Facts
Frans Maas, a firm of freight forwarders, warehousemen and road hauliers, acted on behalf of Palmier Plc, a company that imported clothes into the UK, in arranging customs clearance, storage in a bonded warehouse and onward distribution to Palmier's customers.

Frans Maas was liable to HM Customs and Excise for duty on all goods stored in the bonded warehouse and would periodically bill Palmier for these amounts. By early 1998, a very substantial outstanding balance had built up and the parties agreed to payment by instalments. Palmier defaulted, so Frans Maas suspended all further deliveries and claimed a lien over Palmier's goods.

Further negotiation resulted in an agreement that allowed for the release of goods to satisfy bona fide orders, subject to a minimum stock level, provided Palmier met a new payment schedule and supplied original bills of lading or, in cases where bills of lading were missing, procured a "hold harmless" letter from the shipping line concerned.

Subsequently, however, in return for a "risk fee", Frans Maas agreed to make certain deliveries without production of bills of lading so that Palmier would be able to fund the repayment of the debt. There was a cap on the value of goods delivered in this way, but Frans Maas failed to monitor it adequately. It turned out that the actual value of cargo released was greatly in excess of the agreed figure and probably amounted to over US$5 million. No hold harmless letters were ever issued.

The arrangement was successful, in that it enabled Palmier to fund its repayments within the agreed timetable. But then Palmier went into administrative receivership and claims started to be made by third parties against Frans Maas for conversion and wrongful interference with goods by reason of misdelivery.

Frans Maas claimed on its insurance with Sun Alliance. The warehousing section of the policy listed the standard conditions covered and provided: "The company will indemnify the insured if the Property [goods and merchandise for which the insured was responsible] be damaged during any period of Insurance whilst warehoused at any Location specified in the Schedule to the extent that there is liability for Damage under the Contract Conditions expressed in the Schedule as being Insured or at Common Law if such Contact Conditions cannot be enforced". "Damage" was defined to include misdelivery.

Frans Maas argued that the policy provided an indemnity for misdelivery. It was a liability "at Common Law" because contract conditions could not be "enforced" against these third parties, since there was no contractual relationship between Frans Maas and the cargo claimants.

Judgment
The judge disagreed. It was not that the terms could not be enforced, they were simply inapplicable. The indemnity was only available in respect of a liability to a customer, i.e. a person who had contractually engaged Frans Maas' warehousing facilities. The only relevant liability was that incurred to customers under the standard terms covered by the policy. The exception would only arise if, for some reason, those terms were unenforceable against that customer. On construction of the policy as a whole, the judge was satisfied that it did not cover non-contractual claims, such as bailment or tort. The third party liabilities incurred by Frans Maas were, therefore, not within the scope of the insurance.

The judge also held that, had the claims been covered, insurers could have avoided liability on the grounds that Frans Maas had breached policy terms. By agreeing to release the goods without bills of lading, it had failed to comply with conditions that required the insured to take reasonable precautions to prevent or diminish any damage to property.

The policy also excluded cover for damage caused by the wilful act or with the connivance of the insured. In the judge’s view, Frans Maas had deliberately chosen to run an obvious risk. Even though the arrangement imposed a limit on the value of goods released, Frans Maas failed to monitor it effectively and ended up releasing far more in value than they intended, without the protection of even the hold harmless letters envisaged in the agreement.