Extent of The Right of Subrogation in Insurance Law  

Sompo Insurance Singapore Pte Ltd v. Royal & Sun Alliance Insurance Plc [2021] SGGC 152

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Singapore Marine Insurance Act 1994 (which is based on English Marine Insurance Act 1906) s. 79(1) stipulates (emphasis added):

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.

The question in this case was: “does an insurer’s right of subrogation extend to the right to call upon a performance bond issued to the assured?”  

The facts can be summarised as follows: In December 2013, the Government of Singapore entered into a contract with Geometra for the transport of military cargo. It was a condition under the contract that Geometra would provide an unconditional performance bond for 5 % of the contract price. This was satisfied by Sompo issuing a bond in favour of the Government.

The Singapore Government also purchased an insurance policy from RSA with regard to this shipment against the risk of loss or damage to cargo. When the cargo was damaged during transport the Government sought and obtained indemnity for the loss from RSA, which then commenced a subrogated recovery action under s. 79(1) of the Act and called on the performance bond issued by Sompo. To this end, RSA’s lawyers wrote to Sampo and made a demand on the bond “on behalf of the Government of Singapore”. Sampo refused the call and the matter was then litigated. In the District Court, RSA secured a judgment in its favour. Sampo appealed the decision to the High Court.

One of the arguments put forward by Sompo was that the bond had ultimately expired as it was not called upon by the Singapore Government. This point was easily disposed by the High Court on the ground that the letter of the RSA’s lawyers was in effect written “on behalf of Singapore Government” as they acquired the right to wear the shoes of the assured, in this case the Government, pursuant to their right of subrogation.

The main discussion was whether the insurer’s right of subrogation extended to the right to call on the performance bond.  The High Court had no doubt that it did. Philip Jeyaretnam JC confirmed that the common law principle of subrogation grants an insurer the entitlement to every right the assured has to recover in respect of a loss including the right to call on a performance bond.    

The judgment is not only in line with the wording and ethos behind s. 79(1), but is in accord with the case law on the subject especially Castellian v. Preston (1883) 11 QBD 380; London Assurance Corp. v. Williams (1892) 9 TLR 96 and more recently England v. Guardian Insurance Ltd [2000] Lloyd’s Rep IR 409. Moreover, it would have been incongruous to hold that insurers are entitled to pursue subrogated recoveries against the person responsible for the loss but not use all rights and remedies that the assured would be able to pursue for recovery including calling on performance bonds. It is very likely that a similar judgment would have been delivered, had the case been litigated in England & Wales.

Misrepresentation in Procuring Insurance- Avoidance or Not?  

Jones v. Zurich Insurance [2021] EWHC 1320 (Comm)

When obtaining insurance cover for his Rolex watch in May 2018, Mr Jones made a representation to the insurer (Zurich), through his insurance broker, that he had not made any other insurance claim in the previous five years. This was not accurate as Mr Jones had previously claimed for a lost diamond in 2016.

Mr Jones put forward an insurance claim for loss of his beloved Rolex watch (valued at £ 190,000), said to have come off his wrist while skiing. The insurer turned down the claim on the basis that Mr Jones made a misrepresentation on his claim history and it would not have written the policy, or would have written it on materially different terms, had the true state of affairs been disclosed (s. 2(2) of the Consumer Insurance (Disclosure and Representation) Act (CIDRA) 2012). In the alternative, the insurer argued that if it had known the true state of affairs, it would have charged a substantially higher premium and the claim should be reduced proportionately. The insurer did not plead that the misrepresentation was “deliberate or reckless”.

His Honour Judge Peeling QC had no hesitation in holding that the assured failed to take reasonable care not to make a misrepresentation to the insurer when questioned about his claim history and he was also satisfied that the insurer could avoid the policy as it managed to demonstrate that it would not have entered into the insurance contract at all had it been aware of the previous claim made in 2016 for a lost diamond. In reaching this decision, the judge considered expert evidence from underwriters. Both experts agreed that some underwriters might accept this particular risk at higher premium and others would refuse to underwrite altogether, but different in emphasis as to how usual a refusal to underwrite would be. However, what ultimately swayed the judge was the fact that the underwriter (Mr Green) had expressed concern in his written notes about the jewellery element of the cover. He also stated in his evidence that “the answer to whether or not there had been ant previous claim was extremely significant to my assessment of the risk… it was already a case which was borderline declinature… it’s just not one which would fit our underwriting strategy.”. The judge accepted his evidence.

The judgment makes clear that the burden of proof on the insurer to establish that it would not have entered into an insurance contract is a high one but can certainly be satisfied especially in cases where underwriters could present to judge written notes confirming their hesitancy to take the risk in the first instance supported by reliable expert evidence. The relevant underwriter’s contemporaneous notes and records giving clues about his thought process at underwriting stage as well as copes of e-mails and documents provided by the assured and his broker were very helpful to advance the insurer’s case.       

The case was considered under the CIDRA 2012 (as this was personal insurance) but it is certainly a good illustration as to how the judges might interpret certain parts of the Insurance Act (IA) 2015 since CIDRA 2012 and IA 2015 share similar provisions (i.e. both of these legal instruments allow an insurer to avoid the policy for misrepresentation if the insurer can demonstrate that the misrepresentation was “deliberate or reckless” or “the insurer would not have underwritten the policy on any terms had there been no misrepresentation”).    

“Inducement” Requirement for Non-Disclosure and/or Misrepresentation Further Clarified

What if the insurer ends up charging less premium and non-disclosure of material facts is a contributory factor? Could it be said in that case that inducement is established as a matter of law? This was essentially the thrust of the insurer’s appeal in Zurich Insurance plc v. Niramax Group Ltd [2021] EWCA Civ 590 against the judgment of Mrs Justice Cockerill, J (which also was reported on this blog last year). Reminding readers the facts briefly: the assured ran a waste collection and waste recycling centre and obtained an insurance policy from the insurer in December 2014. In September 2015 a fixed shredding machine, known as Eggersmann plant, was added to the policy with an endorsement. On 4 December 2015, a fire broke out at the assured’s premises and the Eggersmann plant along with the other plant was destroyed. The assured made a claim, which, at trial was valued at around £ 4.5 million, under the Policy. The majority of the claim related to the loss of the Eggersmann plant, which was valued around £ 4.3 million. The insurer refused to pay stating that the assured’s non-compliance with risk requirements under the buildings policy with another insurer and the fact that special terms under that policy were imposed on the assured were materials facts which needed to be disclosed under s. 18(1) of the MIA 1906. Mrs Justice Cockerill agreed that these were material facts and needed to be disclosed. However, it was held that the insurer failed to demonstrate that, if the facts had been fully disclosed, the original Policy for the plant (effected in December 2014) would not have been renewed. On the other hand, the insurer was able to demonstrate that, if the facts had been fully disclosed (especially imposition of special circumstances for the assured company by another insurer), the extension of cover for the Eggersmann plant would have been refused. Accordingly, it was held that the insurer was entitled to avoid the cover for the endorsement under the Policy and no indemnity was due for the loss of the Eggermanns plant.  Otherwise, the original Policy stood and the insurer was bound to indemnify the assured for the items of mobile plant which were covered by the original Policy (as renewed in December 2014) and damaged in the fire.

On appeal, the assured was essentially arguing that they should have been allowed to avoid the original policy as well as the Eggersmann endorsement as they ended up charging less premium as a result of the assured’s non-disclosure with regard to special conditions imposed on them by another insurer due to non- compliance with risk requirements. Before evaluating the legal position on “inducement”, it is worth highlighting facts that led the insurer to charge premium less than it would have normally done. When rating risks, the particular insurer normally apply a “commoditised and streamlined” process that take into account three aspects, namely the amount of the cover, the nature of the trade, and the claims experience. A junior employee of the insurer when entering these variables, instead of categorising the risk as waste, with an automatic premium of 6 %, categorised it as contractor’s portable plant, with a premium of 2.25, to which a loading of 40 % was applied. The argument of the insurer is that if full disclosure had been made, the risk would have been referred to the head underwriter who would have noticed the mistake and accordingly priced the premium correctly. The non-disclosure therefore fulfills a “but for” test of causation in that it provided the opportunity for a mistake to be made in the calculation of premium that would not otherwise have been made.

Popplewell, LJ stressed in his judgment, at [30], that

“in order for non-disclosure to induce an underwriter to write the insurance on less onerous terms than would have been imposed if disclosure had been made, the non-disclosure must have been an efficient cause of the difference in terms. If that test of causation is not fulfilled, it is not sufficient merely to establish that the less onerous terms would have not been imposed but for the non-disclosure.”                            


To support this finding, he made reference to several legal authorities, including the judgment of the House of Lords in Pan Atlantic Insurance Ltd v. Pine Top Ltd [1995] 1 AC 501, but perhaps the words of Clarke, LJ, in Assicurazioni Generali SpA v. Arab Insurance Group [2002] EWCA 1642, at [62] emphasised in the clearest fashion the accurate legal position:

“In order to prove inducement the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevant non-disclosure or misrepresentation he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of doing so.”

 The Court of Appeal’s judgment in the present case, and the line of authority on the subject of inducement, is a good reminder that in most cases if an insurer cannot satisfy the effective cause test he will also be unable to satisfy the “but for test”. But the opposite is not always true. There could be cases, like the present one, where it is possible to satisfy the “but for test” but the non-disclosure or misrepresentation could still not be the effective cause leading the insurer to enter into the contract on the terms it did. Here, the reason for the insurer charging less premium for the risk underwritten in December 2014 was the error of the junior employee mistakenly categorising the risk. The insurer has, therefore, failed to prove that non-disclosure of the condition imposed by another insurer had any impact on the premium charged or the decision to insure the assured. Accordingly, the judgment of the trial judge on this point (lack of inducement to enable the insurer to avoid the original policy) was upheld.

The case was considered under the Marine Insurance Act 1906 (s. 18). The law in this area was reformed by the Insurance Act 2015 especially with regard to remedies available in case of breach of the duty to make a fair representation. There is no indication, however, that the law reform intended to alter the “inducement” requirement (and in fact the Law Commissions stated clearly in the relevant reports published that this was not the case). It can, therefore, be safely said that the decision would have been the same has the case been litigated under the Insurance Act 2015.       

EU Proposes a Uniform Approach to the Regulation of Artificial Intelligence

Artificial intelligence (AI) is used in many domains ranging from public sector to health, finance, insurance, home affairs and agriculture. There is no doubt that AI can potentially bring a wide array of economic and societal benefits for nations and humanity as a whole. However, it has been subject of intense deliberation as to how AI can be best regulated given that its applications could potentially have adverse consequences on privacy, dignity and other fundamental human rights of individuals. There is no easy answer to this question and various options have been deliberated over the years. Academics have come up with theories as to which manner of regulation would suit the interest of the society best, whilst various stakeholders (developers and/or users of the technology) have supported different types of regulation alternatives suiting their interests.

On 21 April, the European Commission unveiled its proposal for the regulation of AI in EU (2021/0106 (COD)). This is an important development which will, no doubt, generate significant interest (and debate) and play a role in shaping the regulatory framework not only in the EU but perhaps globally. In a nutshell, the proposed new regulatory regime for AI will be as follows:

  • The regulation lists AI systems whose use is considered unacceptable and accordingly prohibited (Article 5). Such AI practices are: i) those that deploy subliminal techniques beyond a person’s consciousness in order to materially distort a person’s behaviour in a manner that causes or is likely to cause that person or another person physical or psychological harm; ii) those that exploit any of the vulnerabilities of a specific group of persons due to their age, physical or mental disability, in order to materially distort the behaviour of a person pertaining to that group in a manner that causes or is likely to cause that person or another person physical or psychological harm; iii) those that are used by public authorities or on their behalf for the evaluation or classification of the trustworthiness of natural persons over a certain period of time based on their social behaviour or known or predicted personal or personality characteristics, with the social score leading to either or both of the following: a) detrimental or unfavourable treatment of certain natural persons or whole groups thereof in social contexts which are unrelated to the contexts in which the data was originally generated or collected; b) detrimental or unfavourable treatment of certain natural persons or whole groups thereof that is unjustified or disproportionate to their social behaviour or its gravity; and iv) those that use “real-time” remote biometric identification systems in publicly accessible spaces for the purpose of law enforcement (certain exclusions also listed for this).
  • The new regime contains specific rules for AI systems that create a high risk to the health and safety of fundamental rights of natural persons (Title III, Arts 6 and 7). Annex III, lists a limited number of AI systems whose risks have already materialised or likely to materialise in the near future (e.g. biometric identification and categorisation of natural persons; AI systems intended to be used for recruitment or selection of natural persons for employment; AI systems intended to be used by public authorities to evaluate the eligibility of natural persons for public assistance benefits and services and AI systems intended to be used by law enforcement authorities as polygraphs and similar tools to detect the emotional state of a natural person) Article 7 authorises the Commission to expand the list of high-risk AI systems in the future by applying a set of criteria and risk assessment methodology.
  • The proposed regulation sets out the legal requirements for high-risk AI systems in relation to data and data governance, documentation and record keeping, transparency and provision of information to users, human oversight, robustness, accuracy and security (Chapter 2).              
  • Chapter 4 sets the framework for notified bodies to be involved as independent third parties in conformity assessment procedures and Chapter 5 explains in detail the conformity assessment procedures to be followed for each type of high-risk AI system.
  • Certain transparency obligations have been set for certain AI systems (e.g. those that i) interact with humans; ii) are used to detect emotions or determine association with (social) categories based on biometric data and iii) generate or manipulate content (deep fakes)) by virtue of Title IV.
  • Title V encourages national competent authorities to set up regulatory sandboxes and sets a basic framework in terms of governance, supervison and liability.   
  • The draft regulation proposes to establish a European Artificial Intelligence Board which will facilitate a smooth, effective and harmonised implementation of the requirements under this regulation by contributing to the effective corporation of the national supervisory authorities and the Commission and providing advice and expertise to the Commission. At national level, Member States will have to designate one or more national competent authorities and, among them, the national supervisory authority, for the purpose of supervising the application and implementation of the regulation (Title VI).           

There is no doubt in the coming weeks the suitability of the proposed regulation will be rigorously deliberated. For example, civil rights campaigners might possibly argue that the proposed regulation does not go far enough as the it allows several exceptions to the use of “real time” biometric identification systems. Fundamentally, Article 5 of the proposed regulation states that the use of real-time biometric identification systems can be allowed for the “prevention of a specific, substantial and imminent threat to the life or physical safety of natural persons or of a terrorist attack”, the interpretation of which leaves wide discretionary power to the authorities. On the other hand, developers of AI applications might find it troubling that the Commission would have a discretion going forward to treat new applications developed as high-risk making them subject to a demanding compliance regime set out in the proposed regulation.

Obviously, the proposed regulation will not apply in the UK. However, it is important for the relevant regulators in the UK to see what is brewing on the other side of the Channel. We should follow the debates emerging, reactions to it from various interest groups and academics with interest. There might be considerable benefit for the UK to make its move once the path the EU is taken on this issue is settled. This might bring economic advantages and even perhaps a competitive edge (assuming that more efficient regulatory measures are preferred in the UK)!   

Non-Disclosure, Materiality and Inducement in Commercial Insurance Context (Again)!

What happens if an assured fails to disclose to the insurer the fact that special conditions were imposed by another insurer as part of another insurance contract? Could that amount to an actionable non-disclosure under s. 18 of the Marine Insurance Act (MIA) 1906? This was the main issue in Niramax Group Ltd v. Zurich Insurance plc [2020] EWHC 535 (Comm). The assured, Niramax, is a company carrying out the business of waste collection and waste cycling from various sites in north-east England. Niramax held a suite of insurance policies with the insurer, Zurich, which provided cover for a variety of risks relating to its plant and machinery. One of these policies was a contractor’s plant policy which provided all risks cover for a mobile plant owned by the assured (the Policy). Niramax also held buildings cover separately with a variety of other insurers. One of these insurers was Millennium Insurance. In the process of providing insurance cover for a building owned by Niramax in 2014, a risk survey report was prepared by Millennium which laid out seven risk requirements. One of these requirements was the installation of a fire suppression system at the main recycling facility of Niramax located at Hartlepool. Even though the assured was reminded by Millennium of the need to install the fire suppression system on several occasions, the system was never installed and as a result special conditions stipulated by the policy came into force on 22 October 2014 increasing the deductible to £ 250,000 and requiring Niramax to self-insure for thirty five percent of the balance of any loss.

In December 2014, Niramax renewed its policy with Zurich on the mobile plant. In 2015, Niramax acquired another mobile plant (Eggersmann plant) and in September 2015, Zurich was persuaded to amend the Policy to extend cover to the newly acquired plant until the renewal date of mid-December 2015. On 4 December 2015, a fire broke out at Niramax’s premises and the Eggersmann plant along with the other plant was destroyed.
Niramax made a claim, which, at trial was valued at around £ 4.5 million, under the Policy. The majority of the claim related to the loss of the Eggersmann plant, which was valued around £ 4.3 million. Zurich refused to pay stating that it was entitled to avoid the Policy for material non-disclosure and/or misrepresentation. Niramax brought the current proceedings against Zurich.

It was held that the assured’s non-compliance with risk requirements under the buildings policy with Millennium and the imposition of special terms under that policy were materials facts which needed to be disclosed under s. 18(1) of the MIA 1906. However, the insurer (Zurich) failed to demonstrate that, if the facts had been fully disclosed, the Policy for the plant (effected in December 2014) would have been renewed. On the other hand, Zurich was able to demonstrate that, if the facts had been fully disclosed (especially imposition of special circumstances for the assured company (Niramax) by another insurer), the extension of cover for the Eggersmann plant would have been refused. Accordingly, it was held that the insurer, Zurich, was entitled to avoid the cover for the endorsement under the Policy and no indemnity was due for the loss of the Eggermanns plant. The insurer was required to return the premium received for the endorsement. Otherwise, the original Policy stood and the insurer was bound to indemnify Niramax for the items of mobile plant which were covered by the original Policy (as renewed in December 2014) and damaged in the fire.

Two comments are in order. First, it is interesting to see that the trial judge (Mrs Justice Cockerril) found that the original policy stood (i.e. there was no inducement) even though it would have not been written on the same terms (i.e. with higher premium to reflect the correct multiplier) if full disclosure had been made by the assured. This certainly raises an interesting question going forward on the application of the test of inducement and seems to be at odds with the sentiments expressed by Clarke, LJ, in Assicurazioni Generali SpA v. Arab Insurance Group [2002] EWCA Civ 1642; [2003] Lloyd’s Rep IR 131, at [62] (emphasis added):
In order to prove inducement the insurer or reinsurer must show that the non-disclosure or misrepresentation was an effective cause of his entering into the contract on the terms on which he did. He must therefore show at least that, but for the relevant non-disclosure or misrepresentation, he would not have entered into the contract on those terms. On the other hand, he does not have to show that it was the sole effective cause of his doing so.

Second, the contract was obviously concluded before the Insurance Act 2015 (IA) came into force but is highly unlikely that the application of the AA 2015 would have led to a different outcome. The materiality test applicable under the IA 2015 (under s. 7(3) of the IA 2015) is practically the same and there is still a need to prove inducement for actionable non-disclosure under the 2015 Act.

No Joy for Insurers- Test Case Goes Against Business Interruption Insurers

Financial Conduct Authority v. Arch Insurance (UK) and Others [2021] UKSC 1 

This was a test case brought by the Financial Conduct Authority (FCA) on behalf of holders of business interruption policies. During the spring national lock-down (in 2020), businesses which held such policies made claims from their insurers but most of these claims were denied on the premise that the wording used in such policies was not broad enough to provide indemnity to the policy holders. In particular, the focus turned on business interruption policies that provided cover for infectious and notifiable diseases (disease clauses) and prevention of access and public authority clauses and restrictions (prevention of access clauses). The FCA selected a representative sample of 21 types of policies issued by eight insurers for the test case. It is believed that the outcome of the case could be relevant for 370,000 businesses holding similar policies issued by 60 different insurers. The High Court delivered its judgment on 15 September [2020] EWHC 2448 (Comm) mainly in favour of the assureds. Using leapfrog appeal procedure, the FCA and six insurers appealed to the Supreme Court composed of Lords Reed, Hodge, Briggs, Hamblen and Leggatt. 

The judgment of the Supreme Court is very technical and lengthy (112 pages) but is no doubt a great victory for holders of such policies. The analysis below will focus on the key points made by the Supreme Court. 

Disease Clauses 

When a business interruption policy provides cover for losses emerging from “any occurrence of a Notifiable Disease within a radius of 25 miles of the premises” what does that exactly mean? Does it mean that cover is available for business interruption losses as long as it could be shown that they resulted from the occurrence of the disease within the radius? Or does the clause provide cover as long as there is one case of illness caused by the disease within that radius? Naturally, the former construction would restrict the limit of cover as in most cases it would be impossible to show that the losses resulted from the localised occurrence of the disease as opposed to the wider pandemic and government restrictions generally. The High Court went along with the latter construction which the Supreme Court was prepared to accept with a slightly different reasoning. The Supreme Court by making reference to the wording of the clause, especially the emphasis in the clause on “any occurrence of a Notifiable disease”, indicated that the wording of the clause is adequate to provide cover for the business interruption caused by any cases of illness resulting from Covid-19 that occur within 25 miles of the business premises. 

Prevention of Access 

It has been stressed that such clauses generally provide cover for business interruption losses resulting from public policy intervention preventing access to or use of the insured premises. A legal deliberation was necessary to determine the nature of public policy intervention required to trigger such clauses. The Supreme Court agreed with the High Court’s analysis on this point to the effect that “restrictions imposed” by a public authority should be understood as ordinarily meaning mandatory measures “imposed” by the authority pursuant to its statutory or other legal powers and the word “imposed” connotes compulsion and a public authority generally exercises compulsion through the use of such powers. On that premise, Prime Minister’s instructions in a public statement of 20 March 2020 to named businesses to close was capable of being a “restriction imposed” regardless of whether it was legally capable of being enforced as it was a clear, mandatory instruction given on behalf of the UK government.  

In some hybrid policies a different wording is used such as “inability to use” or “prevention of access” or “interruption”. The Supreme Court was inclined to construe such wordings broadly. For example, in policies where the insurance provides cover when there is “inability to use” the premises, the Supreme Court was adamant that the requirement is satisfied either if the policyholder is unable to use the premises for a discrete part of its business activities or it is unable to use a discrete part of its premises for its business activities as in both of these situations there is a complete inability to use. This construction opens the door for businesses in hospitality sector which can do only take-away meals for the loss of their in-person business. Similarly, the Supreme Court rejected insurers’ argument that the hybrid policy that refer to “interruption” implies a “stop” or “break” to the business as distinct from an interference, holding that the ordinary meaning of “interruption” is capable of encompassing interference or disruption which does not bring about a complete cessation of business activities, and which may even be slight.  

Causation Issue  

Insurers argued that traditional causation test applied in insurance law should not be adopted as the appropriate test in the context of construing relevant provisions of business interruption policies. Instead, it was argued, that is should be necessary to show, at a minimum, that the loss would not have been sustained “but for” the occurrence of the insured peril. In their view, it was necessary for the business to show that the insured peril had operated to cause the loss; otherwise due to the widespread nature of the pandemic it would be very easy for holders of such policies to show business interruption losses even if the insured risk had not occurred. The obvious objective for developing this contention was to limit the scope of cover provided by such policies as otherwise (if the traditional causation rules were to apply in this context) businesses operating in locations which have no or few cases of the illness could still recover under the policy even though the loss in those instances is caused by disruption occurring outside the radius (or nationally).

In developing their argument, insurers relied heavily on the decision in Orient-Express Hotels Ltd v Assicurazioni General SpA [2010] EWHC 1186 (Comm); [2010] Lloyd’s Rep IR 531. In that case, the claim was for business interruption losses caused by Hurricanes Katrina and Rita. The insured premises in question were a hotel in New Orleans. There was no dispute that the insured property suffered physical damage as a result of the hurricanes. When it came to the business interruption losses, however, insurers in Orient-Express case successfully argued that there was no cover because, even if the hotel had not been damaged, the devastation to the area around the hotel caused by the hurricanes was such that the business interruption losses would have been suffered in any event. Accordingly, the necessary causal test for the business interruption losses could not be met because the insured peril was the damage alone, and the event which caused the insured physical damage (the hurricanes) could be set up as a competing cause of the business interruption. The High Court chose to distinguish Orient Express from the current litigation on matters of construction.  The Supreme Court went further and decided that Orient-Express was wrongly decided and should be overruled. Analysing the facts of Orient-Express case the Supreme Court reached the conclusion that business interruption loss arose there because both as a result of damage to the hotel and also damage to the surrounding area as a result of hurricanes. Therefore, there two concurrent causes were in operation, each of which was by itself sufficient to cause the relevant business interruption but neither of which satisfied the “but for” test because of the existence of the other. In such a case when both the insured peril and the uninsured peril which operates concurrently with it arise from the same underlying fortuity (i.e. the hurricanes), then provided that damage proximately caused by the uninsured peril (i.e. damage to the rest of the city) is not excluded, loss resulting from both causes operating concurrently is covered.

Accordingly, the Supreme Court rejected insurers’ argument, holding that the “but for” test was not determinative in ascertaining whether the test for causation has been satisfied under the insuring clauses analysed as part of the test case. The traditional principles of causation should, therefore, be applied. The Supreme Court on this point concluded at [191]  

there is nothing in principle or in the concept of causation which precludes an insured peril that in combination with many other similar uninsured events brings about a loss with a sufficient degree of inevitability from being regarded as a cause – indeed as a proximate cause – of the loss, even if the occurrence of the insured peril is neither necessary nor sufficient to bring about the loss by itself.” 

Applying the traditional proximity test, essentially enables business to recover under such policies simply by proving a link between the local occurrences and the national reaction even if the “but for test” is not satisfied.

Some Further Remarks 

The judgment is legally binding on the eight insurers that agree to be parties to the test case but it provides guidance for the interpretation of similar policy wordings and claims. However, it should not be ignored that there are still many policy wordings not tested or considered by this decision. There is no doubt that the decision is welcomed by businesses that have been adversely affected from the global pandemic and have failed to rely on their business interruption policies. Was this a case simply concerning construction of certain insurance contracts or other considerations (i.e. impact of the pandemic on social and economic life) played a significant role? The answer is probably the latter even though insurers throughout the litigation maintained that “one simply should not be allowed to rewrite an insurance contact to expand the scope of the indemnity”. But isn’t this the nature of test cases, i.e. judges are usually required to pass moral, ethical judgments on an issue that has significant implications on a part of the society? The global pandemic had significant implications on our lives and economy and at times like this it is inevitable that a judgment needs to be made as to where the economic loss resulting from the pandemic should fall. This is what the UK Supreme Court did here!     

Can Independent Contractors be sued under the Athens Regime?

Sperling v. Queen of Nanaimo [2020] BCSC 1852 (CanLII)

Athens Convention Relating to the Carriage of Passengers and Their Luggage at Sea 1974 has been implemented into Canadian Law by the Marine Liability Act 2001. By virtue of Article 3.3 of the Athens Convention, a carrier is liable for the negligence of its “servants and agents”.

The plaintiff claims damages for personal injuries allegedly sustained when the Queen of Nanaimo, a ferry on which she was a passenger, hit the dock at Mayne Island BC on 3 August 2010. It is the contention of the plaintiff that she was thrown from a chair abroad the ferry and struck her head on a pole.  In addition to the owner and operator of the ferry, the present applicants, Ulstein Maritime Ltd and Rolls Royce Ltd, are named as the defendants in this action. They are alleged to have been involved in “the design, construction, installation, maintenance, service, inspection, refit and/or repairs of the operating systems, equipment and/or machinery of the ferry, including but not limited to those relating to its propulsion, breaking and or steering systems.”

The applicants (Ulstein) seek a declaration under r 9-4 of the Supreme Court Civil Rules that any liability they may have to the plaintiff is subject to a monetary limit of about CA$ 325,000 (the limit set by the Athens Convention 1974). Article 11 of the Athens Convention 1974 extends the benefit of the monetary limit to servants or agents of a carrier acting within the scope of their employment.

 Rule 9-4 of the Supreme Court Civil Rules stipulate:

…(2) If, in the opinion of the court, the decision on the point of law substantially disposes of the whole action or of any distinct claim, ground of defence, set-off or counterclaim, the court may dismiss the action or make any order it considers will further the object of these [Rules]…

If the application of Ulstein is successful, their liability and the extent of their liability would be determined under the Athens Convention 1974. This is an outcome that plaintiff wishes to avoid at any cost as bringing a personal injury claim with no limit to liability outside the Athens Convention regime against Ulstein would obviously yield serious advantages for the plaintiff in terms of litigation strategy.  

The key question, therefore, is whether Ulstein can be regarded as the “servant or agent” of the carrier for the purposes of the Athens Convention 1974. These terms have not been defined in the Convention and it is natural that when determining the meaning of these terms each contracting state will be tempted to defer to its legal system. This is precise what the applicants suggest that the Court should refrain from. It is the contention of the applicants that common law definitions of, and distinctions between servants/employees, agents and independent contractors should not apply to the interpretation of international agreements given that such agreements are meant to apply in multiple jurisdictions under many legal systems (a similar point was made in J.D. Irving Ltd v. Siemens Canada Ltd 2016 FC 69 at [260]).

The author has sympathy to this approach (as it promotes uniformity of the Athens regime) even though he is well aware of several cases where courts in contracting states have applied their national law in answering questions not addressed in the relevant international convention.

To advance their argument further the applicants argue that there is a distinction between contractors who repair or maintain a vessel, including installing necessary equipment, and those who manufacture or modify a vessel or its components. It is the contention of the applicants that the former are agents of the carrier while the latter are not. Applying this logic, the applicants suggest that they should be treated as the agent of the carrier for the purposes of the Athens Convention as their contract with the operators required them to maintain, service, inspect the vessel in addition to repair, design and install necessary parts.

The plaintiff, on the other hand, does not agree the extended definition of agency applies, and insists that common law definitions remain relevant.

The Honourable Mr Justice N Smith dismissed the application of the applicants under Rule 9-4 indicating that the ruling sought by the applicants would likely not be decisive or shorten the trial and it is a point of law that cannot be resolved without hearing evidence. He indicated that it would be for the judge to decide the nature of the relationship between the applicants and the operators, what work the applicants were engaged to perform.

It is fair to say that the issue of whether an independent contractor who is engaged in maintenance of the vessel can be regarded as an agent or employee of the carrier for the purposes of the Athens Convention is still an open one. It is submitted that at trial the court should attempt to maintain the objective behind extending the application of the Athens regime to the agents and employees of the carrier. In a technical sense, the applicants here do not seem to be an agent or employee of the carrier (under common law). However, if they are actively involved in maintaining the vessel’s systems as an independent contractor should their position be any different than an employee onboard responsible for maintaining the vessel? Put differently, if their activities have a significant impact on the passenger’s safety onboard the vessel, is it in the spirit of the Convention to leave them outside the Athens regime? It is expected that the judge will be able to shed light on the position of independent contractors who have an ongoing responsibility to maintain the vessel from the perspective of the Athens regime. Ultimately, the finding will be binding from the perspective of Canadian law. However, it will certainly be an analysis that will be put forward for consideration when the same issue arises in another jurisdiction that has implemented the Athens regime into its legal system.                             

Rescinding A Charterparty or Not! That is the Question SK Shipping Europe plc v. Capital VLCC 3 Corp and another (C Challenger) [2020] EWHC 3448 (Comm)

The charterers entered into a charterparty contract with the owners of the C Challenger in February 2017 for a period of two years. The charterparty contained a term warranting fuel consumption and speed. Following problems with a turbocharger, the charterers alleged inter alia that the owners had misrepresented the vessel’s performance capabilities. The charterers raised the issue concerning potential misrepresentation on the part of the owner of the capabilities of the chartered vessel during a meeting in London on 21 March 2017. It was not until 19 October 2017 that the charterers purported to rescind for misrepresentation or to terminate for repudiatory breach. During the period of March- September 2017, the charterers continued to use the vessel (by fixing occasionally sub-fixtures); deduct periodically from hire and reserve their rights. The following day, the owners purported to terminate on the basis that the charterers’ message was itself a renunciation.

Was there a misrepresentation on the part of the owners?

Under common law, for the charterers to be able to rescind the contract (i.e. set the charterparty aside) it is essential that they demonstrate that the owners made an inaccurate representation with regard to the capabilities of the chartered vessel in terms of speed and consumption. The main argument put forward by the charterers was that the details of the vessel’s consumption circulated to the market by the owners constituted a representation of fact (and this representation was substantially inaccurate). Foxton, J, rather appropriately, held that an owner by offering a continuing speed and consumption warranty in a charterparty could not be assumed to make an implicit representation as to the vessel’s current or recent performance. This certainly makes sense given that the warranty in question did not require the owners to act or refrain from acting in a certain way. The so-called “speed and consumption” warranty in the contract simply related to a particular state of affairs and was only concerned with the allocation of responsibility for certain costs in relation thereto.   

However, this was not the end of the matter! The charters also argued that in a letter sent by the owners, historical speed and consumption data provided which was not reasonably consistent with the average performance of the vessel over its last three voyages and therefore untrue. Foxton, J, found that the owners did not have reason to believe that the statement based on the three recent voyages was true and accordingly this amounted material misrepresentation. However, he also found that this would not have given the charterers the right to rescind the contract as there was no inducement. This was the case because if the same warranty had been offered, but no representation made as to the vessel’s performance, the charterparty would have been concluded on the same terms.

The effect of ‘reserving rights’

It is rather common for most parties in shipping practice to add a ‘reservation of rights’ statement to the end of messages in pre-action correspondence. Usually, such a statement has the effect of preventing subsequent conduct of an innocent party constituting an election. The trial judge found that the charterers were aware at the latest in July 2017 that the fuel consumption of the chartered vessel was misdescribed by the owners. Whilst the charterers sent messages to the owners that they wished to reserve their rights emerging from the misconduct of the owners, they went ahead to fix a voyage with a sub-charterer expecting the owners to execute this voyage. Foxton, J, on that basis, held that such actions of the charterers were incompatible with an attempt to reserve rights to set it aside the charterparty ab initio for misrepresentation of which they had complained. Put differently, the judgment illustrates that in a case where the innocent party demands substantial contractual performance from the other, this is unlikely to be prevented from being treated as an “affirmation” simply because the innocent party earlier attempted to reserve its rights.

Was the owner in repudiatory breach?

The judge accepted that the owner was in breach of the charterparty i) by refusing to accept the legitimacy of the Charterer’s refusal to pay hire or make deductions from hire and ii) by sending messages demanding payment of hire, wrongly asserting that the Charterer was in breach. The terms breached were deemed to be innominate terms. However, it was held that the breaches complained of, taken cumulatively, had not deprived the charterers of substantially the whole benefit which they were intended to obtain under the charterparty for the payment of hire, or “go to the root” of the charterparty. As a result, the charterers had not been entitled to terminate the charterparty and their communication to that effect was itself a renunciation, entitling the owners to damages representing the loss it suffered by reason.              

The facts of the case provided a great opportunity to the trial judge to construe and apply several key principles of contract law (note that in the judgment there is also an obiter discussion on the application of s. 2(2) of the Misrepresentation Act 1967). Perhaps the most significant contribution of the case to the development of the contract law is the trial judge’s observation on the effect of reserving rights in this context. As noted, the previous authorities have not provided any extensive consideration to this matter. It is now emphasised clearly that a reservation of rights will often have the effect of preventing subsequent conduct from constituting an election to keep the contract alive, but this is not an inevitable rule. One might say in this context “actions might speak louder than words”. So in any case whether a statement reserving the rights of an innocent party has the desired impact will depend on the actions of the innocent party!

Off-hire Clauses- Normally Construed Narrowly Unless the Wording Is Expansive!

Disputes concerning ‘off-hire’ clauses often require various legal construction techniques to be employed and can be rather challenging for the courts/arbitrators. However, the arbitrator managed to resolve the dispute under the relevant off-hire clause in London Arbitration 25/19 with not much difficulty.

The chartered vessel arrived at a port on the US West Coast on 23 October to discharge a cargo of steel products. The vessel’s cranes were inspected on behalf of the charterers’ stevedors by or on behalf of the International Longshore and Warehouse Union (ILWU) and the vessel failed that inspection. The owners maintained that the cranes were in good working order as they complied with all statutory and Class requirements and they had been inspected and used for loading and discharging in the US three months earlier. They also put forward a recent report from the crane manufacturers. The relevant off-hire clause in the charter party was worded in the following manner:

‘The Vessel will comply with any and all safety regulations and/or requirements applicable during the currency of this Charter Party, including those in effect of any port of loading and/or discharge. If the Vessel does not comply with said safety regulations or requirements, the Vessel will be off-hire until the Vessel is compliant with the said safety regulations or requirements… ‘

The charterers’ argument was that the vessel was off hire from the time when she failed the inspection to the time when she passed (i.e. after the cranes were repaired) and discharging started. The arbitrator found that the vessel’s failing the inspection amounted to breach of the Pacific Coast Marine Safety Code. This Code governed safe working practices and conditions for the whole of the US West Coast when ILWU labour was employed. The arbitrator found that the Code was at the very least a ‘safety requirement’ and quite possibly, for practical purposes also a ‘safety regulation’. The views of crane manufacturers, Class and engineering company were treated as irrelevant as they only reflected the earlier experience of the ship.

Given that the off-hire clause made explicit reference to ‘safety requirements’ as well as ‘safety regulations’, the outcome does not come as a surprise. Had it made reference only to ‘safety regulations’, a closer legal scrutiny of the nature and status of the Pacific Coast Marine Safety Code would have been necessary. The fact that the arbitrator refers to the Code as a ‘safety regulation for practical purposes’ indicates that from a technical perspective it might not qualify as a safety regulation! The message to charterers is very clear. Off-hire clauses are often construed in a narrow fashion so to be able to bring themselves under the off-hire clause they need to ensure that the wording used is expansive! Charterers in this case were glad that the wording in the off-hire clause was very broad i.e. made explicit reference to ‘safety requirements’. Few doubts can be raised for a finding that a Code that provides safe working practices and conditions in a port for stevedors, who are members of a trade union, is a ‘safety requirement’ for that port.                    

The Legal Effect of “Subject-to” in Charterparty Contracts

When negotiating charterparties, it is very common to make such negotiations “subject to” a variety of conditions. Justice Foxton in Nautica Marine Ltd v. Trafigura Trading (The Leonidas) [2020] EWHC 1986 (Comm) offered a valuable guidance on the legal effect of such clauses in charterparty contracts.

In the case, the owners entered into negotiations between 8-13 January 2016 to conclude a voyage charterparty for their crude carrier, the Leonidas, with Trafigura. These negotiations were initially subject to “Charterers’ Stem/Suppliers’/Receivers’/Management Approval” latest 17.00 Houston time, Tuesday 12 January, 2016. The loading ports were to include Aruba and St. Eustasius (collectively referred to as Statia). The intended loading terminal rejected the Leonidas on the basis that the vessel was too large to load at that particular berth (the vessel could have been able to load from the Statia SBM- another nearby terminal not chosen by the charterers).

The owners brought an action against Trafigura arguing that this was a performance condition, meaning that it is a condition which does not prevent a binding contract coming into existence, but if not satisfied the contract would cease to be binding. Building up on that, the owners argued that it was an implied term of the charterparty that Trafigura would take reasonable steps to satisfy the suppliers’ approval subject. It was maintained that Trafigura took no such steps to obtain that approval, or alternatively, that Trafigura bearing the burden of proof, would have to show that the suppliers’ approval would not have been obtained even if reasonable steps had been taken.

Foxton, J, held that the “Suppliers’ Approval Subject” was a pre-condition to a contract (condition precedent to contract) and, therefore, Trafigura was not required to take steps to obtain its suppliers’ approval. A few factors led him to conclude in this manner:

  • a “subject” is more likely to be a pre-condition than a performance condition where the subject involves the exercise of a personal or commercial judgment of one of the potential parties to a contract. Here, it was a commercial choice for Trafigura to determine who the relevant supplier would be and which terminals and berths/tanks within terminals, cargo would be loaded from;
  • the particular negotiating language of the parties referring to agreements as “on subjects” and “lifting” subjects, point towards a subject in the chartering context being more likely to be a pre-condition because it connotes that the subject is resolved by one or both parties removing it, rather than the subject being resolved automatically on the occurrence of an external event; and       
  • based on previous authority, the “Stem Subject” and “Management Approval Subject” were both pre-conditions; where “subjects” appear as a compendious phrase, it is more likely that they are all intended to have the same effect.

Obiter dictum, Foxton, J, considered how damages were to be assessed if the clause had been a performance condition. He held that because the alleged lost benefit (loss of profit under a concluded charterparty) was dependent on the decision of a third party (supplier) to approve the vessel, damages in that case had to be assessed on a “loss of chance” basis (Wellesley Partners v. Withers [2015] EWCA 1146)

Two points emerge from the judgment that have implications for the market. First, the judgment strongly indicates that a “subject to” clause in a charterparty will normally be construed as a condition precedent to a contract given that such clauses often involve the exercise of a personal or commercial judgment of one of the parties to the contract. Obviously, it is still possible that a “subject to” clause could be treated as a performance clause if it depends on the approval or performance of those other than the parties to the contract; e.g. “subject to the approval of the Ministry”. In that case, the question may arise whether or not one of the parties to the contract must act reasonably or in good faith in taking steps to ensure that the condition is lifted (See, The John S Darbyshire [1977] 2 Lloyd’s Rep 457). Second, there was a disagreement in the case as to whether the suppliers referred to in the subject were only terminals from which cargo was intended to be loaded or included the charterers’ contractual suppliers. Foxton, J was adamant that the phrase encompassed all those approvals which the charterer commercially wished to obtain on the supply side. This sounds sensible but naturally makes such conditions more challenging from the shipowners’ perspective.