Fair Presentation of the Risk and Waiver- Latest from Scotland on the Insurance Act 2015

Last year we commented on Young v. Royal and Sun Alliance plc [2019] CSOH 32 which was the first case to be decided under the Insurance Act (IA) 2015. The Scottish appeal court (Inner House, Court of Session) has recently upheld the first instance decision [2020] CSIH 25.

Let us remind our readers the facts of the case briefly. The co-assureds (Mr Young and Kaim Park Investments Ltd, a company of which Mr Young was a director) brought a claim of £ 7.2 million for extensive fire damage to commercial premises insured. The insurer, Royal and Sun Alliance plc, rejected the claim on the basis that the assured failed to disclose material information in breach of the duty of fair presentation under the Insurance Act (IA) 2015. The policy had been entered through an insurance broker. The assured was requested by the insurance broker to fill in a proposal form which was prepared using the broker’s software. One part of the proposal form required the proposer to select from various options in a drop-down menu. The instruction read: “Select any of the following that apply to any proposer, director or partner of the Trade or Business or its Subsidiary Companies if they have ever, either personally or in any business capacity: …” The drop-down menu that followed this instruction included an option that any of the persons identified had been declared bankrupt or insolvent. Neither Mr Young nor Kaim Park Investments had been declared bankrupt or insolvent, however, Mr Young had previously been a director of four other companies which had entered into insolvency. The option which was selected on the proposal form was “None”. Accordingly, the proposal forwarded to the insurer showed the option selected, i.e. “None”, and the list of persons to which the declaration related. Once receiving the presentation, the insurer sent an e-mail to the brokers providing a quote for cover and a list of conditions. The conditions, inter alia, included: “Insured has never been declared bankrupt or insolvent.

Before the commercial judge, Lady Wolffe, the assured’s argument was that the insurer’s e-mail response amounted to a waiver by the insurer of its right to receive the undisclosed information regarding the four insolvent companies. Section 3(5)(e) of the IA stipulates that the assured is not required to disclose a circumstance “if it is something as to which the insurer waives information.”

It needs to be stressed that the introduction of the IA 2015 does not alter the legal position with regard to waiver established by case law pre-dating the 2015 Act. On that basis, with reference to Doheny v. New India Assurance Co [2005] 1 All ER (Comm) 382, the commercial judge indicated that waiver could be established in a case where the insurer had asked a “limiting question” such that the assured could reasonably infer that the insurer had no interest in knowing information falling outwith the scope of the question. The classic example is where the proposal form asks about convictions within the last 5 years and which can instruct waiver of information about convictions more than 5 years ago. This was not held to be the case here and accordingly it was held that there was no waiver on the part of the insurer with regard to the information not fully disclosed (i.e. the involvement of Mr Young in four insolvent companies).

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The assured appealed. The main argument brought forward by the assured was that by showing that it was interested in one aspect of Mr Young’s experience of insolvency, the insurer had impliedly demonstrated that it was not interested in others, and, therefore restricted Mr Young’s duty of disclosure. The Court of Session indicated that the commercial judge successfully identified relevant legal principles in that to found implied waiver of the insurer of this nature it is necessary to show that it made an inquiry directing the assured to provide certain information but no other information. This means that the appeal turned on the construction of a single email sent by the insurer to the brokers when providing a quote (during the pre-contractual stage). The Inner Court found that there was nothing in the email that amounted to an inquiry. Essentially, the insurers were responding to the broker’s request to provide a quotation based on the information provided. The response of the insurers in the relevant email was, therefore, an offer to insure on a variety of terms and conditions. It was not an inquiry and did not amount to limited concern of Mr Young’s past experience of insolvency that excluded the undisclosed information from which he was required to disclose for fair presentation of the risk. The insurer was accordingly entitled to avoid the policy.

It is hard to suggest that the case establishes any novel point with regard to “implied waiver” of the duty of disclosure on the part of the assured by the insurer. Although, this is a Scottish case, it is very much in line with the pre-Act English law authorities and essentially turns on the impression an insurer’s response to a disclosure might create on the mind of a reasonable assured. If it can be said that insurer’s answer amounts to an inquiry (judged from the perspective of a reasonable assured) there could be a possibility of arguing that the relevant assured could infer that the insurer had no interest in knowing information falling outside the scope of that inquiry. Otherwise, there will be no issue of waiver by asking “limiting questions”. The judgment is obviously not binding on English courts but one suspects that it is one that will be referred to not only because it is the first case under the IA 2015 but also as it relies on principles developed by English courts pre-dating the IA 2015 which obviously remain relevant at least in the context of establishing “waiver of disclosure” by the insurer.

Commencement of Laytime- Covid 19 and “Free Practique” Rears Its Face Again

“Free pratique” is essentially the licence given to a vessel by authorities to enter a port on the assurance that she is free from contagious diseases. In normal times, obtaining this certificate is regarded as a mere formality and this led some judges to comment in some cases, like Longmore, LJ did in The Eagle Valencia [2010] EWCA 713, that lack of this certificate will not prevent a valid notice of readiness (NOR) essential for the commencement of laytime. However, it should not be disregarded that the decision in this case was the result of judicial construction of various contradictory terms incorporated into the relevant charterparty. So, it will be ambitious to suggest that this case establishes a principle to the effect that obtaining free pratique is not essential for a vessel to be ready in legal sense!

In fact, the “free pratique” forms an important part of the ship’s papers and has the potential to cause problems for owners in today’s climate especially if the charterparty in question does not expressly state otherwise. It has been doubted in a number of old authorities (e.g. The Delian Spirit [1971] Lloyd’s Rep 64) whether incorporation of a “WIFPON” clause (Whether in free pratique or not) removes the need for obtaining a “free patique” certificate so a vessel which is physically ready becomes an “arrived ship” in legal sense of the word. To say that WIFPON clause does not have this effect clearly contradicts plain meaning of such a clause. And, it is hoped that this point receives some judicial attention soon.

aerial photo of cargo ships on pier
Photo by Tom Fisk on Pexels.com

However, in the absence of a specialized clauses (e.g.  BIMCO’s Infectious or Contagious Diseases Clause for Voyage Charterparties) and in  today’s world hit by the Covid-19 pandemic, it is very likely that not being able to obtain free pratique will have grave consequences for the owners and time lost in a loading or discharging port as a result will be on their account. Reports are suggesting that in many ports around the world, vessels are asked to remain in quarantine for 14 days before authorities grant the free pratique certificate. For example, recently Argentinian Ministry of Transport and the Ministry of Health have instructed the maritime authorities in the country to compel specific vessels- under certain circumstances- to remain in quarantine for 14 days.

When entering into charterparties, shipowners need to be aware of the so-called “new normal” and it is advisable to insist on incorporating specialized clauses to deal with such problems.  BIMCO’s Infectious or Contagious Diseases Clause, mentioned above, or INTERKANKO’s Covid-19 Clause, (discussed in an earlier blog) offers protection to owners as under such clauses any time lost in a port of loading or discharge due to reasons associated with Covid-19 pandemic will count as laytime  (or demurrage).

Covid-19 and Business Interruption Policies- Courts Are Expected to Be Called into Action Soon

More than 300 small and medium sized businesses have formed an action group (Hiscox Action Group) with a view to bringing a class action against Hiscox’s decision to refuse payment under its commercial business interruption policies. It now looks like the Financial Conduct Authority (FCA) will also be involved in the ongoing debate by seeking clarity from the courts about whether the wording of some business interruption insurance policies should provide cover as a result of the pandemic. Although this particular class action might involve Hiscox, there is no doubt that other insurers, such as AXA, Allianz, RSA, QBE and Zurich, might face potential multi-million pound lawsuits from businesses such as hotels, pubs, restaurants and leisure groups that allege legitimate business interruption claims have been rejected by their insurers.

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The legal issue at stake here is a matter of construing the scope of such policies. Several assureds claim that their policies specifically provide cover for the “inability to use the insured premises due to restrictions imposed by a public authority following an occurrence of any human infectious or human contagious disease.” However, Hiscox and other insurers are arguing that cover is only available under such policies if “there is an incident within a mile radius of the insured building” and therefore unless the businesses are closed by authorities due to outbreak of the disease at the premises, the relevant business interruption policy will not respond.

On several occasions, courts have adopted purposive interpretation techniques when construing terms in commercial contracts. Lord Clarke, famously, in Rainy Sky S.A. and others v. Kookmin Bank [2011] UKSC 50 stipulated [at 14]: “The ultimate aim of interpreting a provision in a contract, especially a commercial contract, is to determine what the parties meant by the language used, which involves ascertaining what a reasonable person would have understood the parties to have meant”.

On that basis, taking into account the wording in question, it will be hard to say that a reasonable person would not have understood the parties to have meant that cover would not be available if the commercial activities of a business are restricted due to restrictions imposed by authorities following an occurrence of any human infectious or human contagious disease. That said, more recently the Supreme Court seemed to be trending back towards the literal approach moving away from the contextual approach. See, for example, Arnold v. Britton [2015] UKSC 36 where Lord Neuberger [at 17] stated that “the reliance placed in some cases on commercial common sense and surrounding circumstances … should not be invoked to undervalue the importance of the language of the provision which is to be construed.”

The Supreme Court in Wood v. Capita Insurance Services Ltd [2017] UKSC 24 attempted to reconcile these authorities by confirming the validity of both literal and contextual approaches to contract construction. Lord Hodge [at 13] explained the appropriate approach in the following fashion:

“The extent to which [textualism or contextualism] will assist the court in its task will vary according to the circumstances of the particular agreement or agreements. Some agreements may be successfully interpreted principally by textual analysis, for example because of their sophistication and complexity and because they have been negotiated and prepared with the assistance of skilled professionals. The correct interpretation of other contracts may be achieved by a greater emphasis on the factual matrix, for example because of their informality, brevity or the absence of skilled professional assistance. But negotiators of complex formal contracts may often not achieve a logical and coherent text because of, for example, the conflicting aims of the parties, failures of communication, differing drafting practices, or deadlines which require the parties to compromise in order to reach agreement. There may often therefore be provisions in a detailed professionally drawn contract which lack clarity and the lawyer or judge in interpreting such provisions may be particularly helped by considering the factual matrix and the purpose of similar provisions in contracts of the same type. …”

This approach indicates that a more contextual approach can be adopted in construing some commercial contracts. The key question will be whether standard business interruption policies sold to small and medium sized businesses can be viewed as sophisticated contracts negotiated and prepared with the assistance of skilled professionals? That is highly doubtful! So, there might be room for the courts to adopt a more contextual approach when it comes to construing such contracts bearing in mind the factual matrix. Defining the factual matrix in this context will not be an easy task but the approach taken by courts when construing the scope of professional indemnity policies in actions brought by those who suffered from mesothelioma or their families (Employers’ Liability Policy Trigger Litigation Durham v. BAI [2012] UKSC 14) might give clues as to the likely direction of travel in this context as well.

On the other hand, one appreciates the genuine concerns of insurers- providing indemnity for losses they did not intend to cover- will have implications on their businesses and also their re-insurance arrangements. They can plausibly argue that higher rate of premium would have been charged if they were expected to cover the financial losses emerging from a global pandemic.

One feels that a lengthy and tough legal battle lies ahead!

INTERTANKO Covid-19 Clause- Tailor Made Solution to the Pandemic in Voyage Charters

One of the main legal challenges emerging from the ongoing Covid-19 pandemic for shipowners in the context of voyage charterparties is whether a valid NOR can be tendered to enable the running of laytime clock before a “free pratique” certificate is obtained from authorities. Reports suggest that there are significant delays in some ports in obtaining this certificate. Some charterparties might include a “WIFPON” clause (Whether in free pratique or not) and some commentators believe that such a clause removes the need for obtaining a “free patique” certificate so a vessel which is physically ready becomes an “arrived ship” in legal sense of the word. However, as discussed by my colleague Professor Simon Baughen (https://www.youtube.com/watch?v=1wcjbGYwW7o&t=52s) this position has been doubted in a number of authorities (e.g. The Delian Spirit [1971] Lloyd’s Rep 64) although such a finding seems to contradict plain meaning of a “WIFPON” clause.

The most recent clause released by INTERTANKO seems to offer a clarification and much needed certainty for shipowners. If incorporated into the contract, under Clause 2© of the INTERTANKO Covid-19 Clause for Voyage Charterparties, ship owners are able to serve a valid and effective NOR whether or not free pratique certificate has been granted, thereby passing the risk of any delay on to charterers who ordered the chartered vessel to that particular port.

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It needs to be noted that the Clause deals with other issues that can arise in ports that are affected from the current situation. Clause 1 enables the shipowner to refuse an order to proceed to a port affected from the pandemic. An interesting point here is that the right to refuse to proceed is left to the reasonable judgment of the owners or master by taking into account whether there is a risk of exposure of the crew or other personnel on board to Codivid-19. From legal perspective, this subjective test means that owners and masters are likely to be given the benefit of any doubt as to the state and condition of the port in question if the matter becomes the subject of litigation at a later stage. Clause 2 is designed to protect the interest of the owners further. For example, by virtue of Clause 2(a) if the chartered vessel sails towards a Coronavirus-affected port, the master can request fresh orders should the level of risk become unacceptable prior to arrival at the load or discharge port. Similarly, Clause 2(b) provides that the chartered vessel may still depart and proceed to a safe waiting place if the risk escalates after the arrival of the chartered vessel at the port and even after the tendering of NOR. Clause 2(d) addresses the issues which arise due to the Coronavirus risk, e.g. quarantine and any delay thereby caused, and indicates that such expenses are passed to charterers.

In addition to risks associated in a port that has been directed by the charterer, the clause goes on to allocate the risk of losses that the vessel might suffer after the completion of the voyage (i.e. in the course of its future employment). Clause 3, therefore, provides:

“Should the Vessel be boycotted, refused admission to port, quarantined, or otherwise delayed in any manner whatsoever by reason of having proceeded to a Coronavirus Affected Area, for all time lost Owners to be compensated by Charterers at the demurrage rate and all direct losses, damages and/or expenses incurred by Owners shall be paid by Charterers. In the event that the Vessel is boycotted, refused admission, or otherwise delayed as stated above within 30 days after having completed discharge under this charterparty, then Charterers are to compensate Owners for all time lost as a result at the demurrage rate in addition to compensating Owners for all direct losses, damages, and or expenses which may arise as a result of the above.”

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This is a very bold provision and it essentially offers a protection for owners for a period of 30 days after the completion of discharge under a previous fixture so that any delays or expense under a subsequent fixture will fall to the previous charterer.

Needless to say, the INTERTANKO Covid-19 Clause is rather owner friendly and is designed to apply to this particular pandemic unlike BIMCO Infectious or Contagious Disease Clause for Voyage Charter Parties 2015 which has a much wider application, i.e. the latter can apply in any instance when there is “a highly infectious or contagious disease that is seriously harmful to humans”. That said, the INTERTANKO Covid-19 Clause offers a tailor made solution to the legal and practical problems facing the sector at the moment and no doubt some owners might be able to slip it in their charter agreements!

US Supreme Court Rules- Warranty of Safety in Charterparties is an Absolute Obligation (Citgo Asphalt Refining Co v. Frescati Shipping Co Ltd)

The tanker, Athos I, was directed to a berth by her charterers at a terminal in Philadelphia in 2004. As the vessel was approaching the berth, she struck a submerged anchor. As a result, the vessel’s hull was damaged and some 263,000 gallons of crude oil spilled into the Delaware River. The cost of the clean-up operations was around US$180m.

The owners of the Athos I brought an action against the voyage charterer contenting that the charterer was in breach of its warranty to provide a safe port/safe berth for the ship to discharge the cargo and was therefore liable to reimburse the ship owner for the costs of the clean-up paid by them. The relevant provision in the charterparty provided:

‘…the vessel shall load and discharge at any safe place or wharf… which shall be designated and procured by the Charterer, provided the Vessel can proceed thereto, lie at, and depart therefrom always safely afloat, any lighterage being at the expense, risk and peril of the Charterer….’

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The district court gave the judgment against the owners of the Athos I on the basis that the obligation of the charterer under the charterparty was to exercise due diligence in providing a safe berth/safe port and that was satisfied in the case. On appeal, the US Court of Appeals for the Third Circuit reversed the district court’s decision. In doing so, the Third Circuit aligned itself with the Second Circuit ignoring a case decided in 1990 by the Fifth Circuit (whereby it was held that a due diligence standard should be read into a charterer’s warranty of a safe berth/safe port).

The US Supreme Court (7-2) came to the conclusion that such a form clause commonly used in the industry must be construed as an express warranty of safety and imposes on the charterer an absolute duty to select and provide safe berth. The majority emphasized that the safe berth clause in the charterparty was clear and unambiguous.

The majority (an opinion delivered by Justice Sotomayor) rejected charterer’s that the safe berth clause imposes simply a duty to exercise due diligence. In their view, such a due diligence standard resonates more in tort, rather than contract. The parties could have adopted a due diligence standard explicitly in the safe berth clause, as they did elsewhere in the contract. The absence of similar language in the safe berth clause provides further evidence that the parties did not seek to imply such a limitation on the duty of the charterer.

The Supreme Court’s decision follows the traditional approach adopted by the English law with regard to warranty of safety of a port/berth (The Eastern City [1958] 2 Lloyd’s Rep 127) and will certainly be welcomed by the industry (i.e. shipowners) and, their hull underwriters who in most cases will end up pursuing charterers when a chartered vessel is damaged in a port/berth which turns out to be unsafe. It is worth to note that the judgment does not prevent this obligation from being watered down by a due diligence standard in a charterparty as long as clear and apposite wording is employed to this end.

Another Nail in the Coffin? Rotterdam Rules One for the Shelves?

When introduced more than a decade ago, the Rotterdam Rules were welcomed with great enthusiasm and many were optimistic that the Rules, which introduce a modern carriage regime suitable for the new century, would soon replace the old-fashioned Hague-Visby regime.

Not many believe that this is a genuine prospect any more. As of today only 4 countries have ratified the Rotterdam Convention, namely Cameroon, Congo, Spain and Togo and the Netherlands have recently taken the first steps towards ratification and implementation of the Rotterdam Rules by submitting two draft bills to Dutch Parliament. However, there seems to be no urgency amongst the trading nations to ratify the Rotterdam Rules. For example, the current administration in the US does not seem to be interested. The same is true for UK government which is at the moment consumed with BREXIT and its implications. Norway has appointed a law commission to review the Rotterdam Rules and its possible ratification, and the commission was in principle in favour of incorporating the Rotterdam Rules, but recommends that Norway does not ratify the convention before the US or any larger EU states do. Germany and Belgium expressed strong objections to the Rules. And China seems to be watching the developments at this stage showing no interest in ratifying the Convention but instead engaged in a review of its Maritime Code which will possibly introduce some aspects of the Rules into its national law.

But life goes on! And the news that Malaysian law makers decided to implement the Hague- Visby Rules into Malaysian domestic law is a very interesting one indeed. The Carriage of Goods by Sea (Amendment) Bill 2019 is expected to come into force in 2020. The amending bill does not set out the provisions of the Hague-Visby Rules but states that the Minister is entitled to amend the Schedule to the Act by order published in the Gazette (the Schedule presently sets out the provisions of the Hague-Visby Rules). So, the Rules will become part of Malaysian law after the Act comes into force and the Minister issues an order. The process might seem complicated for those who are not familiar with the constitution and public law of Malaysia but the step is important as it is a clear indication that emerging trading nations are now working under the assumption that no fundamental change will happen in this field and Hague Visby Rules will continue to dominate international carriage. There is no doubt that Rotterdam Rules introduce several sensible solutions to modern problems, i.e. electronic documents, which can be utilised when reforming national legal systems (and it is believed that China will do that) and some of its aspects might be introduced by contractual agreement into a carriage contracts, but it is also becoming clear that the Rules will probably not become part of international legal system.

For a legal analysis of Rotterdam Rules, you can read an article that the author wrote together with late Dr Theodora Nikaki:

A New International Regime for Carriage of Goods by Sea: Contemporary, Certain, Inclusive, and Efficient or Just Another One for the Shelves?’ (2012) 30 Berkeley Journal of International Law pp 303-348

Dr-Theodora-Nikaki

Dr Nikaki talking about Rotterdam Rules at IISTL’s 10th International Colloquium

Exceptions to the Running of Laytime- “Wording” is the Key (Bad Weather?)- London Arbitration 21/19

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In commercial contracts, exclusion clauses are often construed narrowly. In the context of voyage charterparties, this could create significant difficulties for charterers who attempt to rely on an exclusion clause to stop the running of laytime or demurrage.

In the contract in question, it was expressly stipulated that … if … loading… [was] … suspended: [a] due to bad weather (including… storms, high winds…) or [b] for other reasons not attributable to charterers or their shippers/receivers, laytime and demurrage would not count.

At the port of loading, the laytime period started on 25 August. A tropical storm was approaching to the loading port but loading continued and the terminal indicated at 13.00 hours on 26 August that there was no present intention to shut-down due to the fact that the approaching hurricane’s land fall remained uncertain. However, at 15.30 hours on the same day, the terminal stopped loading and the vessel was advised to leave for anchorage. The terminal informed the vessel that they had no alternative but to vacate the vessel as weather conditions would make anchorages scarce and they had to consider the safety of their docks, fleet and terminal. The port remained closed for the next few days and on 29 August the vessel re-berthed and completed loading. The main legal issue was whether laytime stopped when the vessel was ordered off the berth.

It was held that the laytime was not suspended when the vessel left the berth on 26 August as for laytime to be suspended under a clause of this nature it was necessary to show that time was lost due to bad weather. The tribunal observed that it was impossible to calibrate the imminence and nature of bad weather when the vessel sailed away on 26 August but was adamant that the facts did not suggest that loading as suspended due to bad weather. What led tribunal to this conclusion was the fact that the hurricane was still at least 2 days away and there was no immediate danger to shipping. The terminal’s decision to close the facility was based on its desire to ensure the safety of its barges and there was also concern that vessels would find it difficult to find anchorages if they stayed any longer in the terminal.

However, the charterers managed to convince the tribunal that the running of laytime was suspended for “reasons not attributable to charterers or their shippers/receivers”. They got the decision of the tribunal in their favour on this point as they successfully argued that they had no connection with the terminal so the actions of the terminal were not attributable to them. It was stressed by the tribunal that shippers and the terminal were separate legal entities with no agency relationship.

The first part of the decision is in line with the precedent set in a number of authorities most notably Compania Crystal de Vapores v. Herman [1958] 2 QB 196 where the chartered vessel ordered from the berth by harbour master due to threat of bad weather. There, it was held that time lost as a result of measures taken for safety of the ship as a result of bad weather does not count. It is vital that bad weather should potentially prevent the loading/discharge. Therefore, to suspend the running of laytime in a case like this, charterers would need to show that the relevant clause refers not only to “bad weather” but also to “steps taken due to bad weather”. The finding on the second part of the clause was fact based and the decision went in favour of the charterer as the owner failed to show that there was any organic relationship between the charterers/shippers and the terminal. However, it is evident that the wording adopted makes this a very broad exception and could potentially provide relief to charters in most instances.

A Further Clarification on Cyber Risk Cover by the Lloyd’s Market Association

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Although cyber risks insurance in the London market is fast growing, more clarity is needed as various types of clauses drafted by different insurers are in use creating an enormous degree of confusion for assureds as to the scope of the cover on offer. With the objective of providing added clarity, from 1 January 2020, Lloyd’s underwriters will be required to clarify whether first-party property damage policies affirm or exclude cyber cover.

This is certainly a positive development and with the aim to assisting in this process, the Lloyd’s Market Association (LMA) has recently published a number of new clauses for the property and marine markets that can be used with traditional lines of business, e.g. hull & machinery policies, war risks insurance policies for vessels and other offshore structure. It should be noted that clauses published by LMA are designed to act as “models” and are distributed for the guidance of its members, who are free to agree to different conditions or amend as they see fit.

The new clauses published by the LMA comprise a cyber endorsement (LMA5400) and exclusion clause for Property D&F (LMA5401) and a cyber endorsement (LMA5403) and exclusion clause for Marine (LMA5402). All clauses explicitly supersede or replace conflicting policy wording related to cyber loss and data.

Both the property endorsement and exclusion clauses exclude coverage for any cyber loss, as well as any costs related to the use or replacement of data. The endorsement does, however, affirm coverage for physical loss or damage to property caused by fire or explosion that results directly from a cyber incident, as well as coverage for physical damage related to data processing media owned by a policyholder.

The marine clauses, meanwhile, rule out coverage for any loss or expense related to the “failure, error or malfunction of any computer, computer system, computer software programme, code, or process or any other electronic system.” Similarly, they exclude coverage for “the use or operation, as a means for inflicting harm, of any computer, computer system, computer software programme, malicious code, computer virus or process or any other electronic system.” However, marine cyber endorsement clause makes it clear that if the clause is used with policies covering risks of war, civil war, revolution, rebellion, insurrection, or civil strife arising  therefrom, or any hostile act by or against a belligerent power, or terrorism or any person acting from a political motive, the cover will be available for losses arising from the use of any computer, computer system or computer software programme or any other electronic system in the launch and/or guidance system and/or firing mechanism of any weapon or missile.

It should be noted that liability and treaty reinsurance policies will also be required to clarify whether they affirm or exclude cyber cover and these requirements will come into effect in two phases during 2020 and 2021.

The Future of Commercial Law (Cryptoassets and Smart Contracts) under Consideration

 

The UK Jurisdiction Taskforce (UKJT), one of the six taskforces of the LawTech Delivery Panel, published its findings on 18 November 2019 on the issues of legal uncertainty regarding the status of cryptoassests and smart contracts under English law in a document entitled “Legal Statement on Cryptoassets and Smart Contracts”.

On the status of cryptoassets, the UKJT concluded that such assets, as a matter of English legal principle, to be treated as a “property”. In reaching this conclusion, the UKJT stressed that crypto assets meet the following characteristics of “property”:

  • They are definable and certain;
  • They are exclusive and capable of being controlled;
  • They are capable of being owned and transferred (through the use of the private key);
  • They have some degree of permanence and stability.

Considering the current legal rules and principles and scope of various statutes, the UKJT expressed the following views on cryptoassets:

i) They are not documents of title (so that they do not enable the person holding them to deal with the property described as if they were the owner);

ii) They are not negotiable (so a good faith purchaser cannot acquire good title);

iii) They are limited in terms of what security can be granted over them (as such they cannot be the object of “pledge” or “lien”);

iv) They are not “goods” for the purposes of the Sale of Goods Act 1979; and

v) However, they are “property” for the purposes of the Insolvency Act 1986.

The UKJT indicated that the intervention from legislators would be necessary to solve two aspects of cryptoassets. It has been stressed that problems are likely to arise if no governing law has been chosen. In that scenario, new law, ideally at international level, is required to answer this question. It is also clear that without new law, a distributed ledger cannot be an official register of title like the Land Register.

On the legal position of smart contracts, the findings of the UKJT are more straightforward. Accordingly, smart contracts are capable of satisfying the English law requirements on contract formation. A court would interpret a smart contract in the same way as any other contract. On the issue of whether one can have a contract with anonymous or pseudonymous parties (given that users within a smart contract chain tend to transact in relative anonymity), it has been stressed that there is no requirement to know a party’s true identity. Also, it is the view of the UKTJ that a statutory signature requirement is highly likely capable of being met by means of a private key. Lastly, it has been stressed that statutory “in writing” requirement is likely to be met in the case of source code and, to the extent it is in readable format, object code.

The legal position of crypto assets has already been judicially aired in a number of cases (Liam David Robertson v. Persons Unknown [2019] not yet reported and B2C2 v. Quoine Pty (2019) SGHC(I)03 (Singapore International Court)). There are also reports that over $1.5 billion worth of cryptocurrency was stolen last year by hackers. It is obvious that courts in near future will be occupied dealing with matters concerning cryptoassets. Although it is not binding authority, there is no doubt that the Legal Statement will very useful when such issues are brought before the English/Welsh courts. The author believes that common law’s ability to adapt to different situations will be a key asset in resolving most of the legal issues emerging. However, it is also clear from the Legal Statement that there is an urgent need to consider developing appropriate legislation and regulation to deal with some of the issues that will emerge in particular: choice of law issues and the legal status of a distributed ledger. So, the ball is now in court of the Law Commission!

The potential for smart contracts in global financial markets is huge. Once they take off, one can see an increased use of them in shipping, aviation and energy sectors as they have the capability to provide immutable data! This can, of course, enhance certainty by reducing the scope of potential disputes between various parties to such contracts.

In summary, the way we do business is changing as a result of technology and this will undoubtedly test the ability of English common law to deliver against the expectations of global businessmen. There is an urgent need to engage in a serious debate to determine how we can address the complex range of legal issues thrown up by the massive accumulation of big data, on-chain smart contracts and other aspects of artificial intelligence.

“The Brillante Virtuoso Was Scuttled by Those Operating under the Instructions of the Owner” is the View of the Commercial Court

On 21 February 2019, a piece was published on this blog posing the question: “What really happened to the Brillante Virtuoso”? A meticulously drafted judgment of Teare, J ([2019] EWHC 2599 (Comm)) provides an answer to that burning question.

Now briefly the facts!  On 5 July 2011, on route to China with a cargo of fuel oil, the Brillante Virtuoso was boarded by pirates off Gulf of Aden. The pirates directed the vessel to Somalia but when the engine stopped and could not be re-started, they allegedly placed a detonator in the engine room causing huge damage to the vessel. The vessel was insured for $US 55 million with an additional $US 22 million increased cover with ten Lloyd’s underwriters. The underwriters refused to indemnify the assured (Suez Fortune Investments Ltd). The assured and its bank (Pireus Bank AE) as a co-assured under a composite policy brought a claim against the insurers.

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In the first stage of the trial, the claimants were successful and Flaux, J, (as he then was) held that the vessel was a constructive total loss under s. 60(2)(i) of the Marine Insurance Act 1906 as she was damaged by an insured peril and the cost of repairs would exceed the insured value of the ship when repaired [2015] EWHC 42 (Comm).  In 2015, war risk underwriters alleged wilful misconduct. As the case proceeded the owner of the vessel, Mr Marios Iliopoulos, declined to provide electronic documents related to the case to his own counsel or to the counsel of underwriters, raising questions for the court. In 2016, the owner’s claim was struck out for a failure to comply with disclosure obligations and Flaux, J, was adamant that Mr Iliopoulos had invented a false story in an attempt to explain his failure to make disclosure. The claim was then pursued by the bank alone. The underwriters resisted the claim put forward by the bank alleging that the loss was caused deliberately by the assured and hence was not covered by the policy.  

The case does not alter established legal principles in any significant manner. The burden of proving wilful misconduct or scuttling, on balance of probabilities, lies upon the insurers and as stressed by Neill, LJ, in The Captain Panagos DP [1989] 1 Lloyd’s Reports 33 at p. 43, “an inference of the owner’s guilt can properly be drawn if the probabilities point clearly and irresistibly towards his complicity.” On that premise, Teare, J, was convinced that the cause of loss was on balance of probability was “wilful miscounduct” of the assured. He pointed out to several inconsistencies in the owners’ account of the attack. For example, the incident occurred within Yemeni waters off Aden, a location where Somali pirates had never attempted a boarding before (and have not since). In VDR recordings, the attackers identified themselves as “security,” suggesting that if they were pirates, they would have had to have known that the vessel was awaiting a security detail. They brought with them an incendiary device. The master allowed them to come aboard, even though they were masked and armed and the ship was awaiting an unarmed security team. When directed to steer towards Somalia, the master selected a very different course, but the attackers did not detect this or correct it!

Accordingly, it was held that the supposed attack by pirates was a “fake attack”, and that in reality it was a charade orchestrated by the owner of the vessel, Mr Iliopoulos. It was also held that the vessel’s master and chief engineer were complicit in the scheme, alongside local Aden-based salvors, Poseidon Salvage, and current or former members of the Yemeni coast guard or navy.

An interesting point was raised by the bank in its submissions. On the assumption that the bank is insured under the policy as a composite co-assured, was it possible to argue that in the popular or business sense the owner of the vessel was a pirate, since they carried out the attack on a vessel (or instructed that the attack was to be carried out) with a motive of personal gain/to satisfy personal senses of vengeance/hatred? Teare, J was quick to dismiss this argument indicating that the violence to the vessel and the threat of violence to the crew would not qualify as piracy if carried out by the owners (or the conspirators) with the intention to defraud the insurers. This might seem an obvious point to some but is another clarification on the meaning of “piracy” for the purposes of marine insurance law. The bank’s attempt to argue that the loss was caused by “persons acting maliciously” also failed. Teare, J, quoting from the Supreme Court judgment in The B Atlantic [2018] UKSC 26 stressed that this peril involves an element of “spite or ill-will or the like in relation to the property insured or at least to other property or perhaps even a person” but he rightly indicated that those who were permitted to board the vessel did not act out of “spite or ill-will or the like” in relation to the vessel but did so on the request of the owner in order to assist him in his fraudulent plan to deceive the underwriters. Put differently, here the owner sought to damage his own property and the armed men sought to assist the owner, not to harm him.

The finding of the trial judge on the “wilful misconduct” point was adequate to decide the case in favour of the war risk underwriters insurers but it was briefly stated in the judgment that underwriters were also successful on a number of subsidiary and alternative defences such as the insured vessel being outside the geographical limits of policy (the so called “Aden agreement” point) at the time of the alleged loss and breach of a warranty that required compliance with advice and recommendations of an IMO Circular concerning planning and operational practices for ship operators and masters of ships transiting the Gulf of Aden and the Arabian Sea.

The case does not necessarily establish novel legal points but a 52 day trial and a very lengthy judgment is a good illustration of the work that needs to be carried out by lawyers and judges in cases where insurers raise “fraud” as a defence to a claim under the policy.