DMC Category Rating: Reversed / Developed

Case note contributed by Jim Leighton BSc (Hons), LLB (Hons), LLM (Maritime Law), Trainee Solicitor and International Contributor to DMC’s CaseNotes

Background
The claimant owned the fishing trawler mfv "Resolute" and took out a policy of marine insurance with the defendant insurer through brokers. The period of cover was for 12 months. The insured value of the vessel was £120,000. The living accommodation on the vessel comprised a crew cabin 6 feet by 9 feet and a galley 6 feet by 6 feet.

The policy was in Aigaion’s Standard Trawler wording with the following additional express provisions described as "CONDITIONS":
"...Warranted Owner and/or Owner’s experienced Skipper on board and in charge at all times and one experienced crew member…"

During the term of the insurance policy, the claimant and his crew of three took the vessel out fishing for a day. They returned to North Shields and by 20:00 hours had made fast alongside. The crew landed the catch and, at 20:30 hours, the claimant went to file the vessel’s fishing log sheet at the Fisheries Office. The crew readied the vessel for fishing the next day before one of them, who lived in North Shields, went home and another visited a pub some 200 yards from the vessel. At 22:00 hours the claimant left the vessel to meet a friend at a café in Tynemouth and a few minutes later the fourth crew member also went to the pub. At about 22.20 hours, the claimant received a telephone call informing him that the vessel was on fire. When he and the crew returned to the vessel, the Fire Brigade was there putting out a fire which was extinguished by about 00:45 hours the following day.

The surveyors’ report concluded that the fire started in the galley/mess room but, because of the severity of the fire, it was not possible to identify the precise location of its seat or its cause with any certainty. Loss by human agency could not be completely ruled out but did not appear the most likely cause. On the evidence available, it was plausible that the fire was caused by operation or malfunction of the deep fat fryer or the fridge. As was usual when the crew were to return to the vessel for the night, the generator was left running while they were ashore.

The insurer declined to pay for the constructive total loss of the vessel citing the "at all times" crewing warranty.

The material clauses/warranties/conditions – in addition to the crewing warranty quoted above - for the purpose of the Court of Appeal opinion were as follows:

Aigaion's ‘Trawler Wording’

"[Condition 26.1] The Vessel is covered while anchored, moored or navigating within the geographic limits set out in the Schedule, including while aground at customary berth and, provided in the following cases the contractor carries adequate liability insurance, and no waiver of the Insurer’s subrogated rights of recovery applies, at place of storage ashore, including lifting out and launching, while being moved in shipyard or marina, while being dismantled, fitted out, refitted, overhauled or undergoing major repairs. Gear and equipment are covered whether on board the Vessel or not, while in transit to and from place of storage ashore, always subject to the terms and conditions of this insurance.

…

[Condition 26.5] It is warranted that unless the Vessel is manned by at least two persons who are medically fit in all respects to man such a vessel, one of whom shall be competent to be in command, she shall not be navigated."

On appeal, the sole question for consideration was whether there was failure by the Shipowner to comply with the typed warranty relied upon by the Insurer.

In essence, the Insurer submitted that the typed warranty meant what it said and that it was not liable because, in circumstances where neither the Shipowner nor anyone else was on board at the time of the fire, there was "no Owner and/or Owner’s experienced skipper on board and in charge at all times". By contrast, the Shipowner submitted that the Insurer’s construction ignored the fact that the typed warranty was obviously directed to periods when the vessel was navigating or working and, if applied literally, would lead to absurd results.

It was common ground that (1) the warranty was a limited warranty in the sense that, if the fire had occurred at a time when the Shipowner was not complying with it, the vessel would not be covered during that period, and (2) if the Insurer could not rely upon the warranty, the Shipowner’s claim would succeed (because fire was an insured peril and there was no suggestion that any fault of the Shipowner or his crew which caused the fire would give the Insurer a defence).

Judgment
The Master of the Rolls, with whom Maurice Kay and Stanley Burnton LJJ agreed, gave the leading opinion of the Court of Appeal.

The Legal Principles
The Master of the Rolls considered that it was "possible to over-elaborate the relevant principles." The relevant principles in this case were for the construction of contracts in general and of warranties in insurance contracts in particular. He stated "any clause in a contract must be construed having regard to its context within the contract, which must in turn be set in its surrounding circumstances or factual matrix". The general principles were found in a number of comparatively recent cases, of which he extensively cited Investors Compensation Scheme Ltd v West Bromwich BS [1998] 1 WLR 897 (HL) in particular¹.

The overall effect of the authorities cited in support of the general principles was that while there had been a shift from literal methods of interpretation towards a more commercial approach, the primary source for understanding what the parties meant was their language interpreted in accordance with conventional usage. While the tendency should therefore be against literalism, the inquiry would start, and usually finish, by asking what was the ordinary meaning of the words used. The more unreasonable the result the more unlikely it was that the parties could have intended it and, if they did intend it, the more necessary it was that they should make their meaning clear. However, such a rule of thumb had its limits and to force upon the words a meaning which they could not fairly bear would be for the court illegitimately to substitute for the bargain actually made one which the court believed could better have been made.

In addition to the above, he accepted that the following paragraphs cited from McGillivray on Insurance Law (10th edn) also applied, in broad terms, to warranties of the kind in this case:

"10-50 The first relevant rule of construction is that the apparently literal meaning of the words in a warranty must be restricted if they produce a result inconsistent with a reasonable and businesslike interpretation of such a warranty. A warranty in a contract must, like a clause in any other commercial contract, receive a reasonable interpretation and must, if necessary, be read with such limitations and qualifications as will render it reasonable. The words used ought to be given the interpretation which, having regard to the context and circumstances, would be placed upon them by ordinary men of normal intelligence conversant with the subject matter of the insurance.

10-53 The second principle of construction which assists the assured who contends that he had complied with the warranty, is that any ambiguity in the terms of a policy must be construed against the insurer …"

While noting that the warranty dealt with in the Court of Appeal decision of Hussain v Brown² was not of the delimiting type³ in the instant case, the Master of the Rolls endorsed that case’s requirement that, if underwriters want the protection of draconian warranties, it is up to the underwriters to stipulate for this in clear terms.

Application to the Facts
The Master of the Rolls first considered the authorities upon which the Insurer had relied before the trial judge. While he did not quarrel with the reasoning in The "Milasan"⁴, he did consider that it did not provide assistance in the instant case because it "relates to a different clause in a policy which insures a very different type of vessel in different circumstances". In relation to The "Newfoundland Explorer"⁵, he thought that because the warranty was significantly different "the decision there is of [no] real help in pointing the way to the correct conclusion on the facts of the instant case".

The Master of the Rolls differed from the trial judge’s thinking (at paragraph [22] of the first instance judgment) because "in circumstances in which the policy wording is significantly different, I do not think that the principle that the court should be consistent in its approach to policy wording … is of any assistance." For the Master of the Rolls, the critical wording of the typed warranty was "Warranted Owner and/or Owner’s skipper on board and in charge". The natural inference from that was that "an experienced skipper was to be on board and that the reason for that is that underwriters wanted protection from risks which a skipper would be needed to guard against." This suggested to him that "the primary purpose of the warranty was to protect the vessel against navigational hazards." In such circumstances, the addition of "and one experienced crew" to the typed warranty underlined that the "purpose of the warranty, read as a whole, was to protect the vessel in circumstances in which at least two members of the crew, ie the skipper and one other, could be expected to be on board." The "principal time when at least two members of the crew, including the skipper, would be required was when the vessel was being navigated, including when she was manoeuvring" and this "would probably be held to apply when the vessel was, say, landing her catch, when again there might well be a need to have the skipper and a crew member on board." However, the critical question was how far the expression "at all times" was to be qualified.

He considered that "the clause seems to me to be ambiguous because it does not make clear or give any indication as to what the extent of the qualification should be." He also noted that this had been recognised by the trial judge and correctly conceded by the Insurer’s counsel. In such circumstances he was of the opinion that "the clause should be construed contra proferentem, that is, against the insurer." He then applied the principle to the facts: "At the time the crew left, the vessel was safely tied up alongside, as must happen very often. Sometimes, no doubt, the generator was left running and sometimes it was not. If the insurer wanted the owner or skipper and an experienced crew member on board whenever the vessel was left with the generator still running it should clearly have so provided. So too, if the insurer wanted them on board whenever the vessel was left, it should clearly have so stipulated. It did not. I would hold that the insurer has not established that there was here a breach of the warranty and would allow the appeal."

If, contrary to his view, the typed clause were not ambiguous, the Master of the Rolls would still have come to the same conclusion because "the purpose of the warranty was to protect the vessel in circumstances when a skipper and experienced crew member could be expected to be needed if something should go wrong. That was not the case when the crew left the vessel to go ashore. In such circumstances, the parties could not have contemplated that a skipper might be required or that more than one crew member might be required, say to put out a fire. It being common ground that ‘at all times’ must be qualified, that would be the natural qualification to adopt ..."

Aigaion’s Trawler Wording – Condition 26
Stanley Burnton LJ, with whom the Master of the Rolls and Maurice Kay LJ agreed, stated that the Trawler Wording, in particular condition 26, was relevant to the proper construction of the insurance policy as a whole. The standard wording, which was expressly incorporated into the Policy, showed "that the vessel was to be subject to cover in circumstances when no one could have sensibly have thought that any crew should or could be on board." This was clear from condition 26.1 (above).

It followed, in his opinion, that the typed warranty could not be read literally, so that some qualification of the words "at all times" must have been intended. Condition 26.5 (above) provided a clue in this regard. In his opinion, the condition 26.5 crewing warranty was "virtually otiose if the typed warranty is to be read literally." He considered that "a more sensible reading is that the typed warranty places a gloss on condition 26.5, requiring the Owner or his experienced Skipper and one experienced crew member to be on board when the vessel is navigated or in other circumstances where their presence would be appropriate."[Emphasis added]

Comment
In contrast to the trial judge, the Court of Appeal considered that the decisions in The "Milasan" and The "Newfoundland Explorer" were insufficiently comparable to be of any real assistance in the instant case. This freed the Court of Appeal to reach a different conclusion from the trial judge, without the necessity of discrediting those earlier High Court judgments which provide guidance when interpreting crewing warranties in yacht policies.

The disapproval of such poorly worded marine warranties by the trial judge has here been brought to fruition by the Court of Appeal applying the contra proferentem rule and the principle described in Hussain v Brown. If harsh consequences flow from ambiguous terms in a contract, the ambiguous terms on which the party who created them relies should be construed contrary to their interests; this being a corollary to a party being required to stipulate for harsh consequences in the clearest of terms if that party is to benefit from them.