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Facts
The Claimants, a Norwegian bank, claimed against underwriters under a Mortgagees’ Interest Insurance (‘MII’) in respect of the mv. ‘The Aliza Glacial’. The vessel had been seized and detained by the Australian authorities in October 1997 and threatened with forfeiture pursuant to the Fisheries Management Act of Australia, 1991, (the ‘FMA’) on grounds of illegal fishing. In order to avoid the forfeiture of the vessel and to minimise its losses, the bank had itself commenced foreclosure proceedings in Australia and had obtained summary judgment in its favour for the amounts due to it from the owners, with a direction that the vessel be valued and sold. The bank then bought the vessel for US$4.5 million at a judicial sale held in December 1998.

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……
6.1.1          by reason of any act or omission of any one or more of the owners… including breach or alleged breach of warranty.’

Judgment at First Instance
At first instance, the judge (Toulson J.) had held that the vessel had indeed been detained for a breach of ‘trading regulations’. He held that phrase was to be given a business-like interpretation and saw no reason to give the expression ‘a particularly restricted interpretation’. He noted that the FMA had the twin objectives of economic advancement and environmental protection. An important part of the statutory scheme was the imposition of control over commercial fishing. He did not regard it as straining the interpretation of the word ‘trading’ to say that it included commercial fishing. "I would regard," he said, "regulations which govern such activities as naturally described by the words ‘trading regulations’.

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’.

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. 
a) 'ordinary judicial process’ 
This exception, the court held, was limited to civil proceedings for the enforcement of private rights, and did not extend to criminal proceedings and public rights. The vessel's initial seizure and its detention up to the point of its arrest by the Admiralty Marshal on February 20 1998 [pursuant to the bank’s foreclosure proceedings] was an executive act under the 1991 Act. It was not correct to say that once the vessel had been arrested in the foreclosure proceedings, the vessel's further detention was by reason of ordinary judicial process. The original seizure and continuing detention of the vessel under the FMA remained in full operational effect until the moment of the judicial sale in December 1998.

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
The court considered these two exceptions together.

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
1991 Act, so as to deprive owners of the use of the vessel. Under the principle of concurrent causes, referred to above, the claim would have been defeated by the exception.

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.

Comment
The defendant brokers have applied for permission to appeal to the House of Lords on the 'trading regulations' issue and the Clause 19.2 point.