Underwriters of a Mortgagees’ Interest Insurance policy could not rely on standard exclusion clauses in the Institute War and Strikes Hulls-Time Clauses in regard to losses arising from a) breach of trading regulations or b) ordinary judicial process, failure to provide security or any financial cause, following the seizure, detention and arrest by the Australian authorities of a fishing vessel on the grounds of illegal fishing.
DMC Category Rating: Developed
The owners had insured the vessel under a War Risk policy incorporating the Institute War and Strikes Hulls-Time Clauses 1983 Edition but containing an express warranty of ‘No illegal fishing’. The owners’ claim for the constructive total loss of the vessel was declined by underwriters on the grounds of breach of this warranty. That in turn led the bank to claim indemnity from its MII insurers for the balance outstanding under the loan agreement, plus the costs in incurred in connection with the Australian proceedings, in the amount of £1.6 million, approx.
Under clause 6 of the MII, the bank was insured against ‘loss
resulting from: loss of or damage to or liability of each vessel which is
prima facie [at first impression] covered by owners’ policies or [PandI]
Club entries, but in respect of which there is subsequent non-payment……
The issue before the court was whether the loss for which the
bank sought recovery was ‘prima facie covered’ by owners’ policies,
subject to the breach of the ‘no illegal fishing’ warranty. The key clauses
in the owners’ policies covered the owners against loss of or damage to the
vessel caused by ‘capture, seizure, arrest, restraint or detainment and the
consequences thereof or any attempt thereat’. The policy further provided –
in the Detainment Clause - that, where the owners had been deprived of ‘the
free use and disposal of the vessel for a continuous period of twelve months’
by one of those named perils, ‘then, for the purpose of ascertaining whether
the vessel is a constructive total loss, the Assured shall be deemed to have
been deprived of the possession of the vessel without any likelihood of recovery’.
The policy was, however, subject to a number of exclusions, which excluded
liability for loss arising from:
Judgment at First Instance
On the remaining issues, he rejected the argument of the defendant underwriters that the failure to pay the draft bonds put forward in January 1998 by the Australian government solicitor against the possible outcome of criminal proceedings against the Master and Fishing Master of the vessel, amounted to a failure to provide security under Exception 4.1.6 of the War Risks policy. He held that the security contemplated by the exclusion related to claims against the vessel, rather than, as here, a form of recognisance for the attendance of the Master and the Fishing Master at their trial.
The background to this part of the judgment was that the Master and Fishing Master, having been charged with offences under the FMA, were later released on bail without conditions. They subsequently left Australia, and failed to return to stand trial. Without their conviction, the Australian authorities could not implement the right to forfeit the vessel under the FMA. The bonds proposed by the Australian authorities were in the amounts of A$9.768 million against ‘possible forfeiture orders and fines that may be imposed’ and A$275,000 to cover the costs of a monitoring system on board the vessel until the completion of legal proceedings relating to the charges against the Master and Fishing Master. The authorities had indicated that the amounts of the bonds were negotiable.
In like manner, the judge rejected the argument that the bond requirement was to be construed as a ‘financial cause’ of the detainment of the vessel. In this regard, the court had to determine whether the dominant cause of the seizure and detention was a financial cause or something else. In the present case, the dominant reason for the detainment of the vessel was that it had been caught fishing illegally, "and the fact that its release might have been procured by the payment of money should not lead to the conclusion that the cause of the detainment was financial." Accordingly, the judge found in favour of the defendant underwriters.
The bank appealed against the findings of the judge on the ‘trading regulations’ issue and the underwriters cross-appealed against the findings of the judge on the issues of ‘failure to provide security’ and ‘any financial cause’.
Judgment of Court of Appeal
1. On the ‘trading regulations’ point, the court held that the phrase was to be construed in the context of a long-standing regime of interlocking clauses designed and applied as a package for inclusion in policies relating to vessels of all kinds, the majority of which will be trading vessels concerned with carriage of goods by sea in furtherance or fulfilment of international trading transactions, being classically, the actual process of buying, selling or otherwise dealing in goods and services, either in the domestic or in the international market. It would therefore be wrong to construe the word "trading" in the context of the nature of the vessel or the nature of the trade or business of the owner.
Instead the question of what was or was not a trading regulation depended on the nature and purpose of the regulation itself and not on the fact that it may incidentally affect a shipowner in the operation of his trade or business.
In the context of the FMA, the court held that a regulation, the purpose of which was primarily the conservation and management of fishing stocks, could not be regarded as a ‘trading regulation’ in the sense intended by the policy. It is not correct to say that, "because commercial fishing is a trade to which the regulation applies, the regulation is therefore a trading regulation.") In the present case the ship's seizure had been for illegal fishing rather than trading illegally.
2. As regards the exclusions under Exclusion 4.1.6. the court dealt with these
under three headings.
The insurers had also advanced the argument that where a loss is caused by two causes effectively operating at the same time, of which one is expressly excluded by the policy, the policy does not pay. Further, where two perils are operating concurrently, they do not have to be exactly co-extensive in time. Whilst accepting both these propositions, the court held that it had first to determine whether one of the causes was plainly the proximate cause of the loss. In this regard, it found that the detention of the vessel under the FMA and the authorities’ continued assertion of their rights in that respect were the effective and dominant cause of the owners’ loss of use of the vessel and consequent claim for a constructive total loss, rather than the judicial process initiated by the bank.
b) failure to provide security.. or any financial cause
It agreed with the judge at first instance that the exception was directed at claims against the vessel, as opposed to a recognisance or security for an individual charged with a criminal offence. But, contrary to the judge at first instance, it held that the security here demanded was one relating to a claim, or potential claim against the vessel. This finding was based on the fact that the FMA had authorised the detention of the vessel against the possibility of its forfeiture, following the conviction [which never in fact took place] of the Master and Fishing Master under the Act.
The court further held that the exclusion in respect of failure to provide security is to be considered independently of the other defences available to the insurers. Its operation is not limited only to those cases where the failure to give security itself gives rise to the original seizure or detention. But this is subject to the limitation that the exception is inoperative in a case where the amounts and circumstances of providing such security would otherwise enable the vessel to be treated as a total loss.
Subject to that point, the court held that, on the facts of the
case, owners’ decision to refuse to pay security of A$10 million in order to
secure the release of the vessel was an effective cause of the continuing
detention, operating concurrently with the seizure and detention under the
The case therefore turned on whether, the vessel having been detained, it would have been reasonable for the owners to have provided the security as required by the Australian authorities, having regard to the size of the security demanded and the likelihood of its recovery, as against the value of the vessel. In this regard, the defendants had argued that the value to be taken into consideration was the insured value of the vessel. This argument was based on Clause 19 of the Institute Time Clauses Hulls 1/10/83, (incorporated by reference into the War Risks policy) which provided;
"No claim for constructive total loss based upon the cost of recovery and/or repair of the vessel shall be recoverable hereunder unless such costs will exceed the insured value".
The insured value was in the region of A$13.5 million.
The court rejected this argument, on the grounds that the terms of Clause 19.2 were not applicable to the claim for constructive total loss in this case; the claim here had been made under the ‘deeming’ provisions of the Detainment Clause in the War Risks policy. This required only proof of deprivation of possession for a continuous period of twelve months in order to establish a constructive total loss. On that basis, the value to be considered was the actual value of the vessel.
The court held that the Australian authorities were demanding, and in any subsequent negotiation, would have required, a sum by way of surety substantially greater than (or at least equal to) the value of the vessel, and given that there was no reasonable prospect of the Master and Fishing Master returning to Australia to stand trial, the owners were entitled to take the view that it would not be reasonable to provide a sum by way of security ‘which would exceed the value of the vessel thereby recovered and would inevitably be lost’.
Accordingly, the bank had established that it had suffered a loss which was prima facie covered by the owners’ War Risk policy and not excluded either of the relevant Exceptions clauses. The bank’s claim against its MII underwriters therefore succeeded.
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