Liberty Clauses

Right from the inception of free markets in the world, the historical motto of Laissez-faire has been the guiding light to individuals wishing to enter into a contract. The individuals who contract often seek to exploit the leniencies granted in law by the term, which is often simplified to mean, freedom of contract. A Liberty clause, the understanding of which is of utmost significance to this essay, is one such prodigy of the free markets.

Liberty clauses are often included in the Charter Party [hereinafter, “C/P”] for the purpose of allowing the Carrier or the Ship-owner to depart from the route which the ship would be obliged to follow in the normal course of the voyage. A Liberty clause may be, as short and precise as a Gencon Deviation Clause [hereinafter, “GENCON”] or as wide and elaborate as the Vegoilvoy standard deviation clause. It is therefore the relevant commercial background governing a particular voyage that influences the draftsman to carve the best-suited clause to fit in the C/P appropriately and escape the application of The Hague Visby rules or Common law.

In order to illustrate on the effect of a liberty clause, we shall consider the, very short yet general, GENCON which confers, amongst other liberties, the liberty to “to call at any ports in any order”. The meaning of this phrase was considered in Leduc v. Ward where the ambit of the GENCON was held not to allow a call at Glasgow on a voyage from Fiume to Dunkirk. Lord Esher, clarifying on the scope of application of GENCON to Leduc , interpreted that the order encompassed by the GENCON ought to be understood to include only such ports substantially on the course of voyage in their geographical order. In a later decision, in Glynn v. Margetson , it was further clarified that the order in which the ports are visited must be a natural and reasonable one, although not necessarily in strict geographical rotation.

The judgement in Glynn v. Margetson is particularly important for the purpose of this discussion, to understand the interpretation as provided in the case, which purports that the ports intended by the liberty are those which it is usual to call at as a matter of the carrier’s general business practice, it is submitted that the correct view is that any port which is substantially on the way may be visited without regard to the usual ports of call . The holding in Glynn v. Margetson, has since been followed in later cases, even as late as in The Nour , wherein a vessel under a part charter for a voyage from Callao to Taiwan was not permitted, under a similar clause, to proceed to ports in central Chile, more than 1,500 miles south of Callao, to load further cargo.

Nevertheless, one may often encounter clauses wherein more liberties, than those conferred by the GENCON, are included. These clauses however, need to be interpreted by considering the implication of the prolixity in the words against the commercial groundings of the contract as a whole . In seeking to reconcile the provisions of a liberty clause with the main object of the contract, the correct approach is not to reject entirely the provisions which, literally construed, could offend against the main object, but to read the clause as being subject to an implied limitation that it will only be relied upon by the carrier to such an extent as is consistent with the main object.

In considering the construction of the various liberty clauses, a distinction should be drawn as not to attract the application of the doctrine of deviation in a contract for the carriage of goods by sea. Deviation, in the law of carriage of goods by sea, means the voluntary and unjustified departure of a ship from her agreed route . Deviation, however minor or harmless it may be , is treated as a breach of contract which has special consequences. Historically, the courts had approached the concept of deviation as an act constituting a fundamental breach of contract. However, the doctrine of fundamental breach, in as much as the application to a case of deviation, was discarded by the House of Lords in Suisse Atlantique and Photo Production v. Securicor .

The rules of deviation under common law, post the decision in Photo Production are not, consequently, as important as they once were and in addition, to the permissible deviations under common law, the Hague-Visby Rules permit carriers to make reasonable deviations One cannot, however, completely jettison the applicability of the doctrine of fundamental breach in re deviation and it is therefore a question of facts in each case that would determine whether the exercise of liberties, though conferred by the respective liberty clause, may constitute deviation and thereby constitute a breach of the contract. On this view, the loss or damage resultant from deviation would continue to be recoverable and the application of any liberty clause, after a deviation, would thereby depend on a proper interpretation of the contract.

[1] Leduc v. Ward, (1888) 20 Q.B.D. 475.

[1] Ibid

[1] Glynn v. Margetson, [1893] A.C. 351 per Lord Herschell, at p. 356, on the meaning of “in any rotation”

[1] Ibid

[1] See also U.S. Shipping Board v. Bunge, (1926) 42 T.L.R. 174; White v. Granada, (1896) 13 T.L.R. 1.

[1] Supra n.3

[1] Islamic Investment v. Transorient Shipping (The Nour), [1999] 1 Lloyd’s Rep.1.

[1] Julian Cooke and Ors., Voyage Charters, (London, Informa, 2007, 3^rd Edn.) at p. 259

[1] Martin Dockray, Deviation: a doctrine all at sea?, [2000] LMCLQ 76

[1] Hain Steamship v. Tate & Lyle, [1936] 2 All E.R. 597

[1] Suisse Atlantique Soc. d’Armement Maritime SA v. N.V.Rotterdamische Kolen Centrale, [1967] 1 A.C. 361.

[1] Photo Production v. Securicor, [1980] A.C. 827.

[1] Ibid.

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The Decision in HIH and the relationship between the SLIP and POLICY

The relationship between the Slip and the Policy following the decision in HIH Casualty & General Insurance v. New Hampshire, [2001] Lloyd’s Rep I.R. 596

I. Jurisprudential understanding of the concepts in Insurance Law

1) An introduction to the contract of insurance

Contracts of insurance, like wagering contracts, are aleatory contracts “depending upon an uncertain event or contingency as to both profit and loss[i]”. A contract of insurance[ii] is the paradigm case of a contract uberrimae fidei – a contract of the utmost good faith. It is obviously of central importance in any contract of insurance to identify the nature and scope of the risk which the policy covers. Although this is purely a matter of construction of the particular contract, many standard terms have, overtime, been subject of judicial ruling which allow the task of construction to be approached with a reasonable degree of certainty. One well known rule of construction which may be of particular relevance in relation to insurance contracts is the contra proferentum rule- that any ambiguity in a document is to be construed in a sense least favourable to the person who has drawn it up[iii].

2) Concepts in consideration: ‘Slip’ and ‘Policy’

There is no precise definition that can be ascribed to a Slip or a Policy. Over the years, a surfeit of case laws, dealing in this regard, has developed an assortment of views on the application of both these terms with relevance to the circumstances in which they have been used.

3) The journey of the concepts, as manifested in case laws, until HIH

The task of defining the concepts of the Slip and the Policy began in the latter half of the nineteenth century when the laws of insurance where still in its infancy. In one of the earliest decisions, that is of utmost significance to our understanding, Blackburn J. in Ionides v. Pacific Fire and Marine Insurance Co[iv] explained the legal effect of the slip as “The slip is in practise, and according to the understanding of those engaged in marine insurance, the complete and final contract between the parties, fixing the terms of the insurance and the premium, and neither party can, without the assent of the other, deviate from the terms thus agreed on without a breach of faith, for which he would suffer severely in his credit and future business”. In an earlier decision, the view taken by the court was that a slip was no more than an application for insurance[v]

Followed by the decision in Ionides[vi], it was observed in Morrison v. Universal Marine Insurance,[vii]that although the Slip constitutes a contract between the insured and each subscribing insurer, the slip is merely a temporary contract which is superseded when the policy itself is issued[viii]. The rule of law that was adopted by the courts in the later decisions reflected a rule of law that the Policy was meant to supersede the Slip. This position continued even as late as American Airlines Inc. v. Hope[ix], wherein Lord Diplock expressed the view that the slip was merely temporary. The contractual effect of a slip was, however, confirmed by the Court of Appeal in a later decision in General Reinsurance Corporation v. Forsakringsaktiebolaget Fennia Patria[x]. Later in the nineties, the view taken by Phillips J and the Court of Appeal, in Youell v Bland Welch & Co Ltd[xi],was that when a slip was followed by a formal policy, reference to the slip was not permitted as an aid to construction of the policy. Nevertheless, all the aforementioned earlier authorities were disapproved by Rix L.J. in HIH Casualty and General Insurance Ltd v. New Hampshire Insurance[xii].

II. The decision in HIH and the shift in the rule of law

1) A gist of the facts in HIH

HIH, in the instant case, of HIH Casualty and General Insurance Ltd v. New Hampshire Insurance (hereinafter “HIH”) [xiii], were the insurers of the Law Debenture Trust Corporation Limited (hereinafter “LDT”). The insurance was prepared in re two ‘slates’ or groups of made-for-TV films. The investors in the films used LDT as their medium of investment or the major investor in the films through separate set of trust deeds. Nevertheless, the investors demanded that insurance for the films was what they required as collateral, i.e., if at the end of a certain period, there was a shortfall between the finance provided and the revenue collected from the films, then LDT would in any case be indemnified from the loss in profits. In short the Investors wanted to insure against the risk that their investment would go haywire and not be repaid. HIH reinsured 80% of its exposure to LDT through other contracts of reinsurance with other insurers. The direct insurance, in HIH protecting the investment was affected by means of two slip policies, which specified that a given number of films were to be made. In due course, formal insurance policies were issued which made no reference to the number of films.

2) Rix L.J. and the relationship between the ‘Slip’ and the ‘Policy’

Rix L.J., who delivered the main judgement in HIH, accepted that where the policy was intended to supersede the slip it followed that the intention of the parties were to be found in the policy alone and the slip could not be used to add or modify the policy. However, he rejected the existence of any rule of law that the slip was immaterial once the policy had been issued. This was so for two reasons. First, even if the policy did replace the slip “as part of the matrix or surrounding circumstances of a later contract”. The parol evidence rule excluded mere negotiations, not prior contract, and, while it was likely that the earlier contract would be of much assistance where there were clear differences between the two contracts, as such differences would demonstrate an intention by the parties to depart from the earlier agreement, the need to exercise caution did not elevate the principle into a rule of law. Secondly, and more fundamentally, it was far from clear that the parties (at least in HIH) had intended that the policy should supersede the slip, and if the point was disputed then it was impossible to determine the relationship between the two contracts without considering both of them.

Rix L.J.’s conclusion was that, where it was not common ground that the slip has not been superseded by the policy, both documents had to be construed by the court. In HIH, he found the slip had not been superseded by the policy; the slip in fact was called a ‘slip policy’, which immediately questioned any presumption in favour of supersession and, also the fact that, the policy wording was deficient in number of respects (e.g. it contained nothing about premium, caps on recovery and cross-collateralisation).The matter, however, is not, entirely free from doubt and in some later decisions, it has been assumed that the slip is deprived of effect following the issue of a policy[xiv].

3) Post HIH and the relationship between the ‘Slip’ and ‘Policy’

Although in one particular decision, before Rix L.J.’s ruling in HIH, in Kyzuna Investments Ltd v. Ocean Marine Mutual Association[xv], wherein Thomas J. used the slip as an aid to the construction of the policy, the practise after HIH was noteworthy in a later decision in Assicurazioni Generali SpA v. Ege Sigorta AS[xvi]. In Assicurazioni[xvii], Colman J. described the slip as the contract and issuing of the policy as “a purely ministerial exercise”. The principle that the slip is the contract, and that there is no need for formal policy wording to be agreed at the point when slip is scratched in order to create a binding contract, was reasserted by Moore-Bick J. in Burows v. Jamaica Private Power Co. Ltd^[xviii]. Again in Standard Life Assurance Ltd v. Oak Dedicated Ltd[xix], credence was also given to the slip as an aid to the construction of the policy. Nevertheless, in Travellers Casualty & Surety Co of Europe Ltd v. Sun Life Assurance Co of Canada (UK) Ltd[xx], the court proceeded on the assumption that the slip would be superseded by the policy.

III. Conclusion

It is clear law that a slip, once scratched by an underwriter, constitutes a legally binding contract providing for insurance cover in its own right. This common law principle is confirmed by s.21[xxi] of the Marine Insurance Act of 1906 (hereinafter “MIA”). It is therefore not necessary that the policy be issued thereafter following the scratching of the slip. In principle the policy, if issued, is merely a formal representation of the agreement of the parties. On this basis, s.21 of the MIA provides that reference may be made to the slip in any legal proceedings involving a marine policy. The aforementioned view as per s.21 is supplemented by s.89 of the MIA[xxii].It is, therefore, just a matter of time, until case laws, in the future, bridge the gulf of uncertainty that clouds the relationship between the slip and the policy and the supersession of one concept over the other.

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[i] ColinVaux and Merkin’s Insurance Contract Law (London, Sweet & Maxwell, 2008) at p 10003.

[ii] Insurance has been defined in broad terms, in Callaghan v. Dominion Insurance Co. [1997] 2 Lloyd’s Rep. 541, per Sir Peter Webster as “an agreement to confer upon the insured a contractual right which, prima facie, comes into existence, immediately when loss is suffered by the happening of an event insured against, to be put by the insurer into the same position in which the insured would have been had the event not occurred, but in no better position”.

[iii] Houghton v. Trafalgar Insurance Co Ltd [1954] 1 QB 247, CA, Lancashire County Council v. Municipal Insurance Co Ltd [1997] QBS 897, CA.

[iv] Ionides v. Pacific Fire and Marine Insurance Co, (1871) L.R. 6 Q.B. 674

[v] Xenos v. Wickham, (1867) L.R. 2 HL 296

[vi] Supra n.4

[vii] Morrison v. Universal Marine Insurance, (1873) L.R. 8 Ex.197

[viii] See also, Thompson v. Adams, (1889) 23 Q.B.D. 361

[ix] American Airlines Inc. v. Hope, [1974] 2 Lloyd’s Rep. 301

[x] General Reinsurance Corporation v. Forsakringsaktiebolaget Fennia Patria, [1983] 2 Lloyd’s Rep. 287

[xi] Youell v Bland Welch & Co Ltd, [1990] 2 Lloyd’s Rep 423, [1992] 2 Lloyd’s Rep 127

[xii] HIH Casualty and General Insurance Ltd v. New Hampshire Insurance, [2001] Lloyd’s Rep. I.R. 596

[xiii] Supra n.12

[xiv] Great North Eastern Railway v. Avon Insurance plc [2001] Lloyd’s Rep. I.R. 793; Unum Insurance Co of America v. Israel Phoenix Assurance Co [2002] Lloyd’s Rep. I.R. 374

[xv] Kyzuna Investments Ltd v. Ocean Marine Mutual Association [2000] 1 Lloyd’s Rep.505

[xvi] Assicurazioni Generali SpA v. Ege Sigorta AS [2002] Lloyd’s Rep. I.R. 480

[xvii] Ibid.

[xviii]Burows v. Jamaica Private Power Co. Ltd [2002] Lloyd’s Rep. I.R. 466.

[xix] Standard Life Assurance Ltd v. Oak Dedicated Ltd [2008] EWHC 222 (Comm); [2008] 1 CLC 59; see also Mines Plc v. Millenium Underwriting Ltd [2008] EWHC 1331 (Comm), where the slip was held to be admissible evidence as part of the factual matrix to ascertain the meaning of the policy itself.

[xx] Travellers Casualty & Surety Co of Europe Ltd v. Sun Life Assurance Co of Canada (UK) Ltd [2004] EWHC 1704 (Comm)

[xxi] Section 21 of the Marine Insurance Act of 1906(UK) provides that “A contract of marine insurance is deemed to be concluded when the proposal of the assured is accepted by the insurer, whether the policy be then issued or not; and, for the purpose of showing when the proposal was accepted, reference may be made to the slip or covering note or other customary memorandum of the contract . . .”

[xxii] Section 89 of the Marine Insurance Act of 1906(UK) provides that “Where there is a duly stamped policy, reference may be made, as heretofore, to the slip or covering note, in any legal proceeding.”

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