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.          

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!