Deductions from Charter Hire Made in Good Faith and on Reasonable Grounds?

London Arbitration 1/22

Disputes often arise in time charters on whether any deduction from charter hire can be made especially when there is an alleged underperformance of the chartered vessel.

It is well established principle of law that if a deduction is made from hire, such deduction must be made in good faith and be based on reasonable grounds (otherwise such deduction amounts to breach of contract on the part of the charterer). This effectively means that in case of a deduction for underperformance of the chartered vessel, the charterer might be called upon at short notice to demonstrate that its deductions were made bona fidei and its calculations were based in reasonable grounds (The Kostas Melas [1981] 1 Lloyd’s Rep 18).

This was the central issue in this dispute. The charterers withheld US$ 53,550.40 gross in respect of what they claimed was time loss due to underperformance to the extent of 6.6938 days (off-hire).

When the tribunal asked the charterers to demonstrate a prima facie case as to whether the deduction from hire was made bona fidei and on reasonable grounds, they responded with a report of weather routing company they appointed, some further comments from that company and the fact that the owners did not appoint their own weather routing company.

The tribunal found that charterers failed to address the question of good faith nor had they made any attempt to show that they had a claim for off hire. It was also noted by the tribunal that the charterers did not address the point made by the owners that there was no speed/consumption warranty in the charterparty as the fixture description of the ship was qualified by the words “all details about/in good faith”.

The tribunal here was simply deciding that the charterers had not shown that their deduction was made in good faith and on reasonable grounds so they were wrong to withheld the deduction from hire. It is theoretically open to charterers to claim that there was an underperformance of the chartered vessel but as hinted by the tribunal, based on the wording in the charterparty qualifying the performance of the vessel, it will be an uphill struggle to prove the existence of a speed/consumption warranty and the fact that it was breached!        

 

Misrepresentation and “Reservation of Rights” in Charterparties

SK Shipping Euorope Ltd v. Capital VLCC 3 Corp (C Challenger) [2022] EWCA Civ 231

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 the charterparty on the basis that the charterers’ message was itself a renunciation.

The trial judge (Foxton, J) found that there was no actionable misrepresentation. Furthermore, it was held that charterers’ conduct (especially fixing the vessel for a sub-charterer in July 2017 for a voyage to Tunjung Pelapas) was incompatible with an attempt to reserve rights to set aside the charterparty for misrepresentation) even though they expressly indicated that they “reserve their rights” after alleging that the owners misrepresented the capabilities of the chartered vessel (i.e. speed and consumption) during charter negotiations. The charterers appealed on both grounds.

Was there an actionable misrepresentation?

The key to the charterers’ appeal was a letter sent on behalf of the owner during pre-contract negotiations on 22 November 2016. The charterers argued that the representations made to them in that letter with regard to the chartered vessel’s last three voyages, its average speed and performance, included a representation as to future performance; and such representation was repeated in each of the parties’ subsequent communications by the restatement of the same data; and the trial judge was erred in law in concluding that there was no inducement

The Court of Appeal found that on an objective reading of the 22 November 2016 letter, a prospective charterer would have understood it be saying “this is how my vessel has performed on its most recent voyages and these are the warranties which I am prepared to give” and nothing more. It can, therefore, be safely concluded that there was no representation as to the future performance of the vessel with regard to speed and consumption. The tribunal also found that the explanation in the 22 November 2016 letter relating to the average of the vessel’s last three voyages was deliberately omitted once the parties began to negotiate. The natural conclusion that emerges from that is that they did not become part of the negotiations on which the charter in dispute was based or became “embedded” in the charterparty. (given that the Court already found that the representations in the letter did not include a representation as to the future, this finding had no impact on the judgment). Also, the Court was adamant that the trial judge made no error of law when concluding that there was no inducement.

Reservation of Rights

This part of the judgment has serious practical consequences for the shipping industry. A part of the industry until recently operated on the basis that the words “reserving my rights” would provide a silver bullet for an innocent party in a dispute or litigation that might follow! There is now authority to the effect that this is not necessarily the case.

The Court of Appeal agreed with the general statement that “a reservation of rights will often have the effect of preventing subsequent conduct constituting an election to affirm or rescind a contract”. However, just like the first instance judge, the Court stressed that this was not an inevitable rule. On this point, the Court agreed with the Commercial Court’s statement that actions of the charterer, i.e. nature and consequences of any demand for future performance, may in some instances be incompatible with a reservation of rights. By considering all relevant circumstances existed at the time the order to proceed to Tanjung Pelapas was given, i.e. the fact that the voyage would last two months and that the general reservations made at the time concerned other complaints, not just the misdescription of the vessel, the Court of Appeal endorsed the decision of the Commercial Court that the order was intrinsically affirmatory conduct.

Lessons!

The judgment is a good reminder that construction of the representations from an objective point of view will be vital in determining whether there is an actionable misrepresentation or not. But this is hardly new. More significant message to the industry (and lawyers) is that it should not be assumed that “reservation of rights” language will always have the effect of reserving the rights of an innocent party. This kind of language will be construed in the light of surrounding circumstances and whether it will have the desired impact will largely depend on the future actions of the innocent party.  

It is worth noting that in deliberating the consumption and speed warranty issue, the Court of Appeal in its judgment made reference to the work of late Dr Nikaki and Professor Soyer “Enhancing Standardisation and Legal Certainty through Standard Charterparty Contracts” published as Chapter 5 in Charterparties Law, Practice and Emerging Legal Issues (Informa Law, 2018)).  

          

Insurable Interest in Cargo Insurance Context and First Late Payment of Claim Assertion in English Law


Quadra Commodities SA v. XL Insurance and others [2022] EWHC 431 (Comm)

The assured was a commodities trader who entered into various contracts with Agroinvest Group for the purchase of grain. On receipt of warehouse receipts confirming that the relevant quantities of grain were held in common bulk in stipulated warehouses or “Elevators”, the assured paid for the grain. However, it later transpired that Agrionvest Group and the warehouses were involved in a fraudulent scheme whereby the same parcel of grain or seeds may have been pledged and/or sold many times over to different traders. The fraud unravelled when buyers sought to execute physical deliveries against the warehouse receipts and it became clear that there was not enough grain to go around.


The assured sought to recover its losses under a marine cargo policy claiming that the insured goods were lost either because they had been misappropriated or because there was a loss by reason of the assured’s acceptance of fraudulent warehouse receipts. The relevant clauses in the policy stipulated as follows:

Misappropriation
This insurance contract covers all physical damage and/or losses, directly caused to the insured goods by misappropriation.

Fraudulent Documents

This policy covers physical loss of or damage to goods and/or merchandise insured hereunder through the acceptance by the Assured and/or their Agents and/or Shippers of fraudulent shipping documents, including but not limited to Bill(s) of Lading and/or Shipping Receipts and/or Messenger Receipt(s) and/or Warehouse Receipts and/or other shipping document(s).

Insurable Interest Issue

The insurers denied cover on the basis that the assured did not have insurable interest in any of the goods which were lost and/or there was no physical loss of the property, only pure financial loss, which was not insured. The basis of the insurers’ case on insurable interest was that this was not an insurance on property but instead an insurance of an adventure, including the success of storage operations. The judge (Butcher, J) was quick to dismiss this submission by referring to various terms in the contract pointing strongly to the direction that this was indeed an insurance on the property (grain) which the assured was purchasing from the buyers. The alternative argument of the insurers was interesting and raised issues whether the assured had insurable interest in the goods. It was essentially argued that even if the insurance was on the cargo purchased, the assured had no insurable interest in the present case as the cargo in question never existed. With this argument the insurers were primarily encouraging the court to adopt a strict approach to insurable interest following the spirit of the reasoning of Lord Eldon in Lucena v. Craufurd (1806) 2 & P.N.R. 269 which suggested that only those who stand in a “legal and equitable relationship to the property” have insurable interest in the context of property insurance.
The judge was able to dismiss insurers’ argument by holding that the assured was successful, on a balance of probabilities, in showing that goods corresponding in quantity and description to the cargoes were physically present at the time the Warehouse Receipts were issued. This meant that this was not an insurance policy on goods that never existed and accordingly the assured had insurable interest on the grounds that:

• The assured had made payment for goods under purchase contracts, and such payment for unascertained goods of the relevant description was valid ground for establishing an insurable interest irrespective of whether there were competing interests in the grain. The assured, therefore, stood in a “legal or equitable relation” to the property by virtue of the payment.

• The assured was able to show on the balance of probabilities that it had an immediate right to possession of the grain and this coupled with its economic interest in the grain can give rise to an insurable interest.

This outcome in the case is in line with authorities on the subject and is not too controversial. However, the curious point is whether the court would have reached the same conclusion on insurable interest, had it decided that on balance of probability the assured failed to show that goods corresponding in quantity and description to the cargoes were physically present. There is authority to the effect that an assured has no insurable interest in insuring property that it does not own although it might have a factual expectation of loss related to that property (Macaura v. Northern Assurance Co Ltd [1925] AC 619). However, a different stance has taken on the matter in other common law jurisdictions (in particular by the Supreme Court of Canada in Constitution Insurance Company of Canada v Ksmopoulos [1987] 1 SCR 2). Also, there is a marked shift in attitude of English courts towards a more flexible approach to insurable interest (especially in cases like National Oilwell Ltd v Davy Offshore (UI) Ltd [1993] 2 Lloyd’s Rep 582 and The Moonacre [1992] 2 Lloyd’s Rep 501). It should be at least arguable that a person who is led to believe by a fraudster to purchase goods (that never existed) and paid for them under a sale contract, should have an insurable interest if s/he enters into a contract of insurance to protect his/her interest against the risk of not getting what s/he paid for.

Late Payment Issue

The Insurance Act (IA) 2015 implies a term into insurance contracts to the effect that the insurer must pay any sums due in respect of a claim within a “reasonable time” (s. 13A of the IA 2015). However, by virtue of s. 13A(4) the insurer is not in breach of this implied term if it shows that there were reasonable grounds for disputing the claim merely by failing to pay while the dispute is continuing. The assured in the present case contended that the insurers’ conduct of the claim was “wholly unreasonable, and its investigations either unnecessary or unreasonably slow” and resulted the assured suffering losses by reference to the return on shareholders’ equity. Conversely, the insurers argued that a reasonable time was “a considerable time” and extended beyond the time by which proceedings were commenced. In any event, the insurers argued that by virtue of s. 13A(4) there was no breach of this implied term as they had reasonable grounds to dispute the claim.

Given that this was the first case on the matter, in considering whether there was any breach of the implied term, the judge apart from the guidance provided by s. 13A(2) of the Insurance Act, also turned to the Law Commissions’ Report and the Explanatory Notes to the legislation before ultimately deciding that there was no breach of the implied term. In reaching this conclusion, the judge made reference to a number of factors:


i) That although the case was relating to a dispute that arose in relation to a property insurance cover (which according to the Explanatory Notes such claims usually take less time to value than, for example, business interruption claims), the cover in question applied to transport and storage operations of different types and involving or potentially involving many different countries and locations, and claims under such a cover, could involve very various factual patterns and differing difficulties of investigation);
ii) The size of the claim was substantial;
iii) The fraud, uncertainty as to what happened, the destruction of documents, existence of legal proceedings in Ukraine and the fact that the assured elected to swap from French law to English law during the investigation were all significant complicating factors; and
iv) Relevant factors outside insurers’ control, included the destruction and unavailability of evidence and the legal proceedings in Ukraine.

On the point raised by the insurer, s. 13A(4) of the IA 2015, it was held that the insurer bears the burden of proof but here they had reasonable grounds for disputing the claim stressing that although the grounds for rejecting the claim were wrong, this did not mean that they were unreasonable. Although the judge considered elements of the insurers’ investigations were delayed, the investigations occurred in what was considered to be a reasonable time and they were part of the reasonable grounds for disputing the claim that existed throughout.

This is the first judgment on s. 13A of the IA 2015. When first introduced, there was some concern especially among insurers that this section might fuel US type of bad-faith litigation against insures. However, the parameters for such a claim are well-defined in s. 13(A) and guidance is provided to courts as to how they should judge whether a claim is paid/assessed within a reasonable time. The manner in which the trial judge made use of such guidance in this case is a clear indication that late payment claims will not go down the path that has been taken by some US courts and in England & Wales an assertion of late payment of an insurance claim will only be successful in some extreme cases. There is no doubt that insurers will take some comfort from the judgment given that it is clear now that an insurer’s decision to refuse payment for a claim will not automatically amount to breach of this implied term even if it is found that the grounds for disputing the claim are wrong.

Off-Hire Clauses- Burden of Proof, Impact of Covid-19 and Legal Construction

London Arbitration 6/22

The vessel was chartered on trip basis on an amended NYPE form from India to China. The vessel was delivered to charterers’ service on 29 June 2020 and arrived at the first loading port at 04.30 on 30 June. The vessel then commenced drifting until 19.22 on 30 June in order to complete the cleaning of the holds. In fact, it was a requirement under the charterparty that the vessel’s holds to be washed down by fresh water, dried and ready in all respects to receive the charterers’ intended cargo of iron ore pallets/fines/lumps to an independent surveyor’s satisfaction. The charterparty also allowed owners 24 hours for cleaning the holds. The owners acknowledged that the 24 hours permitted expired at 13.44 on 30 June and they had, therefore, exceeded the allowance permitted by 5 hours and 38 minutes by completing cleaning at 19.22 on 30 June. They have, on that premise, accepted that the vessel was off hire during this period. However, charterers argued that hold cleaning was not completed at the end of the drifting period (by 19.22 on 30 June) and submitted that extensive manoeuvring by the vessel after the end of the drifting period has been an attempt by the owners to delay the time of arrival at the first load port with clean holds to ensure that the vessel would not be seen to have used time which would otherwise have fallen outside the agreed cleaning period. In fact, it was alleged by the charterers that hold cleaning continued between the end of the drifting period and was ultimately completed at the arrival of the vessel at the first load port. On that basis, it was the contention of the charterers that the vessel was off hire until 03.36 on 1 July (the time which the notice of readiness was tendered). To substantiate their point, the charterers relied on a message sent to them by owners on 26 June setting out their plan to clean holds taking into account the short ballast leg between previous discharge port and next port of loading.

The arbitration tribunal held that there was no evidence to substantiate the allegations made by the charterers that cleaning of holds continued after 19.22 on 30 June or that the voyage from the end of the drifting period to arrival at the first load port was prolonged by any further cleaning undertaken by the vessel. Therefore, the vessel was off hire until 19.22 on 30 June. Without being aware of all the evidence presented to the tribunal, it is hard to criticise the finding of the tribunal on this point but as a general principle of law the burden of proving something was not the case falls upon the party arguing it and clearly charterers failed to prove their point. There was nothing in the message on 26 June relied on by the charterers to suggest that owners did in fact not complete cleaning of holds at the time they said they did. In the message, the owners simply indicated that completing cleaning might be problematic in the time frame, but they set out a schedule to achieve the required cleaning.

It was also argued by charterers that the vessel was off hire from 14.40 on 26 July until 15.30 on 28 July while awaiting a quarantine officer’s permission to discharge in China. The delay was caused as one of the crew members had a slight fever (37.4 Celsius) and it was as a result requested by the quarantine officer that a nucleic acid test is conducted.

The relevant provisions of the charter party were:

Clause 15   

In the event of loss of time from deficiency of men or stores, fire, breakdown or damages to hull, machinery or equipment, grounding, detention by average accidents to ship or cargo, drydocking for the purpose of examination or painting of bottom, or by any other cause preventing the full working of the vessel, the payment of hire shall cease for the time thereby lost.                         

Clause 45

Officers and crew to comply with vaccination and sanitary regulations in all ports of call and corresponding certificates to be available on board, enabling the vessel to obtain free pratique by radio.

 The crux of the charterers’ argument was that illness of crew member constituted a deficiency of men within cl 15 or alternatively the events fells within the definition of “any other cause” in cl 15. It was also contended that the owners were in breach of cl 45.

The tribunal was of the view that a body temperature of 37.4 Celsius was within the normal range of temperatures for human body and there was no reasonable ground to assume that the crew member was ill. Therefore, there was no good reason for the actions of the quarantine officer which were clearly excessive and arbitrary. On that basis, the delay was not an off hiring event within cl. 15- there was simply no “deficiency” of crew or the full working of vessel was not affected adversely as a result of a similar incident. It was also held that cl 45 was not relevant as there was no evidence that the owners and/or master failed to comply with the vaccination and sanitary regulations at the discharge port or there was evidence of any absence of certificates required be on board.

The events at the discharge port took place when China was implementing very strict measures to deal with the outbreak of the pandemic. That said, terms of a commercial agreement still need to be construed in line with the established principles of law and construction. The finding of the tribunal emphasises once again the fact that off hire clauses (just like any exception clause) will be construed narrowly (as illustrated recently in The Global Santosh [2014] EWCA Civ 403 by the Court of Appeal).

It is also clear from the finding of the tribunal that burden to prove that the off hiring event took place is on the charterers and mere speculation will not be adequate to convince the arbitral panel or judge that the event might have occurred in a particular way.            

Performance Claims in Trip Time Charters- Log Book Entries and Weather Routing Company Reports

London Arbitration 23/21

The charterted vessel was on a trip charter of about 55 days without guarantee from Recalada (Argentina) to Cuba. The charterparty form used was NYPE 1946 with additional clauses, and contained a performance warranty (cl 74) which stipulated:         

SPD/CONS ARE ABOUT, UNDER GOOD WEATHER CONDITION’ I.E. THE WINDS NOT EXCEEDING BF4, EVEN KEEL, NO DECK CARGO, NO SWELL, NO ADVERSE CURRENTS, THE SEA STATE UP TO DOUGLAS SEA SCALE 3 (MAX 1.25M). THE WORD ABOUT IN SPEED/CONSUMPTION REFERS TO AN ALLOWANCE OF +/- 0.5 KNOTS ON SPEED AND +/- 5% ON BUNKER CONSUMPTION RESPECTIVELY BOTH ALWAYS IN VESSEL’S FAVOUR. ANY GAIN ON TIME AND/OR CONSUMPTION TO BE SET OFF AGAINST LOSS OF TIME AND/OR CONSUMPTION – IF ANY.

ABT 13 KNOTS ON ABT 20 TONS VLSIFO + 0,1 MT LSMGO ECO SP/CONS:

ABT 12 KNOTS ON ABT 18 TONS VLSFO + 0,1 MT LSMGO

Clause 67 of the charterparty also provided:

The Charterers may supply an independent weather bureau advice to the Master, during voyages specified by the Charterers and the Master shall comply with the reporting procedure of the weather bureau. However, the Master remains responsible for the safe navigation and choice of route. Alternatively Charterers have the option to instruct the Master to report daily to a weather bureau during the execution of sea voyages. The weather bureau will subsequently produce a performance analysis report.

Evidence of weather conditions shall be taken from Vessel’s logs. Consideration of minimum 24 hours continuous good weather periods from noon to noon. No hire deductions for alleged underperformance claims. Vessel to be monitored by Charterers’ appointed weather routing company strictly in accordance with the performance warranty. The independent weather reporting bureau appointed by Charterers will be for their account. This does not preclude Owners from appointing their own independent weather reporting bureau for their account which evidence along with Vessel’s evidence shall be taken into consideration by all parties.

The charterers instructed a weather routing company (WRC) which prepared a report on the performance of the chartered vessel during the trip concluding that the chartered vessel achieved a good weather performance speed of 10.63 knots on the voyage compared to the minimum 12.5 knots warranted. As part of its assessment, the WCR employed a “good weather parameter” which utilised significant wave height (which naturally included swell) and ignored the effect of the adverse currents. Accordingly, the charterers claimed that the trip took an additional 87.78 hours (so was off hire during that period)- a sum of US$ 49,383 and they also claimed excessive bunker consumption in the sum of US$ 31,423.20. The charters also contended that the hull was fouled on entry into charterparty, which was a breach of line 22 of the Charter form providing that “On delivery the vessel to be… tight, staunch and in every way fitted for the service.” The charterers also challenged the veracity of the logbooks as “not true and correct logs of the voyage.”            

The arbitrator found that:

1) In the light of the evidence presented by the charterers, the vessel’s hull was fouled on entry into the charter (especially the constantly high slip figures on the laden voyage were inconvertible indication of hull fouling). This was a defect of the hull in breach of line 22 of the charterparty. Moreover, as the vessel was not in every way fit for the service to be undertaken, the owners were in breach of the charterparty, which resulted in a loss of time. The loss of time was an off-hire event under cl. 15 of the charterparty.

2) The arbitrator was convinced that the master exaggerated the wind and sea conditions recorded in the log book from sailing from Recalada until 16 February so he failed to maintain a true and correct log in breach of cl. 11.

3) The arbitrator found that the role of cl 67 was to evaluate the performance strictly in accordance with the parameters set in this clause. However, WRC essentially devised its own methodology of assessing the vessel’s true performance by construing the parameters set in cl. 67. Therefore, WCR’s findings were based on non-contractual criteria and not binding. However, based on the finding that the log entries were not accurate, the arbitrator was satisfied that the vessel underperformed in speed due to a hull deficiency.    

The finding of the arbitrator was in favour of the charterer but it clearly demonstrates that if the charterparty specifies the source of data from which good weather assessment should be derived, that data needs to be used and an assessment that employs other methods (or data) will be regarded as non-contractual regardless of how sound those methods are.  The arbitral finding also shows that increasingly reports from weather routing companies play a significant role in performance claims and the days of relying solely on the log book entries of the master are long gone! Performance claims usually require complicated assessment methods and there is plenty technical analysis in this arbitral finding that might be useful to parties and arbitrators in the future especially when depicting “good weather” qualification.          

Athens Convention- Elaboration on key terms “defect in ship” and “fault”

Warner v. Scapa Flow Charters (No 2) [2021] CSOH 92

The pursuer was the widow of Mr Warner who tragically died in a technical exploratory diving trip on a wreck off Cape Wrath on 14 August 2012. The defenders facilitated the trip and skippered the boat (MV Jean Elaine). While walking in his cumbersome gear, including diving fins, preparing for a dive, Mr Warner fell off the deck of the vessel. This fall caused him, unknowingly, to suffer internal injuries. Stating that he was fit, he started his dive but during the dive he got into difficulties and made a rapid surface ascent due to the pain of his internal injuries. By the time he surfaced, his breathing apparatus was no longer in situ and he drowned.       

Mrs Warner brought an action for damages on behalf of her son. The action was within the scope of the Athens Convention 1974 (by virtue of the Carriage of Passengers and their Luggage by Sea (Domestic Carriage) Order 1987). It was argued that:

  1. Mr Warner’s injury arose from or in connection with a “defect in ship”. This meant under Article 3(3) of the Athens Convention that the carrier’s fault could be presumed.
  2. Even if not, the carrier was at fault as it failed to make adequate risk assessment.

The Outer House of the Court of Session held that the injury was not connected with or arose from a “defect in ship”. There was no evidence that the configuration of the deck defective. Also, it was pointed out that there were handrails that could have been put to sensible use, but at the time of the incident Mr Warner was not using them. The Court, however, held that the carrier was at fault in that he failed to recognise that the system of dive preparation he had set up or allowed to develop permitted or even encouraged divers to walk on deck in fins, and that was an inherently risky activity to the extent that consideration should have been given to putting in place mechanisms apt to eliminate it or at least bring it under control. Given the known risk of falls while walking in fins, particularly given the equipment worn by technical divers, and the unavailability of swift medical assistance on board, there should have been put in place proper precautions to mitigate the risk. Such precautions would have eradicating or minimising the risk of falling and Mr Warner would not have fallen at all, or it he did, he would not have  sustained a serious injury as he in fact sustained, because the force of any fall would probably have been broken by him holding on to a handrail or being supported by the onboard deckhand.  Accordingly, the defenders were liable to make reparation to the pursuer in terms of Art 3(1) of the Athens Convention 1974.               

What do we learn from the case?

The Athens Convention 1974 does not provide a definition for the term “defect in ship”. This means that determining whether an injury has occasioned from a “defect in ship” needs to be addressed by the national court. It is hard to suggest that the court’s handling of the matter in the present case is not satisfactory. That said, it should be noted that 2002 version of the Athens Convention provides a more rounded definition for this term. There, a defect in the ship has been described as “any malfunction, failure or non-compliance with applicable safety regulations in respect of any part of the ship or its equipment when used for the escape, evacuation, embarkation and disembarkation of passengers, or when used for the propulsion, steering, safe navigation, mooring, anchoring, arriving at or leaving berth or anchorage, or damage control after flooding; or when used for the launching of life saving appliances” (Article 4 of the Athens Convention 2002). Given that the main finding of the Court here was that the carrier failed in their risk assessment and there was no evidence that the deck’s configuration was defective, it is unlikely that a different outcome would have been reached even if Athens Convention 2002 had applied in this case.       

It is also left to the national law to determine what amounts to “fault” for the purposes of Article 3 of the Athens Convention 1974. This enabled the Court to adopt a flexible approach in determining whether the carrier was at fault for failing to make appropriate assessment of the risk. The Court initially focussed on a statutory duty to carry out a risk assessment of those on board under Regulation 7 of the Merchant Shipping and Fishing Vessels (Health and Safety at Work) Regulations 1997 but then moved its focus to general duty to exercise reasonable care for the health and safety of others onboard and a positive obligation to assess risk. This approach is in line with the general principles of tort law and a similar approach has been employed by British courts in the context of deliberating what amounts to “fault” under the Athens Convention- see Janet Dawkins v. Carnival PlC (t/a) P & O Cruises [2011] EWCA Civ 1237.

One positive development coming out of the case, especially for small maritime operators and their insurers, is that the Court found that a risk assessment was carried out by the skipper here although it was not written down or recognised as such (and of course although it was not adequate). This indicates that risk assessments need not to be formal affairs and a dynamic risk assessment carried out by the skipper or operator might be deemed to be adequate in some instances.            

For a comprehensive analysis of these issues see:

Carriage of Passengers by Sea: A Critical Analysis of the International Regimeby B. Soyer and G. Leloudas published

[2018] Michigan State University International Law Review, Volume: 26, Issue: 3, Pages: 483 – 535

This article has been cited with approval by the District Court of Columbia in Erwin-Simpson v. Berhard (DC DC, 2019).

Proposal Questions and Implied Waiver in Insurance Contracts

It is common for underwriters to utilise automated computer underwriting systems through which applications for insurance are evaluated and processed without the need for individual underwriter involvement. Reliance on such emerging technologies inevitable brings attention to the questions posed to potential assureds in the proposal forms used by such systems. Any ambiguity in the wording of questions put forward to the assureds is likely to have an adverse impact on the insurer’s ability to claim non-disclosure or misrepresentation. This was the central issue in Ristorante Ltd T/A Bar Massimo v. Zurich Insurance Plc [2021] EWHC 2538 (Ch).

The facts can be briefly summarised as follows: The assured obtained an insurance policy that provided cover for inter alia business interruption, money, employer’s liability and legal expenses. The insured property was damaged by fire in 2018 and when the assured sought to claim under the policy, the underwriters rejected the claim and purported to avoid it for misrepresentation and non-disclosure of a material risk. At inception and each renewal the assured was asked to answer the following question as part of procuring insurance through the insurer’s electronic automated underwriting system:

“No owner, director, business partner or family member involved with the business … has ever been the subject of a winding-up order or company/individual voluntary arrangement with creditors, or been placed into administration, administrative receivership or liquidation”.

On each occasion, the assured selected “Agreed” in response to the question. At claims stage, when it transpired that three of the directors of the assured had been directors of other companies that had entered voluntary liquidation, and had subsequently been dissolved, insurers argued that there had been a material misrepresentation by the assured in responding to the question above and/or non-disclosure of material facts and sought to avoid the policy.

The assured disputed that insurers were entitled to avoid the policy and started this litigation requesting the court to order the insurers to indemnify the assure with respect to the loss.

Two issues required legal analysis in this case:

  1. Was there any misrepresentation on the part of the assured by responding wrongly to the question? and
  2. Was there a non-disclosure as the assured failed to disclose insolvency of other persons or companies?

On (i) the assured submitted that the “Insolvency Question” was clear and unambiguous in that it simply asked about insolvency events relating to individuals (i.e. any owner, director, business partner or family member involved with the insured business) and did not ask about insolvency events of any other person or company with which any of them have been connected or involved in some way. The judge agreed with the assured noting especially in the question lack of express reference to any corporate body with which any of the persons expressly identified has been or is involved or connected with in some way.

The insurer’s attempt to rely on the Court of Appeal’s reasoning in Doheny v. New India Assurance Co [2004] EWCA 1705  was not successful given that the question put to the assured in that case was fundamentally different:

“No director/partner in the business, or any Company in which any director/partner have had an interest has been declared bankrupt, been the subject of bankruptcy proceedings or made any arrangement with creditors.”

The Court of Appeal in that case held that this question required disclosure of insolvency events in relation to other companies of which the policyholder’s director had previously served as a director. However, that question in the proposal form was worded rather differently than the present “Insolvency Question”, because it clearly referred to “any Company in which any director/partner have had an interest”. Conversely, the wording of the present “Insolvency Question” is different and on literal construction more restricted. The insurer’s attempt to draw support from another judgment (R & R Developments v. Axa Insurance UK plc [2009] EWHC 2429 (Ch)) that deliberated a differently worded “Insolvency” question was also not successful.

On (ii) the court held that the insurer by asking a well-defined question essentially waived its right to information on the same matters outside the question asked. Several legal authorities pre-dating the Insurance Act 2015, which still represent the legal position on this matter, dictate that the test here is an objective one and requires the judge to question whether a reasonable person reading the relevant question would be justified in thinking that the insurer had restricted its right to receive all material information, and had consented to the omission of specific information (here the other matters relating to insolvency). In holding that this was the case in the present case, Snowden, J, said at [91-92]:

[91] To my mind, having identified previous liquidations as a subject on which the [insurer] required disclosure, and having specified the persons in respect of whom a previous liquidation would be disclosable, the [insurer] thereby limited its right of disclosure in respect of other (unspecified) persons or companies which had been placed into liquidation. The Other Insolvency Events were all liquidations. They were therefore precisely the same type of insolvency matters which were the subject of the Insolvency Question: the difference is that they related to a different set of persons than those identified in the question.

[92] I therefore conclude that it was a reasonable inference for the [assured] to draw that the [insurer] did not wish to know about any other liquidations (or, indeed, administrations, administrative receiverships, company voluntary arrangements, and so on), other than those specified in the Insolvency Question.

Lessons from the Judgment

Given the increased use of electronic platforms for provision of information to insurers at pre-contractual stage, the case is another timely reminder to insurers that they need to check the wording of questions they rely on in proposal forms which appear as part of such platforms. In commercial setting we often advocate the use of clear wording but when it comes to legal matters concerning fair presentation of the risk, a very well-defined and clear question might serve the purpose of limiting the scope of disclosure for the assured- as was the case here (careful readers would remember that a similar point was raised by the assured (unsuccessfully) in Young v. Royal and Sun plc [2020] CSIH 25 (discussed again on this blog)). Also, it is worth keeping in mind that drawing support from previous authorities especially when construing such questions might often be problematic as wordings of questions in proposal forms deliberated in those judgments will inevitably differ- a matter that the insurer found out to its detriment in this case!            

Avoidance of Insurance Policy under the New Law 

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

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

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

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

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

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

              

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

Extent of The Right of Subrogation in Insurance Law  

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

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

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

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

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

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

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

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

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

Misrepresentation in Procuring Insurance- Avoidance or Not?  

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

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

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

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

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

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