Avoidance of Insurance Policy under the New Law 

The new proportionate approach to remedies for breach of “the duty of fair presentation” introduced by the Insurance Act (IA) 2015 has recently been to put test in Berkshire Assets (West London) Ltd v. AXA Insurance UK Plc [2021] EWHC 2789 (Comm).   

The facts are relatively straightforward. The assured, a joint venture vehicle used to purchase and develop an existing office block into residential apartments, bought from the insurer a Construction All Risks and Business Interruption Policy. On 1 January 2020, the insured development suffered damage as a result of flooding and the assured sought to claim for the property damage under the policy. During the investigation stage of the claim it transpired that when the policy was procured in November 2019, the assured failed to disclose the fact that criminal charges were filed against one of its directors in Malaysia in August 2019 by the Malaysian public prosecutor in relation to an alleged scheme to defraud the Malaysian government and other purchasers of bonds. The insurer avoided the policy on the premise that the relevant non-disclosure was material and if it had been adequately disclosed, the insurer would not have agreed to insure the assured at all. The judgment was given in favour of the insurer on both grounds. 

The finding on materiality is not surprising at all. The IA 2015, introduces no change in the materiality test, which originates from s. 18(2) of the Marine Insurance Act (MIA) 1906 and, accordingly, stipulates that a circumstance’s materiality will need to be judged with reference to the influence it would have on “the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms.”  The fact that the test remains unaltered means that the case law as it stood prior to the introduction of the IA 2015 is still relevant. And on numerous occasions, the courts repeatedly acknowledged that the charge of a criminal offence would often constitute a material circumstance (see, for example, March Cabaret Club v. London Assurance [1975] 1 Lloyd’s Rep 169). And it did not matter that the Malaysian criminal charges had been subsequently dismissed. There is authority indicating that materiality must be judged at the date of placement and not with the benefit of hindsight. This was put very cogently by Phillips J (as he then was) in The Dora [1989] 1 Lloyd’s Rep 69, at 93: “when accepting a risk underwriters were properly influenced not merely by the facts which, with hindsight, can be shown to have actually affected the risk but with the facts that raised doubts about the risk.” (a point endorsed by Mance, LJ (as he then was) in Brotherton & Ors v. Aseguradora Colseguros (No 2) [2003] EWCA Civ 705). Further, Colman, J, held (which was approved by the Court of Appeal) in North Star Shipping Ltd v. Sphere Drake Insurance Plc [2005] EWHC 665; [2005] 2 Lloyd’s Rep 76 that a failure to disclose pending criminal charges were material facts, even though the assured was acquitted and the charges set aside.            

Proving materiality and inducement would have been adequate to avoid the policy under the old regime but the changes introduced by the IA 2015 on the remedies available now requires the insurer to prove either that the assured acted fraudulently or recklessly in failing to present the risk fairly or the insurer would not have taken the risk at all had (s)he been aware of the criminal charges brought against one of its directors in Malaysia (s. 8 of the IA 2015). In this case, the insurer was able to prove the latter by relying on an internal practice note on “disclosure of previous insurance, financial or criminal matters” which provided that if an assured client disclosed maters that fell within a particular “negative criteria”, the risk was not acceptable to the insurer and should be declined. The Court was satisfied that the insurer had no authority to write the risk under the practice note and if the criminal charges had been appropriately disclosed the insurer would have declined the risk.  

The case is a timely reminder that failing to disclose criminal charges or convictions could trigger moral hazard concerns in relation to the assured and in most instances would be held to be material even if they are not directly related to the assured’s involvement with the insured property. But more significantly, one should not disregard the role the insurer’s internal practice note played in achieving the desired result from the insurer’s perspective. Given that under the IA 2015, it is vital for the insurer to demonstrate what s(he) would have done had the risk been fairly presented to him/her, one perhaps would expect insurance companies to produce more detailed internal underwriting guidance going forward ready to be deployed in litigation.  

The changes introduced by the IA 2015 have been systematically analysed in a book edited by Professors Clarke and Soyer, The Insurance Act 2015: A New Regime for Commercial and Marine Insurance Law, published by Informa Law in 2016.

              

Several excellent contributors (Sir Bernard Rix, Professor Tettenborn, Associate Professor Leloudas, Simon Rainey QC and Peter Macdonald-Eggers QC, also commented on various parts of the law reform in this book.

Bank of New York Mellon (International) Ltd v Cine-UK and other cases [2021] EWHC 1013 (QB)

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Issue: Whether tenants of commercial premises remain responsible to pay their rents despite the enforced closure or inability to trade from their premises because of COVID-19 and COVID-19 Regulations?

The Claimant (Landlord) requested a summary judgment (CPR 14.2)  to be made against the Defendants (tenants) for the rent of three (3) commercial premises that became due during the COVID-19 pandemic. The tenants are Cine-UK Limited (Cine-UK), Mecca Bingo Ltd and Sports Direct.com Retail Ltd. The landlords are Bank of New York Mellon (BNY / Superior landlords) and AEW respectively. The annual rent to be paid in advance by quarterly instalments on the usual days. The tenants claimed that the COVID-19 Regulations meant that public access was restricted to their business premises which eventually led to their closure for substantial periods. As a result, the tenants claim that they did not have to pay all or parts of the rent. The tenants believe they have a real prospect of defending the Claims based on the following reasons: the rent cesser clauses should be construed or be implied so that at least whilst the businesses are closed because of COVID -19 and COVID-19 Regulations and on the assumption that the landlords have insurance, they do not need to pay rent. Alternatively, the landlord is to recover the rent by their insurance. Even if the rent cesser clause did not have such effect by construction or implication, a similar effect could be achieved from suspensory frustration or  an application of principles of supervening event in terms of illegality and or the doctrine of temporary failure of consideration. Finally, such effect could be achieved by an application of Government guidance requiring negotiations and ameliorative measures between landlords and tenants as it relates to the payment of rent during the pandemic.

The landlords’ position is this is a matter of allocation of risk in relation to events that were foreseeable and for which the tenants should have negotiated a cesser clause. They argue that the insurance may cover some liabilities to the landlord but does not extend to covering loss or rent where there are no relevant rent cessation provisions in the leases and the relevant tenants can pay. Therefore, the rent including the value added tax (VAT) and interest continue to fall due despite the COVID-19 Regulations and its effects.

Mecca Bingo and Sports Direct had additional claims concerning mistaken payments and miscalculations which they are seeking to recover, however the details of such claims will not be addressed herein.

Lease Agreements

The leases are written in a standard commercial form, for a defined number of years and after 18 months of closure, the Cine -UK lease would have 12.5 years to run or 2.5 years if the break clause were to be exercised, The Mecca and Sports Direct leases would have another 11 years to run.[1] There were provisions made in each lease for the insurance of specific events including against property loss or damage by insured risks. Equally relevant is the presence of a rent cesser clause in each lease where the property has been destroyed or damaged or access to it denied or the property is unfit for occupation and provided the insurance is not vitiated or payment of insurance monies is not refused as a result of the act or default of the tenant.[2] There is also an extension of cover clause for ‘Murder Suicide or Disease[3] where insurers agree to indemnify the insured for loss of rent resulting from interruption of the business during the indemnity period following any human infectious or contagious disease manifested by any person whilst in the premises or within a 25 mile radius of it.

Issues: Construction of Rent Cesser Clauses

The landlords submit that the rent cesser clause would operate to only suspend rent where the insured risks have caused physical damage or destruction which prevents the premises from being fit for occupation or use.  Conversely, the tenants maintain that the word “physical” was not used, thus they propose that what has happened is damage or destruction even though not of a physical nature. Even if destruction must be physical, damage which is used as an alternative to destruction, need not be.

Master Dagnall held that the usual meaning of the word damage relates to a physical state. The tenants referred to Halbury’s Law[4] definition of “damage” which had a wider meaning representing ‘any disadvantage suffered by a person as a result of the act or default of another…’, however “damage” as used in that context was based on the law of “damages” and not the lease of a property. Additionally, ‘damage or damaged’ was used as an alternative to destruction thus there must be a link to a physical item. Whereas the words ‘damage or damaged’ could apply to nonphysical events, it is imperative that the context in which the words are used is analysed. Throughout the agreement, ‘damage or damaged’ is used with or surrounded by words which connote a physical state for example ‘reinstatement work or physical remediation.’[5]. In any event, ‘it will be a stretch of the definition of the words “damage or damaged” if it should include nonphysical disadvantage as suggested by the tenants.’[6] Master Dagnall reasoned this would ‘introduce a modern colloquial meaning into standard form documents’[7].

The rent cesser clause is subject to the requirement that the inability to use the premises must be caused by physical damage or destruction and not a mere inability to use the premises without more. The real subject of the insurance is the property of the landlord, that is the ‘brick and mortar’, in other words the physical property rather than the ‘effects on the trade’.[8] Accordingly, the rent cesser clause will operate where the closure to the insured property is due to physical damage or destruction, it is not sufficient for it to be in consequence of closure without physical damage or destruction.[9] In concluding on this issue, the court agreed with the landlords’ that the rent cesser clause is only triggered by physical damage or destruction to the insured premises. This is also the natural meaning of the words ‘damage or damaged’ used on their own or in the context of the agreement.[10] Furthermore, this interpretation is consistent with a possible commercial purpose and in line with the ‘brick and mortar’ aspects of the provisions.

Implication of the Rent Cesser Clauses

Master Dagnall acknowledged that it would be fair and reasonable to imply the rent cesser clause as proposed by the tenants. Yet, it might be prejudicial to the insurers who may not have contemplated this liability when they agreed the premium even though it is their responsibility to consider both the expressed and implied terms of the relevant lease.[11]

There is no warranty in the leases that the premises can always be utilised for its permitted use but the obligation to pay the rent remains unless the parties agree otherwise. Moreover, if the parties intended for the rent cesser clause to operate where there is nonphysical damage, the parties should have expressly provided for this in the agreement. As such, the court agreed with the landlords’  that the lease sets out all the circumstances under which the rent cesser clause would apply including where an insured peril has occurred. Even though COVID-19 and COVID-19 Regulations may be unprecedented, in respect of SARS and the consequent fears, it is not convincing that COVID-19 and COVID-19 Regulations were unforeseeable.[12] The case is not fit for an ‘Aberdeeen implication’, because it is not clear what both parties would have intended if they were notified of the potential of and had considered COVID-19 and COVID-19 Regulations.[13]  Based on the foregoing, Master Dagnell concluded that the tests for implication of the rent cesser clause proposed by the tenants was not met, therefore they do not have any real prospect of success for summary judgement on this issue.

Tenants’ reliance on the Insurance

Master Dagnall agreed with the landlords that the insurance policies do not compel the insurers to pay the landlords the outstanding rent where the rent cesser clause does not operate.[14] The court’s decision is influenced by the following points[15]:

  1. Without the operation of the rent cesser clause (no physical damage), the landlords who are the insured have not suffered any loss of rent.
  2. The landlords’ construction was in accordance with policy wording, particularly ‘the Murder, Suicide or Disease extension’. The policy provides that the insurer will indemnify for the loss of rent, which has not occurred. The loss to the landlords must have been due to the interruption of the landlords’ businesses which in the circumstances have also not occurred.  If the premises were vacant and could not be leased due to COVID-19, that could have been reasoned differently but those were not the facts before the court.
  3.  Even if damage could be extended to nonphysical loss, the other requirement mentioned in i. and ii. above must be satisfied.
  4. The commercial purpose of the insurance taken out by the landlords is to insure against the operation of the rent cesser clause which would have been a loss to them. If the tenants wanted to be protected in these circumstances, they would need to negotiate a wider rent cesser clause or alternatively purchase a separate business interruption insurance policy.
  5. The Mark Rowlands v Bermi[16] and Frasca-Judd v Golovina[17]. line of authority[18] relied on by the tenants was not accepted as directly on point. They are not concerned about what is covered by the insurance but with whether the insurance as it exists can be extended to protect the interests and loss of the tenants. Rather than being concerned about the liability for rent, it is concerned about the liability for remediation costs.
  6. Any suggestion that a clause be implied into the insurance policy that rent would be covered in the absence of a rent cesser clause cannot be accepted as either obvious or necessary for business efficacy. The insurance policy is well drafted and contains clauses specifically detailing the allocation of risks. Furthermore, the insurance is chiefly to protect the landlords against loss and to imply such a clause would be in contract with rules of implication.

Interpretation of the Insurance Provisions

Another point raised by the tenants is the breach of the insurance contract by the landlords who sought insurance coverage against COVID-19 and COVID-19 Regulations but not the sums equivalent to rent that would be loss from the closure or inability to use their premises. Additionally, the tenants insist that since they pay the premium for the insurance, they have the right to benefit from the insurance through cover for the rent.[19] The leases define COVID-19 and other diseases and Basic Rent as an ‘Insured Risk’ as such the tenants reasoned that since they pay for the insurance, it makes sense that when there are resultant closures, the insurer will pay for the rent or its equivalent. The landlords disagreed. They are of the view that this issue is governed by the rent cesser clause which describes when rent is payable following an insured risks which will eventually determine when the insurance covers the rent.[20]

Master Dagnall agreed with the Landlords ‘that the inclusion of something as an insured risk does not mean the landlord must include a clause in the insurance for the insurer to pay three (3) years of rent if the insured risk occurs and cause the closure of or prevented the permitted use of the premises.’[21] The fact that the tenants indirectly pay for the insurance does not mean the insurance must be tailored to benefit the tenants as suggested by implying such a term. The court also dismissed the notion that the implied term was required to give the lease business efficacy. The lease works well without the implied term. It provides for insurance against rent where a rent cesser clause applies in some instances and not in others. The tenants could have insured themselves against this risk by purchasing a separate and more appropriate insurance policy.

Frustration

Some of the tenants (Sports Direct, Mecca and Cine – UK) argued that there was a temporary frustration of their lease during the periods of lockdown hence rent not being payable during those periods. The landlords countered by stating there has been no frustration since ‘temporary frustration’ does not exist in law.  Master Dagnall considered and applied National Carriers v Panalpina[22] and The Sea Angel[23]and held that the principle of frustration does apply to leases. Closure of the premises due to events outside the control of the parties is a supervening event, thus being capable of causing frustration of the lease but only on rare occasions. The relevant question is whether ‘the situation has become so radically different that the present situation is outside what was the reasonable contemplation of the parties so as it to render it unjust for the contract to continue?’[24]  

COVID-19 and COVID-19 Regulations could qualify as a supervening event but in light of SARS, they were foreseeable but unprecedented.[25] While it was not reasonably expected by commercial people that the lockdowns would last for more than eighteen (18) months, there was significant amount of time remaining in each lease (Cine -UK another 12.5 years to run or 2.5 years if the break clause were to be exercised and Mecca Bingo and Sports Direct another 11 years each)  in relation to the period of closure due to COVID-19 and COVID-19 Regulations. For this reason, there was no ‘radical difference’ nor was it unjust for the leases to continue bearing in mind their terms and the allocation of risks. There was no frustration of the leases. As for the tenant’s contention that the Sports Direct lease was temporarily frustrated, Master Dagnall rejected the tenant’s claims and agreed with the landlords that there is no such doctrine as temporary frustration in law. Frustration by definition and effect means the discharging and ending of the contract without the possibility to revive it hence it cannot be suspended.

Illegality

The tenants claim as well that they are relieved from their obligations to pay rent under the lease as its performance has become impossible based on its illegality. The landlords responded by agreeing that this is possible, however of no benefit to the tenants since it is not illegal for them to pay rent. It was held that the suspension of an obligation that is illegal does not excuse another obligation which is not interdependent or conditional upon the former. A suspension of the rent will only be allowed if a rent cesser clause can be invoked, however the tenants have failed to do so. Illegality of an obligation would not excuse the tenants from their obligation to pay rent.

Failure of Consideration

The final point raised by the tenants is that they are relieved from their obligation to pay rent due to partial failure of consideration arising from their inability to operate from and use the premises as permitted. Master Dagnall accepted that the tenants may successfully establish that they cannot trade from the premises as permitted by their lease however he refused to accept that would relieve the tenants of their obligation to pay rent. Moreover, ‘partial failure of consideration’ is not a separate principle; It is related to or dependent on a relevant principle of contract law, which the tenants have failed to establish.[26] The inability of the tenants to use the premises as permitted is not necessarily a ‘partial failure of consideration, instead it is an unexpected occurrence which means the leases are not as beneficial to the tenants as initially expected.[27] The landlords did not breach the contract and there was no provision for the rent to be suspended except for the limited circumstances provided for the application of the rent cesser clause. Based on the foregoing, the tenants were unable to rely on to COVID-19 or COVID-19 Regulations to counter claims against them for rent incurred during the period of interruption. The tenants must continue to pay the rent even for the period in which they could not use the premises as permitted because of COVID-19 and COVID-19 Regulations.

Comments

Bank of New York Mellon (International) Ltd v Cine-UK and other cases is among the recently decided cases addressing business interruption claims arising from COVID-19 and COVID-19 Regulations. It reveals to contractual parties, businesses, and insurers that an interruption to businesses caused or arising from COVID-19 and COVID-19 Regulations on its own may not be sufficient to successfully claim for business interruption and to compel the insurers to indemnify an assured for their loss. As demonstrated in this case, the legal obligations between a tenant and landlord will not change because of interruption to the business caused by COVID-19 and COVID-19 Regulations as this is not the fault of either party. It is important for tenants and landlords to recognise that the terms of the lease and insurance policies will determine the allocation of risks and that rent will only be suspended in accordance these terms and the scope of a rent cesser clause where expressly provided.  The same is true for the interpretation of insurance clauses. Though an insurance policy may contain a business interruption clause or extension clause on ‘diseases’ that is wide enough to include COVID-19, the scope of its application will be limited based on the surrounding words of the clause. Therefore, if as in this case, the business interruption clause requires there to be ‘damage or destruction’ and there is no physical damage to property at the insured premises, the assured will not recover for loss merely because COVID-19 disrupted their business and caused financial or other nonphysical loss.

The context and surrounding words within which the clauses are written are very important to aid with their construction and it should not be assumed that ‘damage’ will take a wider meaning to cover nonphysical loss simply because COVID-19 is widespread and has affected many businesses. The identical concerns apply to the treatment of an extension clause on ‘diseases’ which for example covers COVID-19, its application to a scenario will depend on the other words or requirements of the clause and what makes commercial sense. COVID-19 Regulations have also not prohibited landlords from requesting the rents from tenants who can afford to pay, in fact the parties are encouraged to arrive at ameliorative settlements and where possible continue to meet their obligations under the lease.  It will be difficult for a court to allow a rent cesser clause to implied into a lease written on a standard form if the test of obviousness and necessity are not satisfied. It is also difficult because standard clauses are usually well drafted, without errors, and deemed to have considered all possible circumstance.

A successful claim for frustration of a lease due to COVID-19 and COVID-19 Regulation is possible. However, what is of value is comparing the period of interruption with the outstanding period of the lease and then determine whether there has been such radical difference in the subject of the agreement that it would be unfair to continue the lease. Merely relying on the occurrence of COVID-19 and the length and extent of the lockdown are not adequate to satisfy this claim. Interestedly, Master Dagnall analysis throughout the judgment in relation to the issues raised were resolved by applying settled principles of law, thus we must be reminded that COVID-19 has not changed the fundamental principles of contractual interpretation, the law of frustration, law of implication and the obligations under a lease agreement. Nonetheless, the specific words of a clause, contract or insurance policy and their interpretation will be the key towards the success or failure of a claim involving COVID-19. More importantly, tenants and other business owners must ensure their business interruption policies and rent cesser clauses are drafted to make provision for loss due to nonphysical damage and loss of turnover.


[1] para 36.

[2] para 43.

[3] para 59.

[4] Volume 29 para 303.

[5] para 120.

[6] Ibid.

[7] para 120.

[8] [2021] EWHC 1013 (QB), para 126.

[9]ibid.

[10] para 127.

[11] para 140.

[12] para 148.

[13] Ibid.

[14] para 167.

[15] para 168.

[16] [1986] QB 211.

[17] [2016] 4 WLR 107.

[18] Essentially, the principle is that in a contractual relationship of landlord and tenant, where a landlord is indemnified by an insurer, the landlord cannot seek to also recover from the tenant in either contract or tort, otherwise that would effectively be double indemnity. The insurance taken out is to benefit both the tenant and the landlords.

[19] [2021] EWHC 1013 (QB), para 173.

[20] para 177.

[21] para 179.

[22] [1981] AC 675.

[23]  [2007] EWCA Civ 547.

[24] [2021] EWHC 1013 (QB), para 209.

[25] ibid.

[26] [2021] EWHC 1013 (QB), para 221.

[27] Ibid.

Demurrage an exclusive remedy: the Court of Appeal gives judgment in The Eternal Bliss – Simon Rainey QC & Tom Bird

The Court of Appeal has today given judgment in The Eternal Bliss on the availability of general damages in addition to demurrage arising from delay. Allowing the appeal, the Court held that demurrage liquidates the whole of the damages arising from a charterer’s breach of charter in failing to complete cargo operations within the laytime.

The appeal raised a point on which there was no previous binding authority and which has, for almost 100 years, divided eminent judges and commentators. The leadig textbooks were split on the issue. 

Scrutton took the position that where the charterer’s breach causes the shipowner damage in addition to the detention of the vessel, losses can be recovered in addition to demurrage. But the authors of Voyage Charters said the better view was that the shipowner could only recover such losses if it could show a separate breach of contract (one other than the failure to load or discharge the cargo within the time allowed).

The dispute in this case arose from a voyage charter for the carriage of soybeans from Brazil to China. The charter was drawn up on an amended Norgrain form, which provided that demurrage, if incurred, was to be paid at a daily rate or pro rata.

After arriving at the discharge port, the vessel was kept at the anchorage for 31 days due to port congestion and lack of storage space ashore. Post discharge, it was said that the cargo exhibited significant moulding and caking throughout the stow in most of the cargo holds. The owners commenced arbitration against the charterers seeking to recover the cost of settling the cargo claim. The sole breach of contract relied on was the charterers’ failure to discharge within the laytime. The charterers contended that demurrage was the owners’ exclusive remedy for that breach.

The parties invited the Court to determine this point of law on assumed facts under s.45 of the Arbitration Act 1996. At first instance, Andrew Baker J found for the shipowner. He held that the cargo claim liabilities were a different type of loss to the detention of the vessel and that the shipowner could recover damages without proving a separate breach of contract. The 1991 decision in The Bonde (in which Potter J had reached the opposite conclusion) was, he said, wrongly decided.

Like the first instance judge, the Court of Appeal approached the point as one of principle, noting that distinguished judges have struggled, without success, to discern a ratio on this issue in Reidar v Arcos (the 1926 decision to which the long debate is often traced back). In delivering the Court’s judgment, Males LJ held that the case turned on the proper meaning of the term “demurrage” as it is used in the charterparty. The Court of Appeal concluded that, “in the absence of any contrary indication in a particular charterparty, demurrage liquidates the whole of the damages arising from a charterer’s breach of charter in failing to complete cargo operations within the laytime” (para 52).

This is a significant judgment on a major point of shipping law. In reversing the first instance decision, the Court of Appeal has given a much broader scope of the meaning of “demurrage” and treated it in much the same way as a standard liquidated damages clause, rather than limiting it to a particular type of loss. But this may not be the last word on the issue, which given the lively debate would benefit from clarification from the Supreme Court.

Simon Rainey QC and Tom Bird acted for the shipowner, instructed by Nick Austin and Mike Adamson of Reed Smith LLP.

One obligation, one remedy. Now it’s Eternal Bliss for charterers.


In K Line PTE Ltd v Priminds Shipping (HK) Co, Ltd (The Eternal Bliss) [2020] EWHC 2373 (Comm) the vessel was kept at the anchorage at Longkou in China for some 31 days due to port congestion and lack of storage space ashore for the cargo. In consequence when the cargo of soyabeans was discharged it exhibited substantial mould and caking. This led the receivers bringing a cargo claim against owners which they then, reasonably, settled and then sought to recover from voyage charterers by way of damages for breach of their obligation to discharge within the laydays. Charterers responded by saying that demurrage was the exclusive remedy for this breach.

At first instance, [2020] EWHC 2373 (Comm), Andrew Baker J heard a preliminary point of law on assumed facts as to whether demurrage was the sole remedy for this breach of the obligation to discharge within the laydays. He found that it was not. It was the remedy only where what owners were claiming was detention loss. Other consequences of the breach, in this case the sum owners paid to settle the receivers’ claim, were recoverable as unliquidated damages. In doing so he declined to follow the only clear decision on this issue, that of Potter J in The Bonde [1991] 1 Lloyd’s Rep 136 who had held that demurrage is liquidated damages for all the consequences of the charterer’s failure to load or unload within the laytime. Andrew Baker J also found that if demurrage was liquidated damages for all the consequences of the charterer’s delay at the discharge port, an indemnity would not be implied rendering the charterer liable for one of those consequences. Charterers appealed the finding on the extent of the demurrage remedy. Owners did not challenge the indemnity finding on appeal.

The Court of Appeal, EWCA/Civ/2021/1712, for whom Males LJ delivered the judgment of the Court, has today reversed that decision and concluded that in the absence of any contrary indication in a particular charterparty, demurrage liquidates the whole of the damages arising from a charterer’s breach of charter in failing to complete cargo operations within the laytime and not merely some of them. Accordingly, if a shipowner seeks to recover damages in addition to demurrage arising from delay, it must prove a breach of a separate obligation. The Court noted that The Bonde was the only clear decision on this point and that both the academic texts and judicial dicta were divided.

The Court of Appeal gave the following six reasons for its decision.

 “First, while it is possible for contracting parties to agree that a liquidated damages clause should liquidate only some of the damages arising from a particular breach, that strikes us as an unusual and surprising agreement for commercial people to make which, if intended, ought to be clearly stated. Such an agreement forfeits many of the benefits of a liquidated damages clause which, in general, provides valuable certainty and avoids dispute.” [53]

”Secondly, we accept that statements can be found in the case law to the effect that demurrage is intended to compensate a shipowner for the loss of prospective freight earnings suffered as a result of the charterer’s delay in completing cargo operations… No doubt this is the loss which is primarily contemplated and, in most cases, will be the only loss occurring. But that does not mean that this is all that demurrage is intended to do. The statements cited were made in cases where the present issue was not being considered.” [54]

Thirdly, if demurrage quantifies “the owner’s loss of use of the ship to earn freight by further employment in respect of delay to the ship after the expiry of laytime, nothing more”, as the judge held at [61] and again at [88], and does not apply to a different “type of loss” (as he put it at [45]), there will inevitably be disputes as to whether particular losses are of the “type” or “kind” covered by the demurrage clause.”[55]

“Fourthly, as Lord Justice Newey pointed out in argument, the cost of insurance is one of the normal running expenses which the shipowner has to bear. A standard expense for a shipowner is the cost of P&I cover which is intended to protect it against precisely the loss suffered in this case, that is to say liability to cargo claims, whether justified or not. Thus a shipowner will typically have insurance against cargo claims, while a charterer will not typically have insurance against liability for unliquidated damages resulting solely from a failure to complete cargo operations within the laytime. Rather, the charterer has protected itself from liability for failing to complete cargo operations within the laytime by stipulating for liquidated damages in the form of demurrage. Accordingly the consequence of the shipowner’s construction is to transfer the risk of unliquidated liability for cargo claims from the shipowner who has insured against it to the charterer who has not. That seems to us to disturb the balance of risk inherent in the parties’ contract.”[56]

“Fifthly, The Bonde has now stood for some 30 years, apparently without causing any dissatisfaction in the market.” [57]

“Sixthly, that reason would have less force if we agreed with the judge (at [127]) that the reasoning in The Bonde “is clearly faulty” or that the judgment “is explicable only if a non sequitur lies at its heart”. With respect, however, we do not accept the judge’s criticisms of The Bonde.” [58]

The Court of Appeal then noted that allowing the appeal would produce clarity and certainty, while leaving it open to individual parties or to industry bodies to stipulate for a different result if they wished to do so.

It will be interesting to see if owners now try to draft clauses stating expressly that demurrage only covers certain stated categories of loss – and whether charterers accept that.

It will also be interesting to see whether the case eventually ends up before the Supreme Court.

Sale of goods and summary judgment for the price: common sense rules.

Sale of goods law can at times be a bit esoteric. When it is, the difficulty can lie in making sure it accords with common sense as practised by businesspeople. Martin Spencer J managed just that today in dismissing what is best described as a pettifogging defence which counsel (absolutely properly, given his duty to his client) had raised to what looked like a straightforward claim for payment for building materials.

In Readie Construction v Geo Quarries [2021] EWHC 3030 (QB) Geo agreed to supply something over £600,000-worth of aggregate to builders Readie for a warehouse project in Bedfordshire. After most of the deliveries had been made and paid for, it turned out that something seemed to have gone badly wrong. Following heavy rain, the aggregate that had been used to form the base of the warehouse had melted into some sort of unprepossessing slush. Readie told Geo to stop deliveries and refused to accept or pay for the final batch, saying that Geo must have supplied the wrong substance. Geo invoiced Readie for the balance of the price and sought summary judgment, invoking the following Clause 4.1 from the sale contract:

The Customer shall make payment in full without any deduction or withholding whatsoever on any account by the end of the calendar month following the month in which the relevant invoice is dated. If payment is not received in full when due the Customer shall pay interest on the unpaid amount at a rate per annum which is 8% and above Bank of England base lending rate from time to time and the Customer shall pay to, or reimburse the Company on demand, on a full indemnity basis, all costs and liabilities incurred by the Company in relation to the suing for, or recovering, any sums due including, without limitation the costs of any proceedings in relation to a contract between the Company and a Customer incurred in or suffered by any default or delay by the Customer in performing any of its obligations. Payment shall only be made to the bank account nominated in writing by the Company on the invoice. Time of payment is of the essence.” (Our emphasis)

Straightforward, you might have thought? Not necessarily. Readie’s first argument was that the clause didn’t protect a seller who delivered the wrong goods, rather than goods that were correct but bad: after all, if it did, they said, it would mean that a seller who delivered nothing at all, or something obviously irrelevant such as sand, would still have the right to be paid after submitting its invoice. This point Martin Spencer J adroitly — and we on the blog think rightly — got rid of by saying that the right to be paid would be implicitly conditional on a bona fide purported delivery.

The next argument was that Clause 4.1 ousted counterclaims and set-offs but not Readie’s would-be right to abatement of the price. There was authority that some clauses would indeed be interpreted that way. But his Lordship remained unconvinced that this one was of that type: it was comprehensive in its terms, and there was no reason not to interpret it in an accordingly wide way, as requiring the buyer to pay in full, no questions asked, and argue the toss later. This again seems, if we may say so, highly sensible. Hardly any businesspeople know the difference between a set-off and a right to abatement; indeed, one suspects the proportion of practising lawyers is also embarrassingly low. However attractive it might seem to a law professor with time on their hands, one should not lightly assume a clause is meant to invoke a technical legal distinction which lawyers and laypeople alike are largely unfamiliar with.

Lastly, it being accepted that because of a retention of title clause s.49(1) of the Sale of Goods Act 1979 did not give Geo a right to the price on the basis that property had passed, Readie argued that s.49(2), allowing a claim for payment on a day certain irrespective of delivery, did not apply either. The right to payment, they said, was dependent on delivery, or at least purported delivery: how could payment then be due “irrespective of delivery”? The answer, again we suggest correct, was that “irrespective of delivery” means simply “not fixed at the time of delivery”, thus ousting the presumption of cash on delivery reflected in s.28.

To this latter question there might have been an easier answer, save for a curious concession on Geo’s part that they could not succeed in a claim for the price unless they were within either s.49(1) or s.49(2). Since The Res Cogitans [2016] AC 1034 it has been clear that freedom of contract exists as to the time and circumstances when payment becomes due, whether or not either limb of s.49 is satisfied. It must have been at least arguable that Clause 4.1 simply provided its own solution and needed to be applied in its own terms without any reference to s.49 at all. Another note, perhaps, for your for the file on the minutiae of bringing claims for summary judgment for goods supplied.

Article III(1) and IV(1) of the Hague Rules. Navigational errors by master in passage plan preparation before and at the beginning of the voyage.

Yesterday, the Supreme Court gave judgment in Alize 1954 and another (Appellants) v Allianz Elementar Versicherungs AG and others (Respondents) [2021] UKSC 51.

The case arose out of the grounding of the container vessel CMA CGM LIBRA on leaving the port of Xiamen, China, on a voyage to Hong Kong. The Admiralty Judge, Teare J, found that the vessel’s defective passage plan was causative of the grounding and that this involved a breach of the carrier’s seaworthiness obligation under article III rule 1 of the Hague Rules. The Court of Appeal upheld the decision. Owners contended that these decisions were wrong because the vessel was not unseaworthy and/or due diligence was exercised, and that any negligence in passage planning was a navigational fault which is exempted under article IV rule 2(a) of the Hague Rules.

Two issues were raised the appeal. First, is the carrier’s seaworthiness obligation under the Hague Rules subject to a category-based distinction between a vessel’s quality of seaworthiness, its attributes and equipment, or navigability and the crew’s act of navigating which concerns how the crew operates the vessel using those attributes? Second, what amounts to due diligence under article IV rule 1 of the Hague Rules? Has the carrier shown due diligence if it has equipped the vessel with all that is necessary for her to be safely navigated, including a competent crew?

The Supreme Court upheld the decisions of the Court of Appeal and the Admiralty Court. The carrier’s obligation under the Hague Rules was not subject to a category based distinction between a vessel’s quality of seaworthiness or navigability and the crew’s act of navigating. Given the “essential importance” of passage planning for the “safety … of navigation”, applying the prudent owner test, a vessel is likely to be unseaworthy if she begins her voyage without a passage plan or if she does so with a defective passage plan which endangers the safety of the vessel. The fact that the defective passage plan involves neglect or default in “the navigation of the ship” within the article IV rule 2(a) exception was no defence to a claim for loss or damage caused by the vessel being rendered unseaworthy before and at the beginning of the voyage as a result of that navigational  negligence. The vessel was therefore unseaworthy before and at the beginning of the voyage by reason of the defective passage plan.

The owners were unable to show that they had taken due diligence to make the vessel seaworthy. Their duty was non-delegable and the crew’s failure to navigate the ship safely was capable of constituting a lack of due diligence by the carrier. It made no difference that the delegated task of making the vessel seaworthy involved navigation. The carrier is liable for a failure to exercise due diligence by the master and deck officers of his vessel in the preparation of a passage plan for the vessel’s voyage, irrespective of the fact that navigation is the responsibility of the master and involves the exercise by the master and deck officers of their specialist skill and judgment.

Additional freight claim. Effect of change of nominated discharge port/s by voyage charterers.

In London Arbitration 20/21 a shipowner claimed additional freight for discharge ports nominated by the voyage charterer who then changed the nomination to discharge ports which were not subject to additional freight. The vessel was chartered to carry 60,000 mt bulk soya to ½ ports in China with the sole/1st disport to be declared 10 days prior to the vessel passing Singapore. The charterers nominate Zhoushan for lightening and Taixing for discharge of the balance of the cargo. The charter provided for $1.75 per mt extra on entire cargo if Taixing was the nominated discharge port. Thirteen days later charterer changed the discharge port to Tianjin. Owners sent charterers an invoice for Zhoushan and Taixing, and charterers insisted on Tianjin. Eventually the disputed extra freight was paid into an escrow account and the vessel discharged at Tianjin.

The tribunal held that in accordance with established authorities culminating with The Jasmine B [1992] 1 Lloyd’s Rep. 39 the initial declaration of the discharge ports made by charterers had the effect of treating those ports as have been written into the charter from the outset. Charterers assumed the risk of any change of nomination subsequently made by their sub-contractors. The nomination provision was a typically worded nomination provision and nothing in it was special in permitting a change of nomination.

The fact that the owners only proceeded to Tianjin under protested, confirmed by the terms of the escrow agreement, was fatal to all charterer’s arguments as to variation, waiver and estoppel. Nor had owners been unjustly enriched at charterer’s expense because the voyage for which additional freight was contemplated was never performed. Nothing in the charter obliged owners to relinquish the freight for the contractual voyage if in the event that voyage was not performed. Owners were accordingly entitled to the freight payable on the original nomination which was held in the escrow account.

Nineteen years on — the Prestige saga, continued

Nearly twenty years after the VLCC Prestige broke up and sank off the Galician coast, spreading filth far and wide, Spain and France remain locked in battle with the vessel’s P&I club Steamship Mutual. Put briefly, they want to make Steamship pay out gazillions on the basis of judgments they have obtained locally on the basis of insurance direct action statutes. Steamship, by contrast, refers to the Prestige’s P&I entry, and says that both states are bound by “pay to be paid” clauses and in any case have to arbitrate their claims in London rather than suing in their own courts.

The background to the latest round, The Prestige (Nos 3 and 4) [2021] EWCA Civ 1589, is that Steamship, having got a declaratory arbitration award in its favour substantiating the duty to arbitrate, which it has transmuted into a judgment under s.66 of the Arbitration Act 1996, now wants to take the battle to the enemy. It wants (a) to commence another arbitration claiming damages for breach of the original arbitration agreement, reckoned by the damages and costs represented by the court proceedings in France and Spain; (b) damages for those states’ failure to abide by the declaratory award; and (c) damages for failure to abide by the s.66 judgment. Spain and France resist service out on the basis that they are entitled to state immunity, and that the claims based on the award and the judgment must in any case fail.

The High Court held, in two different proceedings (see here and here), that sovereign immunity did not apply; that claims (a) and (b) succeeded; and that claim (c) failed because of the effect of the insurance provisions in what is now Articles 10-16 of Brussels I Recast (this being, of course, a pre-Brexit affair). Both sides appealed, and the appeals were consolidated.

On sovereign immunity the Court of Appeal have now sustained the judgment of non-applicability and as a result allowed claim (a) to go ahead. They have equally upheld the first instance judgment against Steamship on claim (c): although in name a claim under a judgment this is, it says, still in substance a claim by an insurer against its insured which, under what is now Art.14 of Brussels I Recast, can only be brought in the domicile of the latter. On claim (b), however, it has held (contrary to an earlier suggestion in this blognostra culpa, we can’t be right every time) that while the jurisdiction rules of the Brussels regime do not stand in the way, the claim is bound to fail. The award being merely declaratory, there can be no duty to perform it because there is nothing to perform, and hence no liability for disregarding it.

The arbitration will now therefore go ahead. Assuming it leads to an award in Steamship’s favour, Steamship will then no doubt seek New York Convention enforcement and/or get a s.66 judgment which they will oppose to any attempt by France and Spain to get judgment here, and doubtless also try to weaponise in order to get their Spanish and French costs back. (Meanwhile they may rather regret not having asked in the original arbitration proceedings for a positive order not to sue in France or Spain, rather than a mere declaration: but that’s another story.)

There’s little to add at this stage. But there is one useful further confirmation: s.9 of the State Immunity Act, removing state immunity in the case of a written agreement to arbitrate, applies not only to a direct contractual obligation to arbitrate, but also to an indirect duty to do so Yusuf-Cepnioglu-style. Useful to know.

Will France and Spain now come quietly, thus putting an end to this saga (which has already appeared in this blog here, here, here, here and here)? It’s possible, but We’re not betting. We have a sneaking suspicion that the events of November 2002 may well continue to help lawyers pay their children’s school fees for some little time yet.

Dock brief

In July last year we noted the holding of Teare J that Holyhead Marina came within the dock-owner’s right to limit liability under s.191 of the Merchant Shipping Act 1995. The issue arose because the Marina faced multiple claims from yacht owners following devastation wrought by Storm Emma in 2018.

We approved then, and are happy to say that the Court of Appeal does now. Today in Holyhead Marina v Farrer [2021] EWCA Civ 1585 it confirmed Teare J’s conclusion that while not a dock, the Marina was a landing place, jetty or stage (which are included in the definition of places entitled to limit), and that there was no reason whatever to limit the entitlement to purely commercial port facilities. ‘Nuff said. Marina owners can breathe a sigh of relief, while hull insurers no doubt will mull putting up rates yet again on yachts to mark the loss of another source of subrogation rights.

Confidential information v trade secrets

Image by Aymanejed from Pixabay

Richard Baker Harrison Ltd v Brooks and others – [2021] All ER (D) 94 (Oct) offered the opportunity for a further exploration of the new legal relationship between trade secrets and confidential information, yet ultimately the case demonstrates how the legal community remains comfortable addressing trade secrets through the prism of confidentiality.

Richard Baker Harrison Limited (“RBH”) is a leading distributor of minerals and chemical raw materials which it supplies to manufacturers worldwide. Whilst not in itself a manufacturer it occupies a key position within the plastic, rubber, coating, adhesive and sealant, composite, ceramic and polishing sectors. In this case RBH sought to enforce obligations of non-competition, confidentiality, and post-termination restrictions against two former employees – Mr Brooks and Mr Sambrook – who had left RHB to establish SBS Sourcing Limited (a mineral sourcing and supply services business).

It was not in dispute that Brooks and Sambrook owed express obligations to protect RBH’s confidential information under their contract of employment but both defendants accepted that their contracts of employment also included the implied term of good faith and fidelity. Deputy High Court Judge Margaret Obi noted, “[T]his abstract concept includes an obligation to refrain from conduct which would be regarded as unacceptable by reasonable and honest people. In essence, it is no more than an obligation to loyally carry out the role of an employee. However, unlike a fiduciary duty, it does not require the employee to act solely in the interests of the employer … and mere preparations to set up a competing business after the termination of the employment are not necessarily a breach of contract.”

Mr Brooks admitted that he was under a duty, whilst employed, to maintain the confidentiality of RBH’s trade secrets and/or confidential information, and not to use any information obtained in confidence as a consequence of his employment to the detriment of RBH. However, he denied that there were any equitable duties in relation to trade secrets and/or confidential information that were not covered by the express terms or applicable implied terms of the contract. Accepting this submission Judge Obi denied the existence of any equitable duty relating to misuse of trade secrets.

Finding it to be “trite law that during the currency of the employment relationship the employer is entitled to protect confidential information whether it amounts to a trade secret or not”, Judge Obi was satisfied that RBH’s “customer/supplier connections, the stability of its workforce and the protection of its confidential information are all legitimate business interests requiring protection”.