The policy insured the vessel against war and other perils for a period of 12 months from 15 March 1998. The policy incorporated the Institute War and Strikes Clauses Hulls-Time of 1.10.83 and covered, amongst other things, loss of or damage to the vessel caused by its detainment. Clause 3 provided that, if the vessel was detained for a continuous period of 6 months, the insured would be deemed to have been deprived of its possession without any likelihood of recovery. Clause 4.1.5, however, excluded "arrest, restraint, detainment, confiscation or expropriation under quarantine regulations or by reason of infringement of any customs or trading regulations".

The issue was whether this exclusion applied, and the argument boiled down to what was meant by "customs regulations". The claimants (the owner, the manager and the mortgagee) argued that it only covered rules of law concerning duties levied on imports from abroad and not breaches of criminal law that happened to be policed by Customs. Nor was the detainment the proximate cause of the loss, as the vessel would only have needed to be detained a short time to recover the drugs. The true cause of the loss was the criminal proceedings against the master and crew. Consequently, the exclusion should not apply.

The insurers argued for a wider interpretation of "customs regulations", as had been allowed in The Anita ([1971] 1 Lloyd’s Rep 487). In that case, the vessel was detained in Vietnam after the discovery of smuggled transistor radios and other unmanifested goods on board. The detention was not pursuant to Vietnam's Customs Code but to an order of a Special Court. Nevertheless, both the High Court and the Court of Appeal found the detainment was "by reason of an infringement of customs regulations". The court took into account that the Institute clauses are used in a wide variety of jurisdictions, and took the view that the phrase should be given a businesslike interpretation and should not be restricted to what, in any particular jurisdiction, may be designated as a Customs Code.

Judgment at First Instance 
The judge at first instance, Mr Justice Cresswell, agreed with the insurers’ approach. Where an expression in a standard form policy used in marine insurance has acquired a settled meaning, the courts will generally apply that meaning in the interest of certainty. Following the authoritative guidance given in The Anita [1971] 1 Lloyd’s Rep 487, he found that the term "customs regulations" was wide enough to include provisions having the force of law in the country concerned (i) as to import or export duties or licences and (ii) as to import or export of controlled drugs and other prohibited goods, substances or materials.

Having found there was an infringement of customs regulations, he was satisfied that the loss was caused by that infringement. Consequently, insurers succeeded in showing that the loss came within exclusion 4.1.5 and the claimants were unable to recover under the policy.

Judgment of the Court of Appeal
The unanimous judgment of the court of appeal, which was given by Lord Justice Clarke, confirmed the decision at first instance in favour of the insurers.

In the appeal, the ship interests had argued that the judge at first instance had misconstrued the expression ‘customs regulations’ and that he was wrong to hold, as a matter of causation, that the loss of the ship arose from her detention by reason of an infringement of customs regulations.

The crucial issue of construction was whether ‘infringement of customs regulations’ extended to an infringement of a law, in this case, the Narcotics Act, which prohibited the import of particular classes of drugs. In holding that it did, the court relied on two principal reasons. The first was the ordinary meaning of the expression ‘customs regulations’ in an international contract of insurance, coupled with the improbability of the Institute Clauses excluding detention caused by infringement of regulations which impose import duty but including detention by infringement of regulations which prohibit import of the same goods altogether. The second reason was the decision in the "Anita" case, coupled with the fact that the wording of the exception in clause 4.1.5 was retained in the 1983 edition of the Institute Clauses, which was, of course, after the "Anita" decision.

The court affirmed two principles of construction, namely, that any term in a commercial contract should be construed in its context and that, where the relevant expression has been given a settled meaning by the courts, it should be so construed in the same context in the future.

In construing the expression "customs regulations" in its context, regard must be had to its place in the contract as a whole and the contract had to be construed having regard to the surrounding circumstances. The most important of the surrounding circumstance, in the view of the court, was that the Institute Clauses were drafted for use in insurance contracts throughout the world, for insuring ships trading worldwide, wherever they are owned and managed. There was, accordingly, no reason to construe them by reference to European, as opposed to international, practices. Whilst the court accepted that European Community (and thus English) customs laws are relevant to what is the meaning of ‘customs regulations’ in clause 4.1.5 of the Institute War Clauses, it held that they were not ‘determinative’ of it. Like the dictionaries, they showed that ‘customs regulations’ included regulations imposing import and export duties but they did not show that they were limited to provisions of that kind. Given that the Institute Clauses are intended to govern the insurance of ships on an international basis, the court held the meaning of ‘customs regulations’ to be much wider, and to have the wider meaning given to it by the "Anita" case.

In the court’s view, the interpretation given to the expression in the "Anita" case was correct. "In ordinary parlance, I would describe customs regulations as including both regulations imposing duties and regulations prohibiting imports altogether….I can see no reason why the parties should agree to exclude a CTL arising from detention caused by the infringement of a regulation prohibiting the import unless duty is paid and not to exclude a CTL caused by detention caused by the infringement of a regulation which prohibits the import absolutely. Such a distinction seems… to make no commercial sense."

The court therefore held that ‘customs regulations’ in clause 4.1.5. of the Institute Clauses included regulations absolutely banning imports just as it included regulations imposing import duties. The court added, however, that it did not follow that all regulations enforced by Customs in a particular port would be within the clause, or indeed, that regulations not enforced by such Customs would be outside the clause. Each case would need to be examined on its facts in the light of the regulations concerned.

In considering whether the interpretation of ‘customs regulations’ adopted in the present case should properly be regarded as ‘settled law’, the court referred to the text book Arnould on Marine Insurance, where the editors had throughout understood the "Anita" decision as construing the expression ‘customs regulations’ to include laws dealing with smuggling. In consequence, the court would, if necessary, have held that the clause had a ‘settled’ meaning, which courts interpreting it should respect, even if the analysis of the expression in the "Anita" case was not part of the decision in that case. But, after considering the "Anita" decision in some detail, the court concluded that the construction of clause 4.1.5 was part of the decision in that case and was, therefore, on any view, ‘settled’ law.

On the question of causation, the court agreed with the judge at first instance that the proximate cause of the ship’s detention remained, throughout the period of six months necessary to constitute a CTL under the policy, the initial infringement which had led to the seizure of the ship under the Narcotics Act.