The 'Star Sea'
Aleka Mandaraka Sheppard
Deficiencies in the Star Sea’s emergency fire pump were found in January 1990, when a Belgian port authority surveyor inspected her after her arrest by cargo claimants. During repairs of the fire pump, which were eventually completed, the chief engineer cut a suction pipe passing through the forepeak ballast tank to a non-return valve in the ship’s side. This pipe was never repaired and, as it transpired later, this affected the ship’s seaworthiness. On May 27th 1990, the Star Sea sailed from Nicaragua bound for Zeebrugge with a full cargo of bananas, mangoes and coffee. Two days later, as she was approaching the Panama Canal, a fire started in the engine-room. The fire spread and was not put out for several days. It caused extensive damage to the vessel, so as to render her a CTL.
The assured shipowners, Manifest Shipping Ltd., claimed under the insurance policy against the underwriters, who pleaded - in reliance on section 39(5) of the Marine Insurance Act of 1906 - that the ship was sent to sea in an unseaworthy condition with the privity of the assured and/or that the assured was in breach of its duty of utmost good faith under section 17 of the Act.
Part of the underwriters’ case was that the ship was unseaworthy by reason of a) the cut suction pipe, because it could not draw when the ballast tank was empty while the ship was laden, thus rendering the emergency fire pump useless; b) the ineffective sealing of the engine room; c) the fact that the master was incompetent in that he was unaware of the right use of the CO2 system. On the issue of "privity" of the assured, the insurers’ case was based upon what had happened to the Centaurus and the Kastora ships in the previous year and what the assured ought to have learned from the previous fires. The underwriters accepted that the occurrence of the fire was not attributable to unseawortiness, but alleged that the spread of the fire and the failure to extinguish it was attributable to unseawortiness. On this analysis, they were prepared to pay a small partial loss, in respect of the damage that would have been caused in any event by the outbreak of fire, but not a CTL resulting from the failure to extinguish the fire.
The underwriters’ case with regard to breach of section 17 related to a) what the assured did not disclose in witness statements - exchanged before trial – about facts concerning defects in the dampers of the Kastora, which were reported in the expert’s second report; b) the fact that they did not disclose the expert’s reports concerning the Kastora casualty, - the allegation being that the assured’s solicitors consciously decided to treat them as ‘privileged’ having appreciated that disclosure of these reports would weaken their clients’case in this litigation; and c) misleading information given by the assured’ brokers about the Kastora casualty. There was no allegation, at any stage, that the claim was put forward fraudulently, namely without an honest belief that it was a claim the assured was entitled to make.
2. The section 17 defence
Although the defence under section 17 raised many questions, the court dealt
generally with the following important issues (but on the facts of the case, it
did not have to decide them):
a) Is the duty of good faith continuous?
Lord Clyde concluded that the concept of good faith in insurance contracts reflects the degree of openness required of the parties in the various stages of their relationship. It is not an absolute. The substance of the obligation which it entails, can vary according to the context in which the matter comes to be judged. For example, a high degree of openness is required at the formation of contract stage, but there is no justification for requiring that degree necessarily to continue once the contract has been made.
Lord Hobhouse was concerned about the drastic sanction for breach of the section 17 obligation. The sole remedy for breach is avoidance of the contract; the section did not give a remedy in damages, unlike the tort of deceit or the breach of a contractual term. He added that the concept of avoidance most appropriately applies to the making of the contract and derives, as old authorities have established, from application of a rule of law, not from the parties’ agreement. Later developments applied the requirement of disclosure to matters occurring after the making of the contract, in particular to the making of fraudulent claims.
There are many judicial statements, he said, that the duty of good faith can continue after the contract has been entered into. However, the content of the obligation to observe good faith has a different application in different situations.
Having a contractual obligation of good faith in the performance of the contract presents no conceptual difficulty. The remedy may be in damages, or if the breach is serious, it may entitle the other party to terminate the contract. But any such relief would apply prospectively and would not affect rights that had already accrued.
The right to avoid referred to in s.17, on the other hand, is different; it applies retrospectively. Thus, where the want of good faith occurs after the making of the contract, the sanction of avoidance becomes anomalous and disproportionate. According to Lord Hobhouse, no principle of this breadth is supported by any authority.
Thus, Lord Hobhouse proposed that a coherent scheme can be achieved by
b) Fraudulent claims
Although confusion arose from some modern cases as to whether the remedy was based on breach of good faith or on contract, Lord Hobhouse was of the view – relying on academic texts and on older authorities - that the sanction for fraudulent claims is forfeiture of all benefit under the policy or all claims upon it, not avoidance ab initio [from inception]. Thus, claims already paid would not be affected.
Lord Scott similarly concluded that:
The meaning of this statement is that the duty of the assured at the stage of making a claim should not be based on section 17 which would have the effect of entitling the insurer to claim back money already paid in relation to other claims honestly made. Such duty should be just limited to making honest claims.
(a) the stage of pre-contractual good faith (applicable also when there is a renewal or variation of the contract of insurance), which is based on a rule of law. Only at this stage may the breach of the obligation be met with avoidance of the particular contract to which the breach was material (namely, the original policy or the renewed one, or a variation). No positive answer was given to the question whether – if the breach occurred in relation to the variation of the policy, only the variation itself would be avoidable or the policy as a whole. But Lord Hobhouse cited with approval what Blackburn J. had said in an old decision that: "if the alteration of the policy was such as to make the contract more burdensome to the insurer and a material fact to the alteration known to the assured at the time was concealed, the policy would be vitiated".
(b) the stage of post-contractual good faith is based on express or implied terms of the contract. Instances of this may be a held covered clause, or a requirement to give information or notice to the insurer in certain circumstances specified by the contract; the remedies for breach will derive from contract law but in most cases are likely to be set out in the relevant clause of the contract. Culpable non-disclosure during the currency of the policy was considered to be insufficient to attract the drastic consequences of avoidance under s.17.
(c) At the stage of presenting claims, the substance of the obligation is not to make fraudulent claims. In the event of a fraudulent claim, the sanction is forfeiture of the claim as provided by the common law rule.
(d) The litigation stage is governed by the procedural rules of court but the concept of good faith will be relevant when the judge exercises his discretion as to whether or not to enforce a particular procedural rule.
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