specific respects, which the judge set out. The first related to Tai Ping’s failure to obtain Gan’s consent, a matter which, as the judge pointed out, went only to paragraph (c) of the CCC. The second, fourth, fifth and sixth particulars all relied on the false premise that Winbond had represented on placement that there were fire precautions in accordance with the Angel drawings, and the third on the false premise that Winbond had represented that permanent fire precautions were or would be in place. The seventh and last related to Winbond’s alleged failure to co-operate, an allegation which the judge had already rejected, and a particular which could anyway only go to paragraph (b) of the CCC. Before us, the judge’s rejection of each of these particulars was not challenged by Gan.

The sole aspect of issue (B) with which we are concerned arises as follows. The evidence before the judge included a witness statement dated 3rd November 2000 of Mr Fisher, of Gan’s solicitors. This included some 16 paragraphs (nos. 39 to 53) advancing further points on issue (B) on which Gan sought to rely. In reply Tai Ping’s solicitors wrote on 9th November 2000, giving notice that they would submit that parts of Mr Fisher’s statement should be ignored as addressing unpleaded and therefore irrelevant issues. In a further witness statement on 17th November 2000 Mr Lowe of Tai Ping’s solicitors again refused to address unpleaded issues. As we have pointed out, neither in Gan’s letter dated 5th December 2000 nor in any other way, did Gan then suggest any amendment of its pleadings in relation to issue (B).

The judge dealt with Mr Fisher’s evidence in the context of issue (B) as follows:

“I should, however, add that there is nothing in Gan’s evidence which suggests to me that the settlement was not proper and businesslike for some reason which has not been pleaded.  I would specifically mention two points:

a) First, Gan relied heavily on the views expressed by other reinsurers.  I cannot tell what information those other reinsurers had when they criticised Tai Pingand the other Taiwanese insurers. Gan cannot simply rely upon the views of other reinsurers to answer the application for summary judgment.

b) Secondly, in their facsimile of 1 August 1997 Tai Ping refer to pressure from the Ministry of Finance and “the publicity concern of Insurers’ social image”. It does not seem to me that these remarks raise real issues about the proper and businesslike nature of the settlement, reading the facsimile as a whole, bearing in mind the small difference between the settlement figure and that which the “main reinsurers” approved and having regard to the evidence of Mr Hayden. It is striking that Gan do not state in their evidence that they believe that Winbond’s claim could have been settled for less than the amount paid by the insurers, not that the insurers had a good defence to the claim, nor that at a trial Winbond would have been awarded less than NT$2.65 million.”

Gan’s failure to raise the aspects of the settlement which are now said to have been unbusinesslike until Mr Fisher’s statement can be readily understood. Mr Fisher was only able to address these aspects at all, because of documentation exhibited to and disclosed for the first time by Tai Ping (in the context of the argument about whether the settlement had involved an “admission”) by an affidavit of Mr Paul Hayden of Tai Ping’s solicitors sworn 11th October 2000. The documentation included a number of letters from other reinsurers of Tai Ping, complaining about Tai Ping’s failure to keep them informed or otherwise co-operate. If failure to co-operate by Tai Ping in relation to Gan is immaterial to the issue whether the actual settlement was reasonable and businesslike, failure to co-operate with other reinsurers must a fortiori be immaterial. In the lengthy paragraphs of his statement, Mr Fisher also cited extensively from the other reinsurers’ correspondence and complaints. Embedded in these paragraphs, one can also find submissions that the documentation disclosed a case requiring trial, to the effect that the settlement was made in the face of differing legal opinions (Liao & Partners’ and that of Dragon Juniper in association with Masons), without seeking to resolve these by obtaining from Winbond documents suggested by Baker & McKenzie, lawyers instructed at the instance of Tai Ping’s other reinsurers, and/or without obtaining Baker & McKenzie’s final view (see paragraph 44 of Mr Fisher’s statement, referring to Baker & McKenzie’s subsequent report dated 27th August 1997), and a submission that reinsurers’ correspondence disclosed a case that  Tai Ping had, in effect, capitulated in the light of its own commercial interests, rather than on the basis of the legal merits (paragraph 45 et seq.).

The other reinsurers’ correspondence contained vigorous expressions of surprise and indignation at the way in which Tai Ping had, without further discussion or notice, moved from figures which had been arrived at, in lengthy meetings with legal advisers and reinsurers, as the highest that could be offered to Winbond, to the still higher figure at which settlement was reached. They also expressed concern about the part played in Tai Ping’s thinking by “local business considerations”. Swiss Re recorded a repeated reference by Tai Ping of its worries about “damage to reputation” and “loss of business” and asked rhetorically whether Tai Ping considered that Swiss Re should finance such concerns.  Tai Ping’s own letter dated 1st August 1997 said, as the judge noted, that the considerations which had influenced Tai Ping included “the hard pressure of Ministry of Finance, the publicity concern of Insurers’ social image”.

It is something of a mystery why Gan did not attempt to formulate any amended case on issue (B) in December 2000, or before the matter came on before the judge in 8th February 2001. The only explanation we were given was that Gan did not wish to incur unnecessary expense, but that did not prevent it producing draft amendments on other aspects by its letter dated 5th December 2000. It is true that, in order to resist an application under Part 24, the respondent to the application need not file a defence. If he has not already done so, the time for doing so is suspended – see Part 24.4(2) – and any factual defence which the respondent may wish to advance will simply appear in the evidence it files under Part 24.5(1). The position is somewhat different if the respondent has already filed a defence. Even so, we have no doubt that circumstances can arise in which a respondent might, without presenting any formal draft, properly raise in evidence a new factual defence, particularly one which had only just come to its attention and which must necessarily depend for its merits on further disclosure of documents and information by the applicant. A decision to give judgment under Part 24 is no mere procedural decision. It is one which deprives the respondent of any opportunity ever to pursue a claim or defence, which is said to have no real prospect of success, in this case before full documentation or information is available. Nevertheless, it is incumbent on a respondent to make sufficiently clear in a concise way the nature of any such proposed claim or defence.

In the light of Mr Fisher’s somewhat diffuse statement, the absence of any draft amendment and the submissions before him, the judge considered that Gan should be confined to its pleaded case, although, for good measure, he added two comments on Mr Fisher’s new points. We do not of course have a transcript of the submissions before him, although we have counsel’s skeleton before the judge and the original skeleton lodged to seek permission to appeal. It seems to be fair comment that the principal emphasis placed before him was on Tai Ping’s dealings with other reinsurers and on the fact and severity of the criticisms levelled in this regard by such reinsurers.

Subsequently to the hearing before the judge, Gan has sought to formalise and regularise its case by “volunteering” particulars. These are still based on the other reinsurers’ correspondence, but they identify specific respects in which, it is submitted, Gan ought to be allowed to pursue a case that Tai Ping’s conduct was unbusinesslike. Their basic theme is that the correspondence asserts and/or raises the inference that the settlement far exceeded any figure which could be justified by the prospects, as discussed and assessed at the time. The voluntary particulars further state that the correspondence asserts and/or raises the inference that other reinsurers were surprised or sceptical about a number of matters, such as (in summary) that (i) the settlement exceeded the level of any authorisation they had given, (ii) Tai Ping’s “sweeping concessions” simply capitulated, in the face of Winbond’s threat to claim punitive damages and/or in order to close the file, and/or because of local business considerations, damage to reputation or loss of business, (iii) the use of Liao & Partners and/or failure to involve Baker & McKenzie and the apparent difference between these firms regarding the facts and (iv) the failure to use a form of settlement prepared by Baker & McKenzie (the form used instead having according to counsel’s skeleton before the judge a number of defects summarised by Baker & McKenzie in its letter dated 27th August 1997 written after the settlement).

These voluntary particulars may still be open to criticism for appearing to plead as material the fact that reinsurers’ criticisms were made, rather than the underlying facts asserted by the criticisms. But in his submissions before us Mr Edelman made clear that Gan’s case would be that Tai Ping acted in an unbusinesslike manner in some or all of the respects identified by the reinsurers. In particular Tai Ping went beyond any justifiable level of settlement, it side-lined Baker & McKenzie and it allowed extraneous factors to influence it to (in effect) give in to Tai Ping. It seems quite likely that, despite the way in which they are drafted, that was what the voluntary particulars also intend. Any actual amendment of the pleadings will no doubt make clear that the case intended relies on the actual facts being as reinsurers asserted, and not on the making of the assertions.

In response, Mr Railton maintained his submission that the judge was right to approach the matter on the basis of the pleaded case and submitted that we should do so too. He further submitted that even Gan’s case as now put still lacked any real prospect at trial. In this last respect, Mr Railton pointed to a report of the adjusters, GAB Robins, dated 12th August 1997, stating their conclusion that the settlement was “not unreasonable” and recommending it “for favourable consideration”. This was, of course, written after the event in circumstances which have not been investigated. Mr Railton also relied, as did the judge, on the absence of any evidence that Winbond’s claim could have been settled for less than it as, although Mr Railton qualified this by adding that “the closest that Gan comes to this is to suggest that Tai Ping gave in too early and settled for too much as a result of local pressure”. The qualification is, in our judgment, of relevance. The matters which Gan now wishes to raise go beyond reliance on mere “views” of reinsurers about the appropriateness of the settlement. So viewed, the other reinsurers give sufficient chapter and verse about their complaints, to justify further enquiry as to whether or not Tai Ping did handle this claim in a reasonable and businesslike manner. We are looking at the matter at an interim stage, before full discovery. Although there is an onus on Gan, Gan was not itself involved at the time and its only source of information is what Tai Ping happens to have disclosed to Gan by Mr Hayden’s affidavit. The court should not, in this situation, set too high a barrier to further investigation.

The same applies, it seems to us, to the submission (adopted by the judge) that the evidence does not positively assert that a lesser settlement could have been reached. The obligation is to reach a settlement in a reasonable and businesslike manner. If, as we consider, there is now a case meriting further investigation as to whether Tai Ping did act in such a manner, there seems to us also to be a sufficiently real prospect that this may have had an effect on the ultimate settlement figure, to justify further investigation and trial. The gist of reinsurers’ complaints was, after all, that carefully considered settlement figures perceived as maxima had been exceeded, and that Tai Ping may have been influenced by extraneous matters (although, we add, we heard no argument on the question whether and to what extent the matters referred to by reinsurers would count as extraneous in this context). In this connection, we add that it seems to us very arguable, as Gan submitted, that the judge under-estimated the difference between the settlement level which most reinsurers were prepared to contemplate and the level at which Tai Ping, without their consent, in fact settled.

In these circumstances, we have come to the conclusion that, however the matter may have been put and may have appeared before the judge, it would be wrong now to refuse to allow Gan to pursue its defence that Tai Ping acted in an unbusinesslike manner in making the settlement it did. We have some sympathy with the judge’s refusal to look beyond the pleadings, having regard to the uncertainty and imprecision regarding the nature of the broader case being presented to him. We are not well placed to judge how precisely the matter was argued, and in any event we consider that Gan’s lawyers should have set out the new points Gan would wish to add to the existing particulars of its reply in a concise written form in advance of the hearing. However that may be, we are confident, at least in the light of the voluntary particulars and the further explanation of Gan’s case given before us by Mr Edelman, that Part 24 is now at all events inappropriate.

We would accordingly set aside the judge’s order in relation to this part of Gan’s case. We will hear counsel on the precise form of order appropriate to give effect to this judgment.

Order:

The Claimant’s appeal be allowed in part and dismissed in part and that the Order, dated 8th February 2001, of the Honourable Mr Justice Andrew Smith, be further varied (further to the variations effected by this Court’s Order of 3rd July 2001) as hereinafter set out:

The Claimant to be at liberty to advance at trial the Claimants’ contention, as set out in paragraph 22 (1st line) and paragraph 36 of their Re-Amended Points of Reply, to the effect that Tai Ping did not act in a proper and businesslike manner in reaching and making its settlement with Winbond.

Paragraph 8 of the Re-Amended Points of Claim and the words “and without having co-operated with the Claimant in respect of the matters set out above” in paragraph 9 of the Re-Amended Points of Claim, be struck out, the Claimants having no reasonable prospect of succeeding on this issue at trial.

Costs before Andrew Smith J to remain undisturbed.

Costs before the Court of Appeal on this appeal to be costs in the case.


 K/S Merc-Scandia XXXXII v Certain Lloyd’s Underwriters & Ors

[2001] EWCA Civ 1275 : [2001] Lloyds Rep IR 802, [2001] EWCA Civ 1275, [2001] CLC 1836, [2001] Lloyd’s Rep IR 802, [2001] 2 LLR 563, [2001] 2 Lloyd’s Rep 563 Longmore LJ

Development of the law of post-contract good faith

(1)          Fraudulent claims

The law about the making of fraudulent claims originally developed in fire insurance cases, see Levy v. Baillie (1831) 7 Bing. 349; Goulstone v. Royal Insurance Co (1858) 1 F.&F. 276; Britton v. Royal Insurance Co (1866) 4 F.&F. 905. The inclusion of some such clause as is now in Lloyd’s J Form has always been common; the same principle will apply as a matter of law, even in the absence of an express term. I have already observed that there is some debate whether the relevant principle of law is an example of the application of the good faith principle giving rise only to a right of avoidance or a separate development of law. There is no evidence that Sir Mackenzie Chalmers had this line of authority in fire insurance cases in mind when he drafted section 17 of his marine insurance code. The concept, would in any event, be alien in a field, such as marine insurance, where most, if not all, policies, were “valued” policies. One of the important conclusions of the Star Sea was that when it came to making a claim, the duty of the insured was one of honesty only. In any event the present case is not a case where the insured has made a claim at all, let alone a fraudulent claim.

(2)          Variations to the risk

A duty of good faith arises when the assured (or indeed the insurer) seeks to vary the contractual risk. The right of avoidance only applies to the variation not to the original risk, Lishman v. Northern Maritime Insurance Co (1875) L.R. 10 C.P. 179 and Iron Trades Mutual v. Cie de Seguros [1991] 1 Re. L.R. 213, 224 and The Star Sea para. 54 page 188D-F. There is no authority for a proposition that a fraudulent misrepresentation leading to a variation will avoid the original contract as well as the variation.

(3)          Renewals

A duty of good faith exists when the insured seeks to renew the contract of insurance. That is a prospective right and if it is not observed by each party, the other party can avoid the contract. It is never suggested that, although the breach takes place during the currency of the earlier contract, the earlier contract is avoided as well as the renewal.

(4)          “Held covered” cases

The requirement that an insurer hold the insured covered in certain circumstances has been held to require the exercise of good faith by the insured. To the extent that the result is a variation of the contract, eg because an addition premium has to be assessed, these cases are examples of (2) above; to the extent that they are only an exercise by the insured of rights which he has under the original contract they are somewhat puzzling; but, although it is settled that good faith must be observed, it is never suggested that lack of good faith in relation to a matter held covered by the policy avoids the whole contract of insurance.

(5)          Insurer having right of cancellation

I have already said that the existence of such a right has been held not to give rise to the duty of good faith, New Hampshire v. MGN [1997] L.R.L.R, 24, 58-62, Issue K.

(6)          Insurer asking for information during the policy

If the insurer has a right to information by virtue of an express or an implied term, there may be a duty of good faith in the giving of such information. Typically such requirements will be in liability policies and reinsurance contracts (which are, of course, only one form of liability insurance), see eg Phoenix General Insurance Co v. Halvanon Insurance Co Ltd [1985] 2 Lloyds Rep 599. It is not usually suggested that breach of any such term gives rise to a right to avoid the contract rather than a claim to damages. To the extent that Alfred McAlpine v. BAI Insurance [2000] 1 Lloyds Rep 437 accepts that giving of information attracts obligations of good faith, it does not support any concept of avoidance in the absence of prejudice to underwriters in connection with their ultimate liability for the claim. If there is no right in the insurer to be given information but he asks for information, no duty of good faith arises as such. The only duty of the insured will be not materially to misrepresent the facts in anything he does say to insurers. If he does make any such misrepresentation, the insurer will have ordinary common law remedies for any loss he has suffered, Iron Trades Mutual v. Cie de Seguros [1991] 1 Re L.R. 213, 224.

(7)          Other situations where good faith may be implied

Such other situations may arise under liability policies, particularly if the insurers decide to take over the insured’s defence to a claim. Interests of the insured and the insurers may not be the same but they will be required to act in good faith towards each other. If for example the limit of indemnity includes sums awarded by way of damages, interest and costs, insurers may be tempted to run up costs and exceed the policy limit to the detriment of the insured. The insured’s protection lies in the duty which the law imposes on the insurer to exercise his power to conduct the defence in good faith. In such circumstances Sir Thomas Bingham M.R. could not “for one instant accept . . . [the] suggestion that a breach of this duty, by an insurer, once a policy is in force, gives the assured no right other than rescission”, see Cox v. Bankside [1995] 2 Lloyds Rep 437, 462.

(8)          Litigation

An important matter decided by the Star Sea is that the duty of good faith (whatever its precise context) is superseded, once the parties become engaged in litigation, by the rules of court contained in the Civil Procedure Rules. There had over the years arisen a view that the ancient rights of a marine insurer to obtain pre-defence discovery stemmed from the post-contract obligation of good faith, but failure to comply with an order for ship’s papers never gave rise to a right to avoid the policy; so as Lord Hobhouse observed, in para. 60 of his speech, in relation to an insured’s obligation to submit to an order for ship’s papers:-

“whatever it was, it was not the obligation referred to in section 17”.

There is a certain irony about this conclusion. When Sir Mackenzie Chalmers published the second and last edition of his Digest of the Law of the Marine Insurance (1903), on which the Act as ultimately passed was to be based, he included what is now section 17 without any explanation of how (if at all) he envisaged any post-contract requirement of good faith would work in practice. When he published the first edition of his work “The Marine Insurance Act 1906” (1907) he added a note in relation to post-contract good faith, instancing the order of the court for ship’s papers as the example of the operation of post-contract good faith. Thus does the whirligig of time exercise its reversals.

It appears from this account of the development of post-contract good faith principles that it is by no means in every case of non-observance of good faith by the insured that the insurer can avoid the contract. It is necessary to find some principle by which it is possible to decide whether, in the event of good faith not being observed by either party, the result is that the contract can be avoided.

Application to Fraud

Mr Hirst correctly emphasised that none of the examples of post-contract good faith considered in the above resumé of the law were cases of dishonesty save for the fraudulent claims cases. They were not, therefore, in any way, inconsistent with his over-arching principle that any dishonesty on the part of the insured entitled the insurer to avoid the contract. His submission on the present state of the law was that, in the light of the Star Sea, the only application of section 17 post contract was to cases of dishonesty but that in such cases the full apparent rigour of section 17 should be applied. This submission could be said in itself to be a considerable gloss upon the statute but, Mr Hirst said, it is the position at which the law has arrived.

Before deciding whether Mr Hirst’s submission is correct, it is helpful to consider Lord Hobhouse’s initial approach to the law on fraudulent claims in para. 61 of his speech.

“. . . On ordinary contractual principles it would be expected that any question as to what are the parties’ rights in relation to anything which has occurred since the contract was made would be answered by construing the contract in accordance with its terms, both express and implied by law. . . . . But it is also possible for principles drawn from the general law to apply to an existing contract – on the better view, frustration is an example of this as is the principle that a party should not be allowed to take advantage of his own unlawful act. It is such a principle upon which the [insurers] rely in the present case. As I have previously stated there are contractual remedies for breach of contract and repudiation which act prospectively and upon which the [insurers] do not rely. The potential is also there for the parties, if they so choose, to provide by their contract for remedies or consequences which would act retrospectively. All this shows that the courts should be cautious before extending to contractual relations principles of law which the parties could have themselves have incorporated into their contract if they had so chosen. The courts should likewise be prepared to examine the application of any such principle to the particular class of situation to see to what extent its application would reflect principles of public policy or the over-riding needs of justice. Where the application of the proposed principle would simply serve the interests of one party and do so in a disproportionate fashion, it is right to question whether the principle has been correctly formulated or is being correctly applied and it is right to question whether the codifying statute from which the right contended for is said to be drawn is being correctly construed.”

With this admonition in mind, I return to section 17. It is the precursor of a number of sections which deal in terms with pre-contract non-disclosure of material facts and pre-contract misrepresentations. It must have been intended by Parliament that avoidance by reason of post-contract matters should be subject at least to the same requirements as avoidance by reason of matters pre-contract. It is well recognised that, before a contract can be avoided for pre-contract non-disclosure or misrepresentation, the fact not disclosed or misrepresented must have been material for a prudent underwriter to know when he was assessing the risk and must have induced the actual underwriter to write the risk. The requirement of materiality is emphasised in all three of the following sections of the 1906 Act and the requirement of inducement is part of the general law which, though not adverted to specifically in the Act, is understood to apply to insurance law generally and marine insurance in particular, see Pan-Atlantic v. Pine Top Insurance [1995] 1 A.C. 501. In my judgment these requirements which must exist before an underwriter can avoid for lack of good faith pre-contract must also apply, making due allowance for the change of context, where an underwriter seeks to avoid for lack of good faith or fraud in relation to post-contractual matters. In particular the requirement of inducement which exists for pre-contract lack of good faith must exist in an appropriate form before an underwriter can avoid the entire contract for post-contract lack of good faith. It is in this context that Lord Hobhouse’s admonition is particularly relevant because, as he points out, the insurer already has his contractual remedies for breach of contract and repudiation. The insurer can treat the insured as being in repudiation of what will normally be an innominate term of the contract if there is a serious breach or there is a breach with serious consequences for the insurer. Avoidance ab initio is an even more extreme form of contractual termination than an acceptance of repudiatory conduct and, for the extreme remedy of avoidance to be available, there must, in my view, be at least the same quality of conduct as would justify the insurer in accepting the insured’s conduct as a repudiation of the contract. It is only in this way that the requirement of inducement for pre-contract conduct resulting in avoidance can be made to tally with post-contract conduct said to entitle the insurer to avoid the contract. It would not be just to the insured to enable the insurer to by-pass the rights and duties imposed on the parties by the contract in order to enable him to claim the disproportionate remedy of avoidance, with the result that he can avoid liability for all other claims under the policy as well as the instant claim, without requiring that the conduct relied on be as serious as conduct which would be viewed as repudiatory. In this way the operation of section 17 post-contract has the appropriate symmetry to the operation of the section pre-contract.

Support for this approach can be obtained from the resumé of the post-contract situations of the operation of good faith particularly instances (6) and (7) which are probably the only true examples of good faith being required post-contract. (Instances (2) – (4), at any rate, are, as I say in paragraph 31 below, more accurately examples of pre-contract good faith). It is in instances (6) and (7) that the requirements of good faith are equated to ordinary remedies for breach of contract.

Mr Rainey submitted that another way of reaching a similar result had been anticipated by Rix J (as he then was) in Royal Boskalis Westminster N.V. v. Mountain [1997] LRLR 523 on which Aikens J placed some reliance. In that case the insured shipowners had deliberately concealed from insurers the details of a “finalisation agreement” particularly the fact that clandestine payments had been made thereunder to the Iraqi government in breach of United Nations sanctions; the assured also deliberately misled insurers by saying that they had not been permitted to retain a copy of the “finalisation agreement”. The shipowners had been compelled to waive all their claims against the Iraqi Government and sued the insurers to recover the value of the waived claims pursuant to the sue and labour provisions of the 1906 Act. Rix J held that there was deliberate and culpable misrepresentation and non-disclosure by the shipowners but stopped short of saying that the shipowners had been fraudulent. He also held (page 592) that the insured were not making a fraudulent claim so that the fraudulent claim line of authority did not apply. He next doubted whether the duty of good faith was statutorily intended in the claims context to extend outside the context of fraudulent claims (page 597) but held that, if it did, the non-disclosure and misrepresentation must be ultimately legally relevant to a defence which insurers had under the policy and that insurers must have been induced to change their position. For my part, I do not, on the facts of this case, derive direct assistance from Rix J’s cogent analysis on the facts of the case before him, because he deliberately abstained from any finding of fraud. I would nevertheless gratefully borrow the concept that the conduct of the assured which is relied on by underwriters must be causally relevant to underwriters’ ultimate liability or, at least, to some defence of underwriters before it can be permitted to avoid the policy. This is, I think, the same concept as that underwriters must be seriously prejudiced by the fraud complained of before the policy can be avoided.

I should lastly refer to what has been called the much-discussed decision in The Litsion Pride [1985] 1 Lloyds Rep. 437 where the assured did not inform underwriters that their vessel was about to go into an exclusion zone but concocted a letter to their brokers two days after a casualty in that exclusion zone had occurred; this letter was falsely dated the day that the vessel entered the exclusion zone and informed the brokers and the underwriters that that was what the vessel was about to do. Owners’ brokers also wrote later false statements in support of the claim. Hirst J held that the false letter was a fraud clearly connected to the claim and the later statements were made in the direct context of the claim. It is thus a case of making a fraudulent claim and to that extent was, with respect, good law but irrelevant to the present case. To the extent, however, that the case enunciates any wider obligations of post contract good faith in relation to merely culpable non-disclosure or misrepresentation, it has been finally and authoritatively disapproved in The Star Sea (see para. 71) and in the present case Mr Hirst rightly felt unable to place any specific reliance on the decision of Hirst J in that case.

Conclusions on the law of post-contract good faith

I have already recorded Mr Hirst’s submission that, in spite of the restriction imposed by the decided cases on the operation of section 17 of the Act in cases where the assured has not acted fraudulently, section 17 still applies to all cases of fraudulent conduct on the part of the assured. Mr Rainey, by contrast, submitted that the duty of post-contract good faith (justifying avoidance if not observed) should be confined (1) to cases (analogous to the pre-contract context) in which there was some subsequent change to the contractual position and (2) to cases of fraudulent claims. He did not enumerate the categories of case which would fall within (1) but they would at any rate include categories no (2) – (4) set out in paragraph 22 of this judgment and, perhaps, be confined to them. One further possible category of case, at any rate in liability insurance cases, might be constituted by those cases in which the insurers have to decide whether to be responsible for defending a claim and do, in fact, agree to do so. In such a case a fraudulent misrepresentation which induces an insurer to defend a claim (by appointing solicitors and agreeing to bear the expense of fighting the claim) might well avoid the agreement that the claim be defended. There is, however, no obvious reason why the assured’s conduct should entitle the insurer to avoid the whole contract.

This submission was, in principle, accepted by Aikens J but there are, as it seems to me, two difficulties with it. The first is that the examples Mr Rainey gives of cases of bad faith leading to avoidance of the contract are not really examples of that at all; they are rather examples of pre-contract lack of good faith because they arise before variation, renewal or application of the “held covered” provision in the policy and avoid the variation, renewal or the application of the “held covered” provision, as the case may be, not the entire contract. As I have said in paragraph 11 it is by no means obvious that even the law of fraudulent claims either derives from or is truly to be treated as an example of post-contract lack of good faith leading to retrospective avoidance of the contract, as opposed to the “forfeiture of the benefit of the policy”.

The second difficulty with Mr Rainey’s submission is that it is not easy to fit within it those cases in which there is lack of good faith post-contract but in respect of which it seems to be accepted that no question of avoidance arises but only damages, whether or not accompanied by an acceptance of the insured’s conduct as repudiatory (para 22, categories (6) and (7)).

The difficulties inherent in this area of the law can be seen in successive editions of Professor Malcolm Clarke’s book the Law of Insurance Contracts. If I may respectfully say so, his book, ever since its first publication, has been much the most perceptive and authoritative text book on the continuing duty of good faith. Chapter 27-1 is called ‘The Continuing Duty of Good Faith’ and in paragraph 27-1A of his second edition (‘The Nature of the Duty’) he stated

“As regards insurance contracts, the duty of good faith continues throughout the contractual relationship. In particular the duty of disclosure, most prominent prior to contract formation, revives whenever the insured has an express or implied duty to supply information to enable insurers to make a decision. Hence it applies if cover is extended or renewed. It also applies when the insured claims insurance money; he must make “full disclosure of the circumstances of the case”

The degree of disclosure, however, varies according to the phase in the relationship. It seems that the level of disclosure appropriate to a claim is different from that at the time of contract; a innocent misrepresentation or non-disclosure in the claim does not defeat a claim; there must be fraud . . .”

This passage was approved by the Court of Appeal in The Star Sea [1997] 1 Lloyds Rep 360, 372. In his 3rd edition, Professor Clarke felt it necessary to expand para. 27-1A considerably and introduce two new paragraphs 27-1A1 relating to “The Time of Duty” and 27-1A2 relating to “The Level of Duty”. In the current loose-leaf edition of his work, he retains the two new sub-paragraphs but considerably amplifies the body of the main paragraph (“The Nature of the Duty”). In the course of this modification he cites with approval Aikens J’s conclusion in the present case that the English cases have gone no further than saying that good faith operates post-contract only (a) when the insurer has been invited to renew or vary his speculation or risk or (b) where the insured is presenting or pursuing a claim on the policy. He then records without express approval what he calls the judge’s preferred view that the acts of the insured in the present case did not fall into the accepted category of ‘post contract’ good faith and that therefore the duty of good faith did not attach at all. This passage was, of course, written before the speeches of the House of Lords in The Star Sea became available.

Some authorities have concluded that the law is (or ought to be) that the duty of utmost good faith is only applicable pre-contract and has no application once the contract is concluded outside the context of fraudulent claims. That seems to have been the tentative view of Rix J in Royal Boskalis [1997] LRLR 523, 587 (col. 1) and is certainly the view of Mr Howard Bennett of Nottingham University in his article entitled Mapping the doctrine of Utmost Good Faith in Insurance Contract Law [1999] L.M.C.L.Q. 165. Lord Hobhouse (in paragraph 42 of his speech) in The Star Sea called this article valuable and penetrating but (I think) stopped short of endorsing this particular conclusion. Mr Hirst was able to point to Lord Hobhouse’s dismissal of underwriters’ defence in that case on the basis that they had failed to obtain a finding of fraud and the comment:-

“Fraud has a fundamental impact upon the parties’ relationships and raises series public policy considerations.” (Para. 72 at page 196C.)

Mr Rainey pointed out that this was said in the context of fraudulent claims, where it is well accepted that the law has a disciplinary element in order to discourage the making of false and fraudulent claims. By contrast, such a disciplinary element is not to be expected in other areas of insurance law, see Pan-Atlantic v. Pine Top [1995] A.C. 501, 549B-D. Despite Mr Rainey’s valid point on this particular dictum, I do not consider it is open to this court to decide that section 17 of the Act has no application after the formation of the contract (according to Lord Clyde this solution is “past praying for”, para. 6 of The Star Sea); nor do I think, in the light of the law set out in paragraph 22 above, that the operation of the section can be artificially limited to the two categories for which Mr Rainey contends and which Aikens J accepted viz (1) cases analogous to the pre-contract context and (2) fraudulent claims.

It seems to me that the solution to the problem must be found in the somewhat broader context of the appropriate remedy, as I have indicated in paragraph 26 above. Section 17 states that the remedy is the remedy of avoidance but does not lay down the situations in which avoidance is appropriate. It is, in my judgment, only appropriate to invoke the remedy of avoidance in a post-contractual context in situations analogous to situations where the insurer has a right to terminate for breach. For this purpose (A) the fraud must be material in the sense that the fraud would have an effect on underwriters’ ultimate liability as Rix J held in Royal Boskalis and (B) the gravity of the fraud or its consequences must be such as would enable the underwriters, if they wished to do so, to terminate for breach of contract. Often these considerations will amount to the same thing; a materially fraudulent breach of good faith, once the contract has been made, will usually entitle the insurers to terminate the contract. Conversely, fraudulent conduct entitling insurers to bring the contract to an end could only be material fraud. It is in this way that the law of post-contract good faith can be aligned with the insurers’ contractual remedies. The right to avoid the contract with retrospective effect is, therefore, only exercisable in circumstances where the innocent party would, in any event, be entitled to terminate the contract for breach.

The desirability of aligning the right to avoid with the right to terminate the contract for breach is self-evident. It is often observed that the right of avoidance is disproportionate (see the speech of Lord Hobhouse, paras. 61 and 72 at pages 191E and 196B). If the right to avoid in a post-contract context is exercisable only when the right to terminate for breach has arisen, the disproportionate effect of the remedy will be considerably less and the extra advantages given to insurers when they exercise a right of avoidance (eg non-liability for earlier claims) will be less offensive than they otherwise would be.

The requirement of materiality has, of course, always been required for avoidance for lack of pre-contract good faith. More significantly, it is also a requirement for the operation of the rule about fraudulent claims. The case of Goulstone v. Royal Insurance Co (1858) 1 F.&F. 276 is instructive. The insured made a claim under a fire policy in the amount of £660 in respect of furniture, linen and china. It emerged in evidence (1) that on the insured’s marriage in 1846 there was a settlement of a quantity of furniture, (2) that in 1854 he had become insolvent and declared to his creditors that he had no furniture except that which belonged to his wife under the settlement and which was valued at £50 and (3) that the linen and china (which were not included in the settlement) had been furtively removed at the time of the insolvency. This concealment from the creditors was, of course, fraudulent; Chief Baron Pollock said to the jury that the plaintiff’s interest was nevertheless legally insurable, whether or not the creditors ought to have the benefit of the insurance. He continued:-

“But the question is whether the claim [viz the claim on insurers] was fraudulent i.e. whether it was wilfully false in any substantial respect; for instance, as to private furniture which was sworn to be worth only £50 in 1854 and has not since been added to.”

The Chief Baron is there drawing a distinction between the material and substantial fraud in the claim on underwriters in respect of the over-valuation of the furniture and the immaterial fraud of concealing the linen and china from the creditors. Further authorities in support of the requirement of materiality are set out in para. 27-2B4 of the current loose-leaf edition of Professor Clarke’s work.

In the context of deliberate and culpable (but not fraudulent) post-contract conduct, Rix J in Royal Boskalis said that a fact would only be material if it had ultimate legal relevance to a defence under the policy [1997] LRLR 523, 589 col. 2 and Aikens J has adopted that as the appropriate test of materiality where fraud has been proved, see para. 76.

Aikens J expressed his conclusion as to the law in that and the following paragraph of his judgment. His view was that there was a continuing duty on the assured to refrain from a deliberate act or omission intended to deceive the insurer through either positive misrepresentation or concealment of material facts and facts would only be material for the purpose if they had ultimate legal relevance to a defence under the policy. I agree with the Judge’s conclusion summarised in this way save that I would also add (even if it is usually or invariably to state the same conclusion in different words) that the insurers cannot avoid the contract of insurance for such fraudulent conduct unless the conduct was such as to justify their terminating the contract in any event. If and in so far as Aikens J was intending to go further that this and say that the insurers’ defence of bad faith was inapplicable because no “good faith occasion” had arisen (and Professor Clarke thinks that this was the judge’s preferred view) I would not agree, since it seems to me that the duty not to be materially fraudulent does continue at all times after the contract has been made.

To this extent, therefore, I would reject Mr Rainey’s submission that there are only some occasions when the requirement of good faith exists post-contract and accept Mr Hirst’s submission that the duty is a continuing one. If, however, I am wrong about that and there are defined categories of good faith arising post-contract, I would conclude that the giving of information, pursuant to an express or implied obligation to do so in the contract of insurance, is an occasion when good faith should be exercised. Since, however, the giving of information is essentially an obligation stemming from contract, the remedy for the insured fraudulently misinforming the insurer must be commensurate with the insurer’s remedies for breach of contract. The insurer will not, therefore, be able to avoid the contract of insurance with retrospective effect unless he can show that the fraud was relevant to his ultimate liability under the policy and was such as would entitle him to terminate the insurance contract.

Application to the facts of the case

I have already given my reasons in paragraphs 14-16 for stating that the insurers would not have been entitled to bring the insurance contract to an end, if they had wished to do so. It remains to consider whether the fraudulent conduct of the insured was relevant to insurers’ ultimate liability on the policy.

In my view the fraud was not relevant, ultimately or at all, to insurers’ liability. The fraud was in relation to the jurisdiction in which and the law by which the claim against the insurers was to be tried. In the event, it turned out that the law of England and the law of Trinidad were the same so it made no difference to insurers’ liability under the policy that it fell to be determined by English law. It is impossible to imagine that the place of trial of the claim against the insured ship repairers would have made any difference to insurers’ liability. I have already given reasons for saying that I am not persuaded that fraud by either or both of the Baboolal brothers would have made the evidence of their employees on the matter of responsibility for tightening the bolts of the engine to the correct tension any more or less believable than it would otherwise have been. It is also the fact that the fraud was never directed at the insurers; the deception was aimed at the shipowners; it was incidental that the assured had also to deceive their own solicitors who had been appointed by and were being paid for by the insurers. All that can be said is that these solicitors maintained their summons opposing English jurisdiction somewhat longer than they might otherwise have done.

None of these conclusions is, in any way, intended to condone or belittle the fraud perpetrated by the assured. The fact that it was a fraud which was never likely to work and was exposed within about 6 months of being committed does not make it any the less reprehensible. The assured were, to coin a phrase, playing with fire, as these proceedings (now culminating 13 years after the original engine explosion) have shown. Nevertheless it would, in my judgment, be absurdly disproportionate that insurers should be entitled to avoid the insurance policy and thus be able to avoid a liability to their assured which they always had and to which there could never have been any defence, if the insured had not been so over-enthusiastic in trying to assist the insurers to defeat the shipowners’ claim.

For these reasons, the defence based on section 17 of the 1906 Act fails and I would dismiss the appeal

MR JUSTICE CARNWATH:

I agree. The Australian equivalent of the 1906 Act (Marine Insurance Act 1909) has recently been the subject of detailed analysis by the Australian Law Reform Commission (‘Review of the Marine Insurance Act 1909’ Report 91, April 2001). The report would be a very useful starting point for any consideration of law reform in this country. In relation to their equivalent of section 17 (section 23), they propose that it should be replaced by a revised section which makes clear that the duty of ‘utmost good faith’ is an implied term of the contract of insurance, and extends, with certain qualifications, for ‘the duration of the relationship between the parties’. The reference to the remedy of avoidance under this provision is deleted. A later provision would give a specific remedy to avoid the contract, for a fraudulent breach of the obligations of disclosure in the pre-contract period (their amended equivalents of 1906 Act ss 18-20). Neither their recommendations, nor their detailed consideration of the case law in relation to section 17, including The Star Sea case, provide any support for the wide interpretation put forward by Mr Hirst.

LORD JUSTICE ROBERT WALKER:

I also agree that this appeal should be dismissed for the reasons given by Longmore LJ.

ORDER: Appeal dismissed with costs; permission to appeal to the House of Lords refused.

(Order does not form part of approved Judgment)


North Star Shipping Ltd & Ors v Sphere Drake Insurance Plc & Ors

[2006] EWCA Civ 378  [2006] EWCA Civ 378, [2006] 2 LLR 183, [2006] 2 Lloyd’s Rep 183 Waller LJ

The law

Courts have previously wrestled with this problem, recognising first that there is something unjust in the notion that insurers can avoid a policy on the grounds of a suspicion as to the insured’s probity flowing from an allegation which is in fact false, but second that it is difficult to gainsay an underwriter who gives evidence that an allegation of fraud would have an influence on his underwriting judgment if it was unknown at that time whether that allegation was true or false.

Different judges have come to different conclusions. Forbes J in Reynolds and Anderson v Phoenix Assurance Co. Ltd [1978] 2 Lloyd’s Rep 440 at 460 recognised that the odd feature of a rule that required allegations to be disclosed was that it was in fact only false allegations to which such a rule had any relevance. If the allegation was true then the insured was bound to disclose that he had committed the fraud, and disclosure of the allegation as such added nothing. As he put it “the only occasion on which the allegation as an allegation must be disclosed is when it is not true” – ” a conclusion so devoid of any merit that I do not consider that a responsible insurer would adopt it and nor do I.” However, May J had expressed a contrary view in March Cabaret Club & Casino Ltd v The London Assurance [1975] 1 Lloyd’s Rep 169, and Phillips J in The Dora [1989] 1 Lloyd’s Rep 69 said that he preferred the view of May J. Colman J then in The Grecia Express [2002] 1 Lloyd’s Rep Insurance and Reinsurance 669 at 718 supported Phillips J, saying “if an allegation of criminal conduct has been made against an assured but is as yet unresolved at the time of placing the risk and the evidence is that the allegation would have influenced the judgment of a prudent insurer, the fact the allegation is unfounded cannot divest the circumstances of the allegation of the attribute of materiality.” But Colman J, having found that the allegation was material, mitigated that finding by holding that for the insurers to persist at a trial in taking the point, in the face of evidence before the court that the suggested facts never existed, would be contrary to their obligation of good faith. In his words “Such a course would be so starkly unjust that I would hold that in such a case it would be unconscionable for the Court to permit the insurers to avoid the policy on the grounds of non-disclosure.” [719R]

The view of Colman J was considered in the Court of Appeal in Brotherton v Aseguradora Colseguros SA [2003] 1 Lloyd’s Insurance and Reinsurance Rep 746. The judgments of Mance LJ (as he then was) and Buxton LJ with which Ward LJ agreed confirmed Colman J’s view as to the materiality of an allegation even if it turned out to be false. As Mance LJ said “it is difficult to see any reason why, if the evidence satisfies the court that a prudent underwriter would have regarded information suggesting the possibility of moral hazard as material in the sense identified by Lord Mustill [in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501], that should not suffice. In my view that is the basic legal position.”

However the Court of Appeal in Brotherton rejected Colman J’s route for mitigating the possible injustice if the facts established at a trial demonstrated that the allegation was false. They held that Moore-Bick J had been right in refusing an application for disclosure relating to the issue whether an allegation was actually false or not. It was irrelevant, they held, to fight out at a trial the truth or otherwise of an allegation because it was the allegation that was material to be disclosed, and as Mance LJ put it “neither principle nor sound policy” supported the conclusion that a court could hold that an insurer should not be entitled to persist at trial in seeking a declaration that he had successfully avoided the policy as Colman J had suggested. As Mance LJ stated:-

“It would be an unsound step to introduce into English Law a principle of law which would enable an insured either not to disclose intelligence which a prudent insurer would regard as material or subsequently resist avoidance by insisting on a trial, in circumstances where:

(i) if insurers never found out about the intelligence, the insured would face no problem in recovering for any losses which arose – however directly relevant the intelligence was to the perils insured and (quite possibly) to the losses actually occurring; and

(ii) if insurers found out about the intelligence, then (a) they would in the interests of their syndicate members or shareholders have normally to investigate its correctness, and (b) the insured would be entitled to put its insurers to the trouble, expense and (using the word deliberately) risk of expensive litigation, and perhaps force a settlement, in circumstances when insurers would never have been exposed to any of this, had the insured performed its prima facie duty to make timely disclosure.”

Mance LJ was clearly aware of what he termed “hard cases”. Having referred to the view of Forbes J he referred to the views of May J and Phillips J in the following terms-

“May J in March Cabaret and Phillips J as he was in The Dora held, after hearing underwriting evidence, that it could be, on the basis, as Phillips J put it, that:

“When accepting a risk underwriters are properly influenced not merely by facts which, with hindsight, can be shown to have actually affected the risk but with facts that raise doubts about the risk.”

I add however that, in this situation, the issues of both materiality and inducement would in all likelihood fall to be judged on the basis that, if there had been disclosure, it would have embraced all aspects of the insured’s knowledge, including his own statement of his innocence and such independent evidence as he had to support that by the time of placing. This might itself throw a different light on the answer to one or both of the issues of materiality and inducement. That would of course be a matter of fact and evidence.”

In another passage he said at 757L:-

“It is true that English insurance law has been criticised in a number of respects (and in the area of private insurance, mitigated by convention and the activity of the Insurance Ombudsman). Lord Mustill in Pan Atlantic identified and considered certain main criticisms at pages 528-530. But they did not in that case, and do not seem to me in this case, to bear on the solution of the present appeal. Courts, which are the ultimate decision-makers on issues with respect to both materiality and inducement, will be able to take a realistic and even robust view about what constitutes “intelligence” which is material for disclosure as distinct from loose or idle rumours which are immaterial, and as to whether a particular underwriter would have been induced to act differently, had he known of an undisclosed circumstance. But, as I have shown, Pan Atlantic identifies a general test of materiality which is on the face of it inconsistent with Mr Millett’s case. Further, I cannot see that the decision in Pan Atlantic that avoidance depends on inducement as well as materiality lends support to a conclusion that avoidance for non-disclosure of otherwise material information should depend upon the correctness of such information, to be ascertained if in issue by trial.”

It was in the light of the decision in Brotherton that Mr Goldstone in the instant case before the trial judge made this concession. “It is accepted that as the law presently stands, it is open to underwriters to rely upon the fact that such allegations had been made and proceedings brought, notwithstanding that owners were subsequently (i.e. after the cover was placed) acquitted” referring to Brotherton and Drake Insurance plc v Provident Insurance plc [2004] 1 Lloyd’s Insurance and Reinsurance Rep 277 [paragraph 172 of his written opening].

In Drake the circumstances were different from those in either The Grecia Express or Brotherton. It was noted in Drake that Mance LJ in Brotherton in paragraph 28, in referring to certain academic writing which had supported Colman J’s approach in The Grecia Express, commented that the welcome in one commentary “appears to have been addressed to a case where, by the time of the purported avoidance, apparently material facts had proved to be untrue…which does not correspond with the facts of either the The Grecia Express or in the present case.” One point taken in Drake was that Provident had acted in bad faith in avoiding; it was alleged that if it had made any investigation as to the true facts it would have discovered that the undisclosed accident would actually have made no difference to the premium to be charged. The judge acquitted Provident of any lack of good faith. Rix and Clarke LJJ were not prepared to go behind that finding, but expressed the view (echoing that of Colman J in The Grecia Express at page 719R) that the doctrine of good faith should be capable of limiting the insurer’s right to avoid [see Rix LJ at 298L and Clarke LJ at 307]. Pill LJ would have found that there was a breach of good faith which prevented Provident being entitled to avoid.

Mr Goldstone for the owners did not at the trial seek to rely on Drake and allege that the insurers were in breach of their duty of good faith in avoiding the policy. In the Court of Appeal, by way of an amendment to the notice of appeal, the owners sought to argue that since by the date of avoidance the owners had been acquitted of all charges in the Greek proceedings, the insurers should not have been entitled to treat the allegations as material at that time. The amendment did not refer to any lack of good faith in the insurers, but in developing his submissions as to why the owners should be allowed to pursue this case in the Court of Appeal, Mr Goldstone made clear that his case would be based on a lack of good faith as recognised (he submitted) in Drake. The amendment was resisted by Mr Hamblen QC on the basis that whether or not the point ever had any chance of success, it could not be fair to run the point in the Court of Appeal for the first time since further evidence would have been required in relation to insurers’ knowledge as at the time of avoidance. Indeed if the point had been run, the insurers would have been entitled to disclosure of material in order to enable them to test whether the allegations were in fact true, which in the light of the concession made in the court below and Brotherton they had not done. Mr Goldstone was prepared to be put on terms that all assumptions should be made in favour of the insurers in order to meet points on evidence or, he suggested, if further evidence was necessary the matter could be sent back to the judge.

It would take quite exceptional circumstances to contemplate an amendment in the Court of Appeal, which might entail the matter being returned to the judge to hear further evidence. As for putting the owners on terms, it was impossible to identify what presumptions could be made against the owners to prevent further evidence being necessary which did not leave the owners without an argument. We accordingly disallowed the amendment.

Arguments on the appeal

Mr Goldstone, accordingly, when opening his appeal felt constrained to accept that his argument could not depend on whether the allegations of dishonesty with which the case was concerned turned out to be false or were ones which the insurers did not seek to establish were true. He sought to argue that there was something about a war risks policy which led to the conclusion that the allegations of dishonesty, asserted not to have been disclosed in this case, were not material. I will return to the details of that argument in a moment, but first I should mention how, with some encouragement from the court, Mr Goldstone ultimately sought to broaden his argument on the appeal.

He suggested that there might be a distinction between allegations which related to the risk and allegations which bore no relation to the risk. He submitted that the court ought somehow to limit the extent to which allegations which ultimately turned out to be false should be held to be material to the risk and disclosable. His suggestion was that allegations that related to the risk itself were one thing but allegations of dishonesty, which had nothing to do with the risk and nothing to do with either the particular insurance or with insurance at all, were another. In relation to fact (1), the Greek criminal proceedings, or fact (2), the Panamanian civil proceedings, the allegations of dishonesty had nothing to do with the risks being insured and nothing to do with claims under an insurance policy. He suggested that, although he must accept that the decisions


Eagle Star Insurance Co Ltd v Games Video Co (GVC) SA

[2004] EWHC 15 (Comm)  [2004] 1 All ER (Comm) 560, [2004] Lloyd’s Rep IR 867, [2004] EWHC 15 (Comm), [2004] 1 Lloyd’s Rep 238, [2004] 1 LLR 238, [2004] Lloyds Rep IR 867

Simon J

The Legal Issues

A. Misrepresentation and Non-disclosure

Value

Although a number of points were taken on the form of the pleading, it was clear throughout the trial that the Insurer contended that the value of the vessel was misrepresented. It was the Insurer’s case that the true value of the vessel at the time of insurance contract (and, if material, after works were carried out) was, to the knowledge of the Assureds, not $1,800,000 but very much less (approximately $100,000).

It was common ground between the parties that value is a matter of opinion and that a statement of value can only amount to a misrepresentation if made in bad faith: see s.20(5) of the Marine Insurance Act 1906 and Economides v. Commercial Union Assurance Co. plc [1998] QB 587 (CA), Gibson LJ at 606g:

Once statute deems an honest representation as to a matter of belief to be true, I cannot see that there is scope for inquiry as whether there were objectively reasonable grounds for that belief. Of course the absence of reasonable grounds for belief may point to the absence of good faith for that belief. But in a case such as the present where the bad faith of the plaintiff is not alleged, I can see no basis for the implication of a representation of reasonable grounds for belief.

In the light of the findings of fact set out above, I have concluded that the Assureds had no genuine belief that the value of the vessel was $1,800,000. My reasons can be stated shortly: the documents which were said to form the basis for the Assureds’ stated belief were, to their knowledge, not genuine. They were not created to support a genuine belief in the value of $1,800,000; they were created because the Assureds knew very well that the valuation of $1,800,000 could not be justified without them. In my judgment the true value of the vessel (at the time of the contract of insurance) was the value estimated by the experts without the benefit of what I find to have been the fictitious Charterparty: approximately $100-150,000; and I further find that the Assureds knew this. I specifically reject Mr Ghiolman’s evidence that he believed that the vessel’s value was $1,800,000 and that he had good grounds for that belief.

Mr Berry QC submitted that there was no obvious motive for any fraudulent valuation. He points out that there is no allegation that the Assureds intended deliberately to cast the vessel away, and therefore no reason to overvalue. He submits that, unless there was an ulterior motive, the overvaluation does not make commercial sense: it simply resulted in the payment of an inflated premium. This argument is superficially attractive. However, it seems to me that Mr Malins QC is right to say that, while a clear motive for an overvaluation would assist him, the absence of a clear motive is not decisive, not least because an overvaluation creates its own hazards. This point was referred to in Ionides v. Pender (1874) 9 QB 531 at 538 where Blackburn J, giving the judgment of the Court said:

It is to be observed that the excessive valuation not only may lead to suspicion of foul play, but that it has a direct tendency to make the assured less careful in selecting the ship and captain, and to diminish the efforts which in case of disaster he ought to make to diminish the loss as far as possible, and cannot therefore properly be called altogether extraneous to the risks …

My conclusions on the issues of materiality and reliance can be stated shortly.

The underwriting experts (Mr Hart for the Assureds and Mr Outhwaite for the Insurer) did not significantly disagree. Both experts agreed that an insurer relies on the assured being honest. In Mr Hart’s view an overvaluation was only material if extreme. Mr Outhwaite thought it was material if the overvaluation was in multiples. In view of my finding that the vessel was only worth (and was known to be worth) in the order $100-150,000, I have concluded that the misrepresentation was material. Mr Outhwaite also said that if the value had been up to $500,000 the overvaluation would have been material. Although there was justification in Mr Berry’s objection that the evidence was not adduced in a satisfactory way, I accept Mr Outhwaite’s evidence on this point: it was consistent with his view that overvaluation in multiples was material, seemed to me to be a matter of common sense and was consistent with Ionides v. Pender (above).

Mr Bridges (the Insurer’s underwriter) said that he would not have accepted the risk if he had known there was an “extreme overvaluation”. This evidence was both credible and consistent with the expert evidence and I therefore find that the Insurer relied on the representation. For the sake of completeness I should record my understanding that Mr Bridges evidence extended to an overvaluation in which the assured has no genuine belief.

It follows that I find that the Insurer is entitled to avoid the contract of insurance.

Other Misrepresentations

It is the Insurer’s case that a number of further representations were made in the Miric fax and the Tolakis Particulars: namely that (1) the Tolakis Particulars had been prepared recently, (2) the vessel and her machinery were in a readily serviceable condition, requiring only repairs of a “routine maintenance” nature before she could be put into the intended service, (3) the owner intended or reasonably expected to complete those repairs within 3-4 months, (4) the vessel had recently (or at least within the last year) passed a special survey as a restaurant café following expenditure of Dr.140 million.

It seems to me that the Assureds are correct in their submission that, although stated to be separate and independent of the value issue, these allegations of misrepresentation of the vessel’s condition are, on analysis, aspects of the Insurer’s case on the valuation fraud. The Insurer’s case is, in summary, that the vessel was in such poor condition that she was worth a fraction of her declared value and that no one could honestly believe that her value was $1.8 million. This view is reinforced by the Insurer’s case on materiality in its Opening Skeleton Argument. This focuses on the condition of the vessel.

Mr Hart considered that none of these representations were material, since this was a Port risk with a stringent SA warranty. Mr Outhwaite did not say they were material in his Report. His evidence was confined to an opinion on the basis that the vessel was in “very poor condition”.

For these reasons, and in the light of the findings that I have already made, I can deal with the additional misrepresentation points briefly.

In relation to these representations the following questions arise: () were the representations made, (ii) were the representations statements of fact, (iii) were they false, (iv) materiality and inducement.

In relation to these questions I make the following findings:

(1)      (i) The Tolakis Particulars are not dated; and nothing was said about them being dated recently. It was simply assumed by Mr Bridges;

(ii) If the representation was made it would have been a representation of fact;

(iii) the statement would have been false since the Tolakis particulars had been prepared in no later than 1995;

(iv) the fact that Mr Bridges made no enquiry about the Tolakis Particulars suggests that he did not regard them as particularly significant.

(2)      (i) No representation was made as to the vessel being in a readily serviceable condition, requiring only routine maintenance;

(ii) in any event such a representation is properly characterised as a matter of opinion and not fact; (

iii) such a representation would have been false since the work to be done was not routine maintenance and was known not to be routine maintenance. It was a conversion to an intended service which involved considerable work and expenditure;

(iv) it is difficult to see how this representation, in isolation, was either material or induced Mr Bridges.

(3)      (i) No representation was made in terms that the owner intended or reasonably expected to complete those repairs within 3-4 months;

(ii) If such a representation had been made it was a statement of opinion rather than fact;

(iii) The representation was not, in any event, shown to be untrue;

(iv) again, it is difficult to see how the representation was material or induced Mr Bridges, since the cover was for 4 months and had to be extended (beyond 13 November 1998) if there was delay. In fact the cover was extended and the Insurers thereby affirmed the contract.

(4)      (i) No representation that the vessel had passed a special survey, as commonly understood, was made. A representation of some sort was made in relation to the vessel as a restaurant/café;

(ii) This was a statement of fact;

(iii) A representation that Dr 140 million had been expended was untrue; (

iv) This representation did not induce Mr Bridges.

Further allegations of Non-disclosures

A number of non-disclosures were relied on. Some of these were simply restatements of the misrepresentation claims in the form of non-disclosures. For example, as already set out above, the Insurers rely on a misrepresentation that the Tolakis Particulars had been prepared recently. The Insurers also make a plea of non-disclosure in relation to the Tolakis Particulars: namely, that they were prepared in 1995. In relation to the non-disclosure plea I reach similar conclusions to those that I have already reached in relation to the misrepresentation plea: the fact was immaterial and cannot have induced Mr Bridges. My conclusions on the misrepresentation issue also dispose of the Insurer’s case that the Assureds failed to disclose the nature of the vessel’s condition and the work required.

B. Coverage

At the beginning of the trial the Insurer amended to plead that the vessel was not on cover at the time of the casualty as follows:

Upon its true construction the Policy only covered the Assured in respect of the vessel “whilst being repaired at Avlis shipyard” and until the completion of the repairs which were “of general maintenance nature”.

The words quoted appear in the Information section of the Policy. The Insurer submits that it is clear that the vessel needed substantial work to convert it from a partly re-furbished and static bar/discotheque into a first class seaworthy casino vessel; and that this work could not properly be described as “repairs of a general maintenance nature”. I agree with this simply as a matter of fact.

However it does not follow that the risk was not covered. First, as already noted, the location section of the Policy provided coverage:

Whilst laid up at Chalkis Greece, or held covered … Also while being repaired at Avlis shipyard.

The location clause was amended on 4 September to read:

Whilst stern to Port Authorities dock at Chalkis and or at Avlis …

There were no words confining the cover to a period while actual repairs were taking place.

In any event, as Mr Berry points out, the Insurer was well aware that conversion and refurbishment work was being carried out as well as repair work. The 5 June SA Survey Report, which was seen by the Insurer, stated that the vessel was surveyed “whilst laid up awaiting conversion, since April 1998” and there were numerous other documents and communications of which the Insurer was or should have been aware showing that the vessel was undergoing conversion. It follows that I reject the Insurer’s coverage argument.

C. Breach of Warranty

The Parties’ respective cases

The Insurer’s case is that the Assureds warranted that all the Salvage Association recommendations in SA Certificate EMO 301/98 would be complied with, including the ongoing recommendations. They submit that two of the Ongoing Recommendations were breached. First, contrary to recommendation 13, there was no telephone available at all times. Secondly, contrary to recommendation 22, there was no security watchman in attendance at the entrance to the vessel at all times.

The Assureds’ case is that, on the proper construction of the Slip, the Salvage Association recommendations only had to be complied with prior to attachment in July 1998 or, possibly, at the end of November/beginning of December, when the cover was extended for a further 4 month period; and that, in any event, the warranties were not breached.

The Construction Issue

By s.35(2) of the Marine Insurance Act 1906;

An express warranty must be included in, or written upon the policy, or must be contained is some document incorporated by reference to the policy.

In this case the enquiry is as to the terms which were incorporated by reference into the policy.

This involves the proper construction of the policy wording:

Warranted approval of Lay-up arrangements, Fire Fighting Provisions and all movements by Salvage Association and all recommendations to be complied with prior to attachment

It is necessary to construe the clause so as to elicit its commercial purpose. The purpose was plainly to ensure that the Assureds would comply with and continue to comply with the express terms of the Salvage Association’s recommendations throughout the period on risk. It would make no commercial sense that the Assured would agree to comply with the recommendations only on the date that the risk attached, but not thereafter. Ongoing Recommendation 6 required that all fire fighting was to remain in position for immediate use. It would plainly have been a breach of warranty to remove all the fire fighting equipment the day after the risk attached. In my view the words prior to attachment are to be read as meaning that the Assureds warranted prior to attachment that they would comply with the Salvage Association recommendations made at the time of the attachment of the risk. Such a construction is consistent to the language and does not lead to the commercial absurdity implicit in the Assureds’ construction.

In any event, the movement to Avlis on 2 December was expressly on the basis:

Warranted all LSA (Salvage Association) recommendations to be complied with (my emphasis)

These would include the Ongoing Recommendations.

Mr Tsantiris’s evidence

Mr Tsantaris’s evidence was that he was the watchman on board the vessel at all material times, including on 12/13 January 1999, and that there was a telephone on board which was linked to the shipyard. He said that, whenever he left the vessel someone stood in for him: the watchman on the “Hamilton” (Mr Dalietos), the yard electrician, the yard fireman, or visitors to the vessel. He also left the vessel twice on the 12 January: on the first occasion (between 1700-1800) when he went to buy soft drinks and on the second occasion (at about 2200) when he went to telephone his wife. It is the Assureds’ case that, on each occasion, Mr Tsantiris was replaced by someone and that the warranty was therefore complied with.

In his contemporaneous interviews with the police and Mr Goldsworthy Mr Tsantiris never mentioned that anyone else replaced him on the vessel. Since the police were investigating a serious crime this was a surprising omission, particularly since he included much detail of less relevance. It was only after the breaches of warranty were raised that Mr Tsantiris said that others had stood in for him when he was ashore. I found Mr Tsantiris to be an unreliable witness and his evidence to be both inconsistent and inherently unlikely.

The trip to Halkida: 1700-1800hrs

In his witness statement Tsantiris said that Mr Leonidopoulos had replaced him when he went to Halkida to purchase soft drinks. In the course of his evidence Mr Leonidopoulos agreed. However, in cross-examination Mr Tsantiris said that Capt Grous had replaced him on this occasion. The reason for the change of story was that the documents showed that Mr Leonidopoulos had left the yard at 1500. However, Capt Grous told Mr Goldsworthy that he had not been on board the vessel in the two days before the explosion and the yard records do not show any attendance at the yard after 30 December 1998.

Mr Tsantiris’s phone call to his wife at about 2200hrs

In the Reply and Defence to Counterclaim the Assureds pleaded that Mr Tsantiris was replaced at about 2200 hours by the yard’s foreman. In his witness statement Mr Tsantiris was less specific but suggested that the watchman on the “Hamilton 1” was the most likely stand-in. In his evidence he initially said that the foreman took his place and later that the watchman on the “Hamilton 1” had done so. Subsequently he said that it was the fireman who had been on the vessel as watchman.

Conclusion on the evidence

I am quite satisfied that Mr Tsantiris was not replaced when he left the vessel. I doubt that he or anyone else thought that he needed to be. The fact that Mr Tsantiris had to leave the vessel to telephone his wife also indicates that there was no telephone on board the vessel and I so find.

Conclusion on this issue

It follows that I find that the Assured were in breach of the two warranties, and that accordingly the Insurer is entitled to refuse to indemnify the Assureds.

D Fraudulent Presentation

I have found that the following (among other) documents are not authentic: the Tsapes Report, the MOA and the Bareboat charterparty. It is Insurer’s case that these documents were knowingly and fraudulently presented in support of the claim and that, as a consequence, the claim can be avoided.

Before considering this submission I must consider two further sets of documents on which the Insurer wishes to rely: the 3 notarised payments and 3 Style Bank receipts. At the start of the trial an application was made to rely on these documents in support of the fraudulent presentation defence. I decided that the amendment was made too late and would cause disruption to the trial. A renewed application was made in the course of the Closing Submissions on the basis that to allow that application would not now be prejudicial since the facts had now become clear and the witness from whom new evidence might have been required (Mr Xirotiris) did not in the event give evidence. It seems to me that it would not be right to allow the renewed application. While I am not aware of any principle which precludes a renewed application; there are practical objections. It is likely that those representing the Assureds acted in the course of the trial on the basis that an application to amend had been made and refused, and that there had been no appeal from that decision. It seems to me potentially unfair that, having acted on this basis, they should now have to deal with the case that they could reasonably have assumed was not being pursued. I therefore refuse the renewed application to amend.

The reason for the common law rule regarding the making of fraudulent insurance claims has been described by Lord Hobhouse in The Star Sea [2003] 1 AC, 469 at 499 §62:

The fraudulent insured must not be allowed to think: if the fraud is successful, then I will gain; if it is unsuccessful, I will lose nothing.

The extent of the rule has been recently considered in Agapitos v Agnew [2003] QB 556. There are two aspects of the rule which it is necessary to distinguish: the making of a fraudulent claim and the use of fraudulent devices.

What is said by the Insurer is that, even if Assureds had a valid claim, the claim must fail because the Assureds have used fraudulent devices to promote the claim. The rule is in some ways anomalous since it only applies between the making of the claim and the start of litigation. After litigation has commenced an insured may advance false documentation and lie without the drastic consequences which follow if the deployment of false documentation and lies are less well timed. Nevertheless, the rule is presently well-established and was expressed by Mance LJ in Agapitos v Agnew at §30 the following terms:

A fraudulent device is used if the insured believes he has suffered the loss claimed, but seeks to improve or embellish the facts surrounding the claim by some lie.

The rule applies to fraudulent devices used during the course of an insurer’s investigation of a claim, see Roche J’s direction on fraud to the jury in Wisenthal v. World Auxiliary Insurance Corpn Ltd (1930) 38 Ll L Rep 54 at 64

Fraud … was not mere lying. It was seeking to obtain an advantage, generally monetary, or to put someone else at a disadvantage by lies and deceit. It would be sufficient to come within the definition of fraud if the jury thought that in the investigation deceit had been used to secure payment or quicker payment of the money than would have been obtained if the truth were told.

The consequences of using fraudulent devices will be the defeat of the claim.

The Assureds submit that: (1) there was no claim on foot when the documents were handed over, (2) there was no device or lie and (3) if there were, it was not designed to improve or embellish the circumstances surrounding the claim (4) nothing that was done prejudiced the position of Casinomar.

The documents were handed over to Mr Goldsworthy as follows: the Charterparty on 28 January 1999, the Tsapes Report on 1 February and the MOA on or about 12 February. Each of these events took place after Mr Ghiolman had instructed the Assureds’ brokers to “take the necessary steps” and after, as the Assureds knew, Mr Goldsworthy had been appointed by the Insurer to investigate the claim. I reject the submission that the Assureds “reluctantly” opened their files to Mr Goldsworthy. They were asked for documents and they handed over the documents whose contents were deceitful. They used fraudulent devices in order to advance the claim, with the intention and expectation that that the Insurer would accept the documents at face value, be reassured and promptly pay the Assureds. I also reject the contention that Casinomar was not involved in the fraudulent devices. Casinomar was closely involved in some of the documentation and Mr Ghiolman was acting on their behalf when he was improving or embellishing the claim, just as much as he was when procuring their mortgage interest insurance.

Accordingly I find that the Insurer is discharged from liability in respect of the present claim.

Conclusion

For these reasons I find that the Insurer is entitled to the declarations that it seeks and the Assureds’ claim for an indemnity must be dismissed.