1. Introduction
For over centuries, Shipping has been the most benevolent mode of transport offering incessant service across the trade map. Nevertheless, high profile casualties were always associated with this particular mode of transport in international trade and therefore we often question the abilities of the regulatory mechanisms that scrutinize such ships. More often than not, the performance of flag states and the classification societies have been the topic of debate in growing economies of the world that constantly work on conducting safe trade across the globe. In this essay, we shall look at the work of the regulatory bodies and the measures employed in conducting safe trade across the shipping world.
2. The Flag State and incessant responsibilities
A Flag State adorns a critical role in pulverising safety of life at sea and endeavouring to protect the marine environment. A progressive regulatory mechanism is therefore a sine qua non for all flag states to ensure effective implementation and enforcement of international maritime regulations for all ships flying its flag and in the process ensuring safety and security in shipping and protection to the marine environment. A flag state must ensure ideally that it is well equipped with the necessary infrastructure in effect to have qualified and competent staff and equipments to carry out its responsibilities under international treaties.
2.1 Obligations under international treaties
A Flag State is required to give effect to the principles and accords as stipulated and prescribed n the principal international maritime treaties, including but not limited to, those adopted and given effect by the International Maritime Organization (“IMO”) and the International Labour Organization (“ILO”). The major international maritime conventions include:
1. International Convention for the Safety of Life at Sea, 1974 (“SOLAS”)as amended, including the 1988 Protocol, the International Safety Management Code (“ISM”) and the International Ship and Port Facility Security Code (“ISPS”);
2. International Convention for the Prevention of Pollution from Ships, 1973 as modified by the protocol of 1978, including Annexes I –VI (oil, bulk chemicals, dangerous packages goods, sewage, garbage and atmospheric pollution)-MARPOL 73/78 (“MARPOL”);
3. International Convention on Load Lines, 1966, including the 1988 protocol;
4. International Convention on Standards of Training, Certification and Watch keeping for Seafarers, 1978 as amended, including the 1995 amendments (“STCW 95”);
5. ILO Merchant Shipping (minimum standards) Convention, 1976, including the 1996 Protocol (“ILO 147”), until superseded by the Maritime Labour Convention, 2006;
6. International Convention on Civil Liability for Oil Pollution Damage, 1992 and the International Convention on the establishment of an International Fund for Compensation for Oil Pollution Damage, 1992 (“CLC Fund 92”).
Further to the aforementioned international instruments in maritime law, and the mother of all conventions, the United Nations Convention on the Law of the Sea, 1982 (“UNCLOS”), flag states are also bound by other treaties and conventions on maritime safety . Flag states are also obliged to enforce rules adopted by other intergovernmental regulatory mechanisms, including the International Labour Organization (“ILO”) which governs the standards of seafarers and the International Oil Pollution Compensation Fund (“IOPC”) which ensures adequate compensation to maritime oil pollution victims. In addition to the above, the Flag states are responsible to adequately maintain a national maritime administration and effectively ensure by periodical surveys to check compliance of ships flying its flag with the applicable national and international laws in place .
2.2 Ensuring safety of life at sea
Article 94 of the UNCLOS assigns the flag state the role of an international policeman and this in turn obliges each state to “take such measures for ships flying its flag as are necessary to ensure safety at sea” with added attention with respect to construction, equipment, seaworthiness, manning and training. The lion’s share amongst the responsibilities to be carried out by such flag states are often delegated to classification societies as recognized organisations (“RO”). Article 94 of the UNCLOS through its various sub-divisions seeks to establish that a Flag state is obliged to maintain a register of ships flying its flag assuming jurisdiction on the same under its national law.
The measures to be taken by the flag state in ensuring protection to the marine environment involve inter alia ensuring the seaworthiness of the ships and their manning and training of staff as applicable. The obligations extend to periodical surveys to ensure that the adequate equipments are maintained on board the ships for safe navigation. In addition to responsibilities under Article 94 of the UNCLOS as aforementioned, the flag state is also obliged under Article 217 of the UNCLOS to ensure compliance of the measures stipulated in Article 94 and this provision also empowers the flag state with the onus to devise actions against non-compliance. The flag state can thereby investigate into any violation of applicable national or international laws in force and can also seek the assistance, if required of any other state in performing its duties .
At this point in time, it is essential to fall back upon the wording of Lord Donaldson in his 1994 report, Safer Ships; Cleaner Seas , “In an ideal world, flag states, whose flags are worn by the world’s shipping, would lay down, and enforce upon their own ship-owners, standards of design, maintenance and operation which would insure a very high standard of safety at se... the present system of flag state control falls well short of this ideal...regrettable it is beyond argument that not all flag states live up to their responsibilities”. The current state of affairs suggest that very little has changes since Lord Donaldson’s observations more than fifteen years ago, as more and more flag states are concerned these days with only accumulating more registry charges than effectively carrying out their responsibilities . The IMO in its efforts to check the activities of flag states have often stumbled upon the most fundamental shield of sovereignty that no doubt is significant nevertheless limits the interference by the IMO by way of its audits and other schematic measures.
3. Classification Societies - a boon or bane??
The flag states’ duties to effectively regulate maritime administration under its realm, as earlier mentioned, is delegated to specialist private bodies and RO’s like classification societies. The flag states determine the adequacy of such RO’s and monitor their capabilities in complying with international regulations in accordance with the IMO Resolution A.739. Classification societies are independent private bodies engaged in the study, development and surveillance of the technical side of ship structural safety and as such, they have achieved an inevitable place in the shipping world . Right from its inception, the class certificates granted by the classification societies have often been the yardstick to gauge the technical paraphernalia of a ship, including the conditions and terms under which the ship can be insured .
Classification societies establish and apply technical standards with respect to design, construction and survey of ships and these standards found in the rules of the classification society are the determining factors in classifying the ship. Such a certification however, is not an express warranty of safety , fitness for purpose or seaworthiness of the ship and it is merely an instrument approving that the ship has complied with the standards prescribed by the concerned society. There are a plethora of organizations around the world that provide marine classification, however about 94 % of all commercial tonnage involved in trade today are classed by the members and associates of the International Association of Classification Societies (“IACS”). The role of classification societies has been recognized in the SOLAS and the 1988 Protocol to the International Convention on Load Lines.
3.1 The works of classification societies
A classification society performs two categories of work:
(i) Statutory work; and
(ii) Non-statutory work.
Non-statutory work involves the contractual works carried out by classification societies for ship-owners as applicable, which does not involve the statutory survey and other such works entrusted to the classification society by the flag state. In this essay, we shall focus more on the statutory works performed by the classification societies, which includes statutory surveys performed representing the state concerned. These surveys are conducted by the classification societies, keeping abreast the applicable regimes under national and international law. The European Union Directive 94/57/EC (“Directive”) is a guideline for classification societies to go through special procedures when performing statutory work.
The only probable check on the works of classification societies functioning as RO’s are by way of ‘Model Agreements’ drafted by the International Maritime Organization (“IMO”) imposing a duty of care on the classification societies concerned and a liability towards the administration for breach of such duty, on the basis of the Directive as amended . The Erika disaster has provided the impetus to the European Union (“EU”) to produce legislations attempting to improve the quality standards maintained by the classification societies at least as far as EU is concerned.
4. Sub-standard ships and establishing liability on classification societies
A substandard ship can be classified as on that is improperly built, maintained poorly and has an under-qualified crew . In short a substandard ship is one that does not adhere to international obligations, including but not limited to the SOLAS, ISM Code, STCW 95 and ISPS to name a few, apart from the IMO’s stipulated initiative like the PSPC (Performance Standards for Protective Coatings) and “Shipbuilding file”.
More regulatory bodies at national and international levels are therefore, a need of the hour today to further conduct surveys or checks on the performance of classification societies around the globe and this can effectively limit the number of substandard ships involved in the trade map. The European Maritime Safety Agency (“EMSA”) is one such organisation that carries out the task of checking the performance of classification societies in the EU.
Owing to the dual role adorned by the surveyor when inspecting the vessel, there is a paradox created in balancing interests of the ship-owners and charterers and the marine environment. The classification society and its surveyors often have to deal with the improbable when faced up with such a situation where in the perils of the sea are involved on one side and the carriage of goods by sea on the other. Therefore, establishing liability on the classification society for a foolproof inspection is an uphill task that can put the flag state and the international maritime organisations under duress. Therefore a distinction should be essentially drawn in re the classification society’s performance as an RO and a private body.
To consider a few scenarios applicable for implication of liability on flag states, the possibilities are endless with regard to contractual and tortious claims. When acting as a private body, the classification society would be alone responsible to a claim from their contractors and when acting as an RO, the flag state will also be implicated. Nevertheless, establishing liability in tort, against a classification society, when working for a private body would involve a hideous process often accompanied with questions involving applicable law and place of suing, as applicable. However, when a maritime accident, manifests owing to negligence on the part of the classification society, acting as an RO, the injured party can have recourse in a civil action, in tort or in an administrative action as per the applicable national laws. If the same instance happens in the EU, the Directive comes to major application in establishing liability in such instances .
4.1 Understanding the Liability Regime
In terms of establishing liability in England, the classification societies often rely on the decision in The Nicholas H , wherein the House of Lords held that since classification societies are non-profitable organisations that act for the collective welfare, they do not owe a duty of care to third party cargo owners. Nevertheless, it is essential for our discussion that the ratio decidendi in the Nicholas H applies to liability of classification societies when working for a private body and not when acting as an RO. It is also significant to note that in Perrett v. Collins , the Court of Appeal distinguished the decision in Nicholas H as a case relevant to economic losses only and that the decision in Nicholas H was not applicable to cases involving loss of life or personal injury.
More often we find that liability for loss of life and personal injury are limited by the contracting parties in a contract of trade, as applicable thereby escaping strict liability and capping their obligations. The recent developments in international law has however worked around this area as is evident from the 2002 Protocol to the Athens Convention relating to the Carriage of Passengers and their Luggage by Sea (PAL). 1974, which apart from making provisions for strict liability , also permits the contracting states to remove the any cap on liability for such claims.
5. Conclusion and visions
The IACS in its code of ethics , considered to be the bedrock of its members, establishes that: “Classification Societies live on their reputation. Acceptance of their technical work can only be maintained by continuously proving integrity and competence.” And “Competition between Societies shall be on the basis of services (technical and field) rendered to the marine industry but must not lead to compromises on safety of life and property at sea or to the lowering of technical standards”. It is therefore apparent from a scrutiny of the code of ethics governing the classification societies that they are bound to maintain professionalism and endeavour to achieving infallible safety of life and property at sea. Nevertheless, what we see today is an utter disregard of the benign intentions with which the concepts of classification societies were founded. Nevertheless International trade involves a lot of expenditure and revenue, and classification societies cannot be singled out to be on the wrong side of things always.
One cannot generalize as to what would include all aspects of safety, and accidents are often unpredictable, for if they were, then the world would be a safe place to live. Substandard ships are just amongst the many contributing factors to an accident but a lot is at stake in International Trade and therefore it is essential that there is an effective mechanism to curtail the movement of such industrial hazards in the sea. Nevertheless, I believe division of responsibility among the flag state and the RO’s can find a plausible solution to the damage brought about by substandard ships.
The classification societies can strongly oppose the grant of a class certificate to such ships and accordingly the flag state can deny registration to the same. The movement of substandard ships in the trade map can only be curbed with more legislations proposing for strict liability regimes and imposing a total prohibition on capping liability as far as loss of life and personal injury is concerned. Once the class certificate is denied to the ship by the concerned classification society, it naturally reflects on the ships ability to be insured, and therefore most insurers would not provide adequate insurance to the ship. Without insuring the ship properly, it is bound to lose business by having no charterer to trade with and thus in effect it is forced to be pushed out of business, thereby avoiding a major accident that the ship could have affected.
Tuesday, February 9, 2010
Do classification societies really ensure safety of life at sea, as RO's for flag states???
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Wednesday, January 13, 2010
Warranties in Insurance
0 commentsWarranties in the law of insurance in the UK The uncertainties in insurance law have often puzzled a student of the law in questioning the system in place and the dearth of uniformity in case laws regarding the laws of insurance. This discussion is one such compendium of incessant questions that remain intertwined in the rigid system in place and the reform suggested with amends to the Marine Insurance Act, 1906 ("MIA") A 'Warranty' is defined by the MIA as "a promissory warranty, that is to say, a warranty by which the assured undertakes that some particular thing shall or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts". The effect of a warranty is that the assured guarantees the truth of his statement, whether or not it is material to the risk involved. The existence of such a warranty therefore, makes it relatively simple for the insurer to establish a proof for breach in the event a question of admissibility of the representation made by the assured comes before the court. The current regime on warranties have evolved over a large period of time by means of a surfeit of decisions in the courts which has often been viewed to be long drawn and unsatisfactory by noted practitioners in this area of insurance law. This unparalleled metamorphosis has however, contributed to the fact that the term 'warranty' in insurance law was used, and has continued to be used, in the sense of being a term in the contract which has the force of a condition. Onceit is decided that a term of an insurance contract is a warranty, strict compliance is required by the law and it is irrelevant that the breach may have been put right before the loss. Furthermore, it is of utmost relevance that the breach of warranty (however slight or serious it may be) is not causative of loss to the insured. In DeHahn v. Hartley there was a statement, in the margin of a policy insuring the ship Juno for a voyage from Africa to the West Indies, that she had "sailed from Liverpool with fifty hands or upwards". For the first six hours of sailing, while she was under pilot, she picked up six more crew members, making 52 in all, and sailed unaltered in her course. She was captured while lying at her African port. Lord Mansfield held that: In the aforementioned case, the insurer won, even though the broken warranty related to a time before the vessel had come on risk at all. Conversely, in Hyde v. Bruce, the warranty was that the ship should have 20 guns. In fact she had 22 guns but only 25 crew, whereas to manage 20 guns properly she should have had a crew of 60 men. The vessel was captured because there were not enough men to handle the guns but the warranty was held to be fulfilled. There is nevertheless, a different situation to have come up for consideration in the courts, which is that any breach of warranty discharges the insurers from the date of breach because compliance with the warranty is a condition precedent to the liability of the insurer. The position taken by the court in The Good Luck serves authoritative settlement in such a situation. Thereby, if there are two separate losses during the period of the policy the first of which is caused by the breach of warranty and the second of which is not, but the insurers only discovers the breach of warranty after the second loss, he is under no liability for either loss. According to their structure, warranties could be express or implied. In fact, this is the classification on which the warranties regime in the MIA is based. Express warranties appear in the policy, or are incorporated therein by reference to them. Under the principle of freedom of contract, the number and extent of express warranties depend on the consensus of the assured and the insurer. Implied warranties, on the other hand, are incorporated into certain marine policies by the MIA and accordingly, their number and scope is determined by the Act. Section 35 (1) of the MIA clearly provides that no formal or technical wording is required for the creation of an express warranty. An express warranty can be created with any kind of wording, provided that the parties' intention is to give warranty status to the clause in question. The word 'warranty' or 'warranted' are, therefore, not essential in order to create an express warranty. However, it must not be thought that the use of these words is of no importance. They may be good evidence of the parties' intention to create an express warranty as was stated in Ellinger & Co v. Mutual Life Insurance Co of New York, the use of the word 'warranted' shows prima facie that the parties understood that a breach of it should be a permanent or temporary bar to the insurer's liability. Accordingly, in Aktielskabet Greenland v. Janson, a clause worded 'No mining timber carried' was held to be an express warranty. Similarly, in Sea Insurance Co v. Blogg, the court did not hesitate to afford warranty status to a clause that, without using the waord 'warranted', required the insured vessel to sail on or a after a specific date. Despite the fact that no specific form is necessary to create an express warranty, s 35(2) requires a warranty to be included in, or written upon, the policy or contained in some document incorporated by reference into the policy. Necessity for inclusion of an express warranty in the policy is unique to marine insurance and has no application in non-marine insurance where the answers in the proposal form can be included in the contract as express warranties by a 'basis of the contract clause'. The Basis of the Contract clause Owing to the purpose, of this discussion, being the emphasis on consumer insurance, it is thereby necessary for us to consider the basis of the contract clause in greater detail. These clauses are often found in consumer insurance contracts for creating warranties. The method in practise to extract a basis clause is by way of a questionnaire and a declaration by the assured that he has chosen to abide by the factual statements in the questionnaire. Little does the assured realize that the basis clause dangles over him like a democles' sword, as inter alia with the warranted statements in the basis clause, he has also entrusted the insurer with an indivisible right to repudiate the contract upon manifestation of any misstatement or proof thereto. The occurrence of any misstatement can be used against the assured by the insurer, regardless of whether such misstatement is material to the risk or not. Although the basis clause was developed in the early nineteenth century for the purposes of life insurance, it has gradually infiltrated into various other forms of insurance as well. The use of the basis clause has often been viewed with contempt by the courts as it disrupts the balance of convenience more often than not, in favour of the insurers. Nevertheless, there have been instances wherein a strict pattern in the questionnaire has not been followed, as evident in the case of Anderson v. Fitzgerald, wherein only some of the assured's answers in the proposal were made the subject of warranty in the policy. A basis clause therefore may be qualified in its operation by its own terms. Dawsons Ltd v. Bonnin is a landmark judgment in this point of discussion, as the House of Lords had to determine the bearing of the basis clause upon the materiality. The case in Dawsons was one involving a misstatement that overstated the risk. The House of Lords reaffirmed the earlier decisions on this point, holding that materiality had no importance wherein a basis clause was included, irrelevant of whether the facts were clearly material or the courts have endeavoured to extract some materiality out of the case when in reality none existed. The decision in Dawsons, however has been criticised by legal practitioners in their works to have been the least satisfactory case on the subject. The Basis clause and the way the courts have dealt with materiality is rather complex considering the plethora of decisions wherein the relationship between the two have often been interpreted in the light of varying circumstances in each case. By contrast, if it is clear that the basis clause and the materiality provision are identical in scope, the doctrine of contra proferentem almost demands that the basis clause be overridden by the requirement of materiality. In most cases, uniformity can only be accorded to the general presumption in favour of construing the assured's promise as directed towards present facts only and such presumption is only justified and strengthened by the doctrine of contra proferentem. The cases decided in the latter half of the twentieth century and the early twenty first century has dwelt around this presumption in great deal. In Hussain v. Brown, the claimant insured his premises under a Lloyd's policy, having answered in the affirmative to a proposal form question which asked whether the premises were fitted with a security alarm: the assured was held not to have been in breach of warranty due to the fact that the alarm had ceased to waork after the inception of the risk and was not working when a fire occurred, damaging the premises, as the question had been framed in the present tense and had not sought to elicit information as to the assured's practises but merely as to the situation at the time. Suggested amendments to the MIA on the basis clause Since the first use of the basis clause in the early nineteenth century, as it was more of a sine qua non then to have a basis clause when the business of insurance was still in its infancy, the law of insurance has developed a great deal and the educated masses have learnt how to work their ways around the perils and niceties of the basis clause. The basis clause however, has been misused more often to enhance the already stronger position of the assured, as a consumer or the insured in the case of a consumer contract would be an individual and not a corporation. The insurers usually have a standard form contract which would include inter alia the basis clause and the unprecedented right of repudiating the contract for misstatements. The assured can be deceived more often than once by having consented to converting his representations into warranties as he would have no other option in this regard to make amends to a standard form contract. This practise has been criticised by the courts in the past, nevertheless legislation ought to have been progressively initiated much earlier to check the vice involved and this draft can therefore set things in the right direction. An earlier instance of reform had come in the year 1986 in the form of barring the usage of the basis clause by the Statement of General Insurance Practise. The empowerment of the Financial Ombudsman Service has also negated the overreliance on such basis clauses by the insurers. Legal practitioners have often welcomed reforms in the MIA, as it would involve an enhancement in the position of the assured when compared to that of the insured in a consumer contract. The very common factor suggested in the welcoming of reform would be in the operation of Section 33 (3) of the MIA, as most legal clerics have considered the remedies available under the section to be inconsiderate and archaic. The arguments advanced for reform have often quoted that the MIA is not suited in many respects for the contemporaneous practices involved in insurance law. The MIA has often borne the brunt to have been made to suit the circumstances as foreseeable at the start of the twentieth century and therefore, is an old horse in the race for a technologically superior world today.
The Parties have liberty in giving a warranty staus to any variety of terms of contract. In Overseas Commodities Ltd v. Style, for example, where a cargo of canned pork was insured, the assured warranted that all tins were marked by the manufacturer with a code for verification of date of manufacture.
Sunday, November 8, 2009
Liberty Clauses
0 commentsRight 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, 3rd 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.
Friday, November 6, 2009
The Decision in HIH and the relationship between the SLIP and POLICY
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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.
[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.”
