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IN THE SUPREME COURT OF JUDICATURE QBCMF 96/02345/B

IN THE COURT OF APPEAL (CIVIL DIVISION )

(MR JUSTICE RIX )

Royal Courts of Justice

Strand

London W2A 2LL

Friday 28th February 1997

B e f o r e

LORD JUSTICE STUART-SMITH

LORD JUSTICE PILL

LORD JUSTICE PHILLIPS

ROYAL BOSKALIS WESTMINSTER N.V. AND OTHERS Respondents

v.

TREVOR REX MOUNTAIN AND OTHERS Appellants

(Handed down transcript of

Smith Bernal Reporting Limited, 180 Fleet Street

London EC4A 2HD Tel: 0171 831 3183

Official Shorthand Writers to the Court)

MR CHRISTOPHER CLARKE QC , MR ALISTAIR SCHAFF and MR DAVID BAILEY (instructed by Messrs Clyde & Co, London EC3M 1JP) appeared on behalf of the Appellants (Defendants).

MR RICHARD AIKENS QC , MR STEPHEN HOFFMEYER and MISS SIOBHAN HEALY (instructed by Messrs Hill Taylor Dickinson) appeared on behalf of the Respondents (Plaintiffs).

J U D G M E N T

(As approved by the court)

cc

©Crown Copyright

LORD JUSTICE STUART-SMITH: This is an appeal from the judgment of Rix J given on 18 December 1995 on preliminary questions of liability.

The action arises out of a claim on War Risks underwriters by the Plaintiffs, which are 5 Dutch companies who owned and operated a dredging fleet. Two of the Plaintiffs, Boskalis International BV (the Third Plaintiffs) and Volker Stevin Dredging BV (the Fifth Plaintiffs) formed a Joint Venture. Together they contracted with an arm of the Iraqi Ministry of Transport and Communications, the General Establishment of Iraqi Ports (“GEIP”), on 28 October 1989 to undertake extensive dredging works at the port of Umm Quasr, which is very close to the Iraqi-Kuwait border. The contract (“the Dredging Contract”) was governed by Iraqi law. It also provided for arbitration in Paris in default of acceptance by the Engineer of the Plaintiff’s claims to additional payment. The dredging fleet was insured against war risks with the Defendant Trevor Rex Mountain and other following underwriters. The insurance contracts were governed by English law. The insurance contracts were all in similar form and it was agreed at the trial that the Royal Boskalis Westminster NV policy (“the Policy”) could be taken as the paradigm.

The dredging work was still being performed when Iraq invaded Kuwait on 2 August 1990. The work was due to be completed by the end of September 1990. At first the Plaintiffs tried to obtain agreement from GEIP that the dredging work should be suspended. GEIP would not agree and insisted that the work should continue, claiming that conditions at Umm Quasr remained normal. Although other contractors abandoned work being done in Iraq after the invasion, the Plaintiffs decided to try and complete the Dredging Contract. But completion was delayed by the invasion and the UN sanctions against Iraq that followed on 6 August 1990. On 16 September 1990 the Iraqi High Command resolved to promulgate Law No. 57. This took effect from 24 September 1990, but the law purported to have retrospective effect to 6 August 1990, the date when UN sanctions were imposed on Iraq. Article 7 of Law No. 57 said that all the assets of the companies of those countries which had enacted sanctions legislation against Iraq “shall be seized”.

The practical effect of this Law was that there had to be negotiations between the Plaintiffs and the Iraqi government about the basis on which the dredging fleet would be demobilised and released. The terms on which the Iraqis would be prepared to permit demobilisation were (in the Judge’s phrase) “progressively ratcheted up”. On the Plaintiffs’ side the negotiations were carried out by Mr. H.B. Huisman, who was then the Project Manager, of the Plaintiffs, Boksalis International BV. He was present in Iraq throughout the period August-December 1990. On 6 December 1990 a “Finalisation Agreement” between the Joint Venture and the Ministry was signed at a public ceremony in Baghdad. The Iraqi’s price of permitting demobilisation of the dredging fleet and its personnel was (1) the abandonment of all claims that the Joint Venture might have under the Dredging Contract (which the Joint Venture claimed were about Dutch Fl. 84 million); and (2) the payment into accounts of the Central Bank of Jordan held in Swiss and Austrian banks, of Dutch Fl. 24,250,000. This sum was what remained of a deposit of Dutch Fl. 36,267,506.57 placed by the GEIP in an account at the Amsterdam - Rotterdam Bank (The Bank) in Holland pursuant to a letter of credit opened by the GEIP as security for payments to be made by the GEIP to the Joint Venture under the Dredging Contract. Pursuant to the Finalisation Agreement GEIP provided the Joint Venture with a “so called final payment certificate” addressed to the Bank directing the release of this sum to the Joint Venture, and the release of the Joint Venture’s performance bond. The final payment certificate certified that the outstanding balance was due to the Joint Venture in respect of final payments for the dredging works. It was signed by Mr. Huisman and by Mr. Mahmoud, the Engineer. The Joint Venture presented the final payment certificate to the Bank on 7 December 1990. Also on that day the Joint Venture requested the Bank to deal with the total sum of some Dutch Fl. 36 million in the following way: two sums of some Dutch Fl. 6 million each were to be transferred to the bank accounts of each of the Joint Venture companies. These represented the amount in fact due to the Joint Venture companies for completion of the dredging works. The balance of approximately Dutch Fl. 24.25 million was to be transferred to an account of one of the Joint Venture companies, Royal Volker Stevin, at another bank, HBU-Bank in Rotterdam; it was this latter sum of Dutch Fl. 24.25 million which the Joint Venture had agreed to transfer to the Central Bank of Jordan pursuant to the Finalisation Agreement. The money was then transferred to GEIP in Iraq.

Following the implementation of the Finalisation Agreement the dredging fleet and the Joint Venture’s personnel were able to leave Iraq safely. Mr. Huisman was subsequently honoured by the Queen of the Netherlands for his part in successfully extricating the Joint Venture personnel from Iraq. When the Finalisation Agreement had been signed on 6 December 1990, Mr. Huisman had been threatened by the Iraqi Secret Service. The threats were to the effect that the Security Officers would kill him if he disclosed the existence or contents of the Finalisation Agreement. In response to these threats Mr. Huisman destroyed all copies. But a fax of the final draft in its unsigned form survived in Holland and was accepted at the trial as a copy of the Finalisation Agreement itself.

It is unnecessary to trace the history of the claims. By their pleadings the Plaintiffs advanced two main claims. The first was that there was a constructive total loss and they claimed the insured value of the vessels on that basis. The Judge rejected this claim and there is no appeal. Secondly the Plaintiffs claimed to recover under the “sue and labour” clause in the policy the value of their claims for extra payment under the Dredging Contract which they had waived or relinquished under the Finalisation Agreement. The Judge upheld this claim and has subsequently assessed the amount of the claim, though the final figure has still not been calculated. The Defendant now appeals from this holding.

Mr. Clarke QC on behalf of the Defendant submits that the appeal raises a number of issues, all of which should be answered in his favour.

1. Can the entering into of an agreement providing for the renunciation or waiver of claims amount to the incurring of a sue and labour charge?

2. What is the legal relevance to the claim under the sue and labour clause of the effectiveness or enforceability of the waiver of claims? In particular if the waiver is unenforceable have the Plaintiffs sustained any expenses or charge for which they can claim under the sue and labour clause?

3. A. Does the fact that the waiver of claims was obtained by duress:

(i) Render it unenforceable in an arbitration of such claims in Paris on the grounds that it is contrary to French public policy? Or

(ii) So affect the waiver that an English Court will consider it contrary to English public policy and unenforceable, whatever the position may be in French law?

B. Does the fact that the repayments of Dutch Fl. 24,250,000 was illegal by Dutch laws and the repayment of Dutch Fl. 12,000,000 (being part of the Dutch Fl. 24,250,000 channelled through the Swiss Bank) was illegal by Swiss law

(i) Render the waiver unenforceable in a Paris arbitration; or

(ii) So affect the waiver that an English Court will consider it contrary to public policy and unenforceable, whatever the position is in French law?

4. Is the Plaintiff’s claim to recover in respect of the waiver of claims irrecoverable on grounds of illegality at common law ( ex turpi causa non oritur actio ) or under S41 or S78 of the Marine Insurance Act 1906 ( The Act).

5. Was the maximum effective loss (or ransom) suffered by the Plaintiffs the value of the balance of Dutch Fl. 24.25 million security which was reimbursed to the Iraqis, alternatively should the value of claims waived be assessed by reference to the chance that they represented the maximum effective loss?

6. By way of cross appeal was Rix J correct in apportioning the sue and labour “expenses” as to 50% incurred for the purpose of avoiding or minimising the insured loss of the fleet (and thus recoverable) and as to 50% incurred for the purpose of avoiding or minimising the continued uninsured detention of personnel (and thus irrecoverable).

A further issue in relation to misrepresentation and non-disclosure was not argued in this Court in the light of the Court’s decision in Manifest Shipping -v- Uni-Polaris Shipping (unreported 20 December 1996). Both sides reserved their position on this issue.

Can the entering into the Finalisation Agreement providing for the renunciation or waiver of the Joint Venture’s claims under the Dredging contract amount to the incurring of a sue and labour charge?

The policies were in the SG form set out in the First Schedule to the Act which contains the usual sue and labour clause in these terms.

“and in case of any loss or misfortune it shall be lawful to the assured, their factors, servants and assigns to sue, labour, travel for, in and about the defence, safeguard and recovery of the said goods and merchandises and ship etc. or any part thereof, without prejudice to the insurance; to the charges whereof we, the assurers will contribute .....”

It is common ground that the Finalisation Agreement and hence the waiver of claims was entered into to preserve the insured property from loss from an insured peril i.e. continued seizure and detention, that the peril was operative and imminent and that the loss, had it occurred, would have been of a type recoverable under the policy.

The dispute between the parties turns on the meaning and scope of the expression “sue labour and travel for, in and about the defence, safeguard and recovery” of the property and the meaning of “charges”.

At the trial it was common ground that a ransom paid in exchange for the release of a ship from detention was recoverable under this clause. The only question was whether, if the ransom price takes the form of a waiver of claims, this can amount to charges or expenses. The Judge held that it could; he could see no difference in principle. He said at p124:

“If one contemplates that the payment of money may be effected by means of book entries in respect of causes of action (viz claims) that a creditor may have in respect of deposited funds, one can readily visualise that the line between out of pocket expenditure and waived claims may in any event become a thin one.”

In this Court Mr. Clarke did not at first dispute the proposition that a ransom paid in cash or specie was recoverable under the sue and labour clause. However as his argument developed, it became clear that it was inconsistent with the concession made in the Court below. His primary submission was that the charges recoverable under the clause were restricted to the expenses incurred by the insured or his agent in carrying out work and labour to safeguard the property from an imminent peril insured against, and that the sue and labour had to be of a kind that could be valued on a quantum merit. For this proposition he relied upon the decision of the House of Lords in Aitchison -v- Lohre [1879] 4 App(a) 755 and particularly the speech of Earl Cairns L.C.. The ship Crimea was insured by the Defendant for £1,200, being valued in the policy at £2,600. It encountered very bad weather, and was in danger of sinking; it was rescued by a steamer, which obtained from the Irish Court of Admiralty £800 in salvage money. The owner did not abandon, but elected to repair. The Defendant’s proportion of the repair expenses amounted (after the deduction of one third new for old) to £1,200, the full sum he had insured, and he was held liable for that amount. The Plaintiff claimed that he could also recover the salvage expenses from the Defendant under the sue and labour clause. That claim succeeded in the Court of Appeal; but the decision was reversed in the House of Lords. At p764 Lord Blackburn, who gave the leading speech said:

“But there is a second point on which the Courts below differed. The policy contains the usual clause as to suing or labouring. The Queen’s Bench Division was of opinion that the salvage, or general average expenses, described in the case did not come within that clause. The Court of Appeal was of a different opinion. In the judgment delivered by Lord Justice Brett, it is said (1) that “the general construction of the clause is that if, by perils insured against, the subject matter of insurance is brought into such danger that, without unusual or extraordinary labour or expense, a loss will very probably fall on the underwriter, and if the assured or his agents or servants exert unusual or extraordinary labour, or if the assured is made liable to unusual or extraordinary expense in or for efforts to avert a loss, which, if it occurs, will fall on the underwriters, then each underwriter will,” etc. Now if the part of this which is above emphasised is correct, there can be no question that both salvage and general average are unusual expenses to which the assured have become liable in consequence of efforts to avert a loss. And such seems to be the opinion of the editor of the last edition of Arnould on Insurance, who says (2) that salvage “is recoverable from him in virtue of an express clause in the policy inserted for such a case, and known as the sue and labour clause;” but for that position he cites no authority, and though the Court of Appeal in this case agreed with him, I am unable to do so. With great deference to the Judges of the Court of Appeal, I think that general average and salvage do not come within either the words or the object of the suing and labouring clause, and that there is no authority for saying that they do. The words of the clause are that in case of any misfortune it shall be lawful “for the assured, their factors, servants, and assigns, to sue, labour, and travel for, in and about the defence, safeguard and recovery of” the subject of insurance, “without prejudice to this insurance, to the charges whereof we the insurers will contribute.” And the object of this is to encourage and induce the assured to exert themselves, and therefore the insurers bind themselves to pay in proportion any expense incurred, whenever such expense is reasonably incurred for the preservation of the thing from loss, in consequence of the efforts of the assured or their agents. It is all one whether the labour is by the assured or their agents themselves, or by persons whom they have hired for the purpose, but the object was to encourage exertion on the part of the assured; not to provide an additional remedy for the recovery, by the assured, of indemnity for a loss which was, by the maritime law, a consequence of the peril. In some cases the agents of the assured hire persons to render services on the terms that they shall be paid for their work and labour, and thus obviate the necessity of incurring the much heavier charge which would be incurred if the same services were rendered by salvor, who are to be paid nothing in the case of failure , and a large remuneration proportional to the value of what is saved in the event of success. I do not say that such hire may not come within the suing and labouring clause. But that is not the case. The owners of the Texas did the labour here, not as agents of the assured, and being paid by them wages for their labour, but as salvors action on the maritime law, which, as explained by Lord Chief Justice Eyre in Nicholson -v- Chapman (1), already cited, gives them a claim against the property saved by their exertions, and a lien on it, and that quite independently of whether there is an insurance or not; or whether, if there be a policy of insurance, it contains the suing and labouring clause or not."

The ratio of the judgment is that a salvor acting pursuant to maritime law and not under contract with the shipowner, was not the agent of the insured and the expenses recoverable were in respect of the exertions of the insured or his agent to safeguard the vessel from the peril insured against. The object of this clause was to encourage exertion on the part of the assured; not to provide an additional remedy for the recovery, by the assured, of indemnity for a loss which was, by maritime law, a consequence of the peril.

Earl Cairns L.C. agreed with Lord Blackburn but he added:

“I will only make one observation with regard to salvage expenses. It appears to me to be quite clear that if any expenses were to be recoverable under the suing and labouring clause, they must be expenses assessed on the quantum meruit principle. Now salvage expenses are not assessed upon the quantum meruit principle; they are assessed upon the general principle of maritime law, which gives to the persons who bring in the ship a sum quite out of proportion to the actual expense incurred and the actual service rendered, the largeness of the sum being based upon this consideration - that if the effort to save the ship (however laborious in itself, and dangerous in its circumstances) had not been successful, nothing whatever would have been paid. If the payment were to be assessed and made under the suing and labouring clause, it would be payment for service rendered, whether the service had succeeded in bringing the ship into port or not.

Now it may be said that that only goes to the amount sought to be recovered, but it appears to me to go farther, and to go to the very principle upon which the attempt is made to recover the amount in question. It shows that the salvage expenses were not expenses incurred under the suing and labouring clause by the owner of the ship, but were a payment which the ship, as an actual chattel, had to submit to by maritime law, and would be obliged to make good in proceedings against the ship in rem .”

If these observations of the Lord Chancellor are correct, it is plain that a ransom, which cannot possibly be valued on a quantum meruit principle, and is paid by the shipowner, not to his agent for his exertions in saving the ship but to a stranger who is detaining it, cannot be recovered under the sue and labour clause.

Lord Hatherley concurred with both opinions, but his speech suggests that his thinking was consonant with that of Lord Blackburn. He said the salvage charge was not recoverable because it was not the result of

“any pains that the shipowner might have inclined to take in preserving for their (i.e. the underwriters) benefit, as much as he possibly could preserve [because] no bargain - (had been) made.”

Lord O’Hagan expressly agreed with Lord Blackburn’s opinion. He said he had some grave doubts on the second point with reference to the suing and labouring clause be he saw no reason to differ from the views adopted by the other members of the House. The doubts I think would have been on the point on which the House differed from the Court of Appeal and particularly Brett LJ’s formulation of the principle.

The question therefore is whether it was part of the ratio of Earl Cairns speech that it is a precondition of recovery under the sue and labour clause that the charges are valuable on a quantum meruit basis, or was merely obiter; and if the latter, is it correct? It was no part of the Appellant’s argument in the House of Lords that valuation of the exertions on a quantum meruit was a precondition to recovery. It has never been doubted that if the salvor is engaged under Lloyd’s Open Form of Salvage Agreement that underwriters of the ship are liable to indemnify the shipowner in respect of the Salvage Award as a sue and labour charge. The expense is recoverable subject to it being “properly incurred” (S78(1) of the Act). Earl Cairns dictum seems to me to be confined to salvage expenses and it was not necessary for the decision in the case, and in my view it was obiter. Moreover I do not think it can be correct. There is no suggestion in any of the text books on maritime insurance that it is a precondition to recovery under this clause. See for example Arnould 16th Ed. Chapter 25; Halsbury’s Laws of England 4th Ed. (Re-issue) Vol 25 paras 259-262; O’May on Marine Insurance Chapter 11. Templeman on Marine Insurance 6th Ed. Chapter 12. Ivamy, Marine Insurance 4th Ed. Chapter 39. Parks, the Laws and Practice of Marine Insurance and Average (1988) Chapter XXVIII. In fact the Lord Chancellor’s dictum seems to have been studiously ignored by the text book authors.

Mr. Aikens QC submits on behalf of the Plaintiff that the insured is entitled to recover under the sue and labour clause if he can show:

(1) That he or his agent has taken “unusual and extraordinary” steps or exertion;

(2) That the object of this action was to preserve the insured property from loss by an insured peril.

(3) That the insured peril was operative or obviously imminent;

(4) That the loss if it had occurred, would have been of a type recoverable under the policy.

(5) That it was reasonable to take the steps.

If these conditions are satisfied, the insured, he submits, can recover the expense or charges involved in taking the steps. I am prepared to accept this formulation. Mr. Aikens then submits that the unusual or extraordinary steps or exertion consisted in this case of the negotiations by the insured for the release of the ships and the expenses incurred was the value of the waived claims. I confess I have found some difficulty in fitting this proposition into the notion of recovering reasonable expenses for the exertions in saving the vessel, since the ransom payment obviously bears no relation to the exertions involved. It might merely consist in the transfer of a sum of money from one account, the owners, to another, the pirate’s or captor’s. But Mr. Aikens has persuaded me that unless the payment of a ransom is illegal, it is recoverable from underwriters and although the precise basis for the recovery is not altogether clear, it does seem to be accepted that it can be under the sue and labour clause. This at any rate appears to be the view of the editors of Arnould 16th Ed. at para 913A (p791) there is the following passage:

“Where the assured is forcibly deprived of possession or control of the insured property, it generally makes no difference whether those who deprive him of it are acting lawfully or unlawfully, as the perils covered by the standard policies are in most cases not subject to any limitation in this respect. Problems may, however, arise over the suing and labouring clause, where the steps the assured has taken (or which it is said he ought to have taken) are of an illicit nature.

No difficulty arises where the payment of ransom or similar demands is illegal under the proper law of the policy, or the law of the forum where the claim is brought. In such cases, it is plain that the assured cannot recover the expenditure under the suing and labouring clause. Thus at one time the ransom of British ships captured by the enemy was made illegal, and similar questions may arise in relation to trading with the enemy under Defence Regulations in time of war.

There appears to be little doubt that where a payment which is not itself illegal under any relevant law is made to secure the release of property, this can be recovered even though the persons demanding the payment are not acting lawfully in so doing. Thus, for example, payment to recover property from pirates or hi-jackers must, it is submitted, in general be recoverable. Similarly, where payment is made to the authorities in a country to obtain the release of property detained by them it can generally make no difference whether or not the laws there in force have been properly applied.”

Legislation in the form of the Ransom Acts, first passed in 1782 but now no longer in existence declared all ransom by British subjects of ships or goods taken by the enemy as prize in time of war was illegal. In Havelock -v- Rockwood [1779] 8T.R. 268 it would appear that Lord Kenyon LJ considered that a ransom would have been recoverable from underwriters, but for the fact that it was illegal under the Ransom Act of 1782.

In his judgment in Goss -v- Withers 2 Burr 683 at p695 Lord Mansfield referred to the case Affievedo -v- Cambridge where the redemption (ransom) was recoverable from underwriters, that being a case before the Ransom Acts.

In Berens -v- Rucker 1 Black 813 it was held that where a capture was made, whether lawful or not, the insurers were liable for the charges of a compromise made bona fide, to prevent the ship from being condemned to prize. That is not strictly a Ransom case and it is not altogether clear what the basis of recovery was, there being no reference to the sue and labour clause, although it was usually a standard clause. But the case can be brought within the principles to which I have referred.

It was not suggested by Mr. Clarke that payment of ransom was unlawful as being contrary to public policy and the fact that Parliament had to pass the Ransom Acts dealing with the specific problem of ransom of British ships in time of war suggests that it is not.

I now turn to Mr. Clrake’s second submission under this head namely that a waiver of claims cannot be properly described as “charges” (under the sue and labour clause) or “expenses” incurred (S78(1) of the Act). The two words have the same meaning. Mr. Clarke submits that in its ordinary meaning expense involves the laying out or disbursement of moneys. (See the Oxford English Dictionary). He also points to the distinction which is apparent from the Act itself between “expenditure” and “sacrifice” see for example S66 ss(1), (2) and (4). But it seems to me that expense involves the payment or disbursement of money or money’s worth and I do not see why the foregoing of a valuable claim cannot be an expense in money’s worth. To take a very simple example, if a shipowner had lent £10,000 to a salvage company and the owner’s ship being at risk of loss from an insured peril contracts with the salvage company and the ship is rescued, I do not see why the consideration for the labour of rescue should not consist in the release of the claim to repayment of the £10,000, provided it was reasonably incurred.

What is the legal relevance to the claim under the sue and labour clause of the effectiveness or enforceability of the waiver of claim?

It was the Defendants’ contention that if the “Finalisation Agreement” containing the waiver could not be enforced at the instance of the GEIP, either because the agreement had been obtained by duress or illegality, then it would have had no effect on the Plaintiffs’ claims and they had suffered no loss. The Plaintiff’s founded their claim on the “Finalisation Agreement” which they said involved the relinquishment of their claims, the value of their claims or the value of the chance of recovering them in a Paris arbitration under the ICC conditions of contract was the measure of their loss.

In my judgment the Plaintiffs had to establish both the fact and quantum of their loss. This can only be done by comparing their position before and after the “Finalisation Agreement”. Before the agreement the Plaintiffs had claims for additional payment under the “Dredging Contract” and they had the advantage of Dutch Fl. 24,250,000 deposited in the Bank as security for payment of their claims. Although in theory these claims might have been agreed by the Engineer, the Judge held, obviously correctly, that the Plaintiffs could only enforce them by going to arbitration. Whatever other defences the GEIP might have, they could not, before 6th December 1990, rely on the waiver.

What was the position after 6th December 1990? The Plaintiff could advance the self-same claims before the arbitrators; but they would or could be met by an additional defence, the waiver. However if the waiver would not be enforced by the arbitrators, then the claims are unaffected by it, and there is no loss. It could be said that the Plaintiffs have sustained loss because the Dutch Fl. 24,250,000 security is no longer available to them and there might well be loss and detriment because it would be more difficult to recover the fruits of any arbitration. I would accept as a matter of principle that when valuing the loss of a chance in litigation the question of recovery is a relevant consideration. Obviously a claim against an insurer is more valuable than the self same claim against a man of straw.

But the Plaintiffs never sought to put their case in this way. On the contrary they successfully resisted an alternative submission made by the Defendant that if the Plaintiffs were entitled to recover anything, it was limited to the Dutch Fl. 24,250,00 security. And they insisted that the Iraqis were and continued to be solvent and that there were assets available at all material times against which they could enforce the full amount of any award made by the arbitrators. Subject to a 10% discount for difficulties and delay in enforcement, the Judge in his judgment on quantum accepted the Plaintiff’s submission. Furthermore the Plaintiffs insisted throughout the trial that their loss was based on the waiver of claims and not the repayment of the security. There were good reasons for this, because they appreciated that the Defendant’s argument on illegality, which was founded entirely on the illegality under Dutch and Swiss law of the repayment of the Dutch Fl. 24,250,000, was much more formidable if they contended that their loss consisted in the loss of the security.

Mr. Aikens accepted that if the existence and quantum of the loss had to be measured by the change in the Plaintiffs’ position before and after the 6th December and if the waiver was ineffective, he was in difficulty because the Judge had not and had not been asked to approach the matter on this basis. In this eventuality he submitted that the matter should be remitted to the Judge to assess the degree of loss or prejudice to the Plaintiffs because the Dutch Fl. 24,250,000 was no long available as security. But I do not think it would be right to remit the matter to the Judge on this basis. It is entirely inconsistent with the whole approach of the Plaintiffs throughout the case.

The Judge held that the fact, if it was a fact, that the waiver of claims was unenforceable and ineffective was legally irrelevant when considering whether the Plaintiffs had sustained any and if so how much loss. The Judge based his conclusion on the proposition that the existence of a remedy to make good the loss did not preclude the existence of he loss. At P131 he said this:

“If the waiver of the joint venture’s claims can, as I believe, properly be regarded as the payment of a ransom, it matters not that there may be good legal remedies for the recovery of that ransom. In seeking to render the plaintiffs’ sue and labour claim valueless on the ground that the Finalisation Agreement, although valid by its proper law, would not be enforced by a Paris arbitration tribunal, the defendants are in effect seeking to discount a sue and labour expense by the value that can be put on the remedies available to recover that expense from the party at fault. There are many factors which might affect the value of such remedies. They do not, it seems to me, affect the essential existence of the sue and labour expense or the validity of the sue and labour claims.”

With all respect to the Judge this seems to confuse the doctrine of subrogation with the need to establish a loss. If a loss has been incurred, the insurers must pay and it is no defence to assert that the loss can be recovered from a third party. On payment of the loss the insurer is subrogated to the insured’s rights against the third party. But here the Plaintiff had to establish the loss and could only do by by showing that the “Finalisation Agreement” would defeat their claims.

Mr. Aikens sought to rely on the case of Dickenson -v- Jardine [1868] LR 3CP 639; in that case the Plaintiff insured goods at Canton by a policy which included jettison among the perils insured against. The goods were jettisoned under circumstances which entitled the Plaintiff to a general average contribution from the owners of the ship and the rest of the cargo, which arrived safely in London, the port of discharge. The Plaintiff sued the underwriters for the whole amount insured, without having first collected the contributions to which he was entitled from the owners of the ship and cargo. The underwriters contended that they were only liable to pay the amount of the loss after deducting these contributions. The Court of Common Pleas held that the Plaintiff was entitled to recover the full loss. Having paid, the underwriters would be subrogated to the Plaintiff’s rights of contribution. In my view this case is nothing to the point and is simply an example of the application of the principle of subrogation.

The Judge also seems to have thought that the fact that the “Finalisation Agreement” was valid by its foreign law, i.e. Iraqi law, was a sufficient answer to the Defendant’s contention. Again I cannot agree. The Plaintiffs only had valuable claims in so far as they could be enforced in a Paris arbitration. Their loss under the sue and labour clause could only be established in so far as they could show that Paris arbitrators would give effect to the waiver. The fact that it was valid by Iraqi law was no doubt essential, but it was not sufficient, if by the curial law the arbitrators would not enforce it.

Issue 3A(i )

I turn then to the first part of the third issue: does the fact that the waiver of claims was obtained by duress render it unenforceable in an arbitration of such claims in Paris on the grounds that it is contrary to French public policy?

In addition to holding that the question was irrelevant the Judge seems to have held that the point was not open to underwriters on their pleadings. At least he described the pleading objection raised by Mr. Aikens, as a “fair point”. He said that since the point had not been pleaded, the Plaintiffs had been deprived of the opportunity to adduce evidence of French law, which might have been different to English law on this point. With all respect I think the Judge was wrong.

Paragraph 18 of the Re-Re-amended points of defence and counterclaim was in these terms:

“18. Further or in the alternative, on the Plaintiffs’ own case or evidence, the Finalisation Agreement was entered into and any agreement to waive contractual claims contained therein was induced by duress of persons (in the form of the alleged threatened refusal alternatively actual refusal of the Iraqis to permit the evacuation of the Assured’s personnel who had been working on the Dredging Contract unless such an Agreement was signed) and/or duress of goods (in the form of the alleged threatened refusal alternatively actual refusal of the Iraqis to permit the demobilisation of the Assured’s Insured Property unless such an agreement was signed). In these premises,

(1) the Assured would have been and is able to avoid the Finalisation Agreement and/or otherwise enforce its original rights under the Dredging Contract unaffected thereby; and/or

(2) the Finalisation Agreement was, by virtue of such alleged coercion objectionable on the grounds of English law public policy so that the Assured’s original rights under the Dredging Contract must be treated as unaffected thereby."

Paragraph 18(2) relates to the sub issue which I have referred to as issue 3A(ii). It is para 18(1) that is material here. It seems to me to be plain that this is a reference to the only place where the rights under the Dredging Contract could be enforced, namely in a Paris arbitration. I do not see how the Plaintiffs could properly be under any misapprehension as to this. If they had wished to contend that French law was different; then it was for them to plead it. They did not do so. In the absence of any evidence of French law it is to be taken to be the same as English law. Dynamit -v- Rio Tinto Co. Ltd. [1918] A.C. 260.

Mr. Aikens sought to rely on the fact that in his written opening Mr. Schaff did not refer to the position in a Paris arbitration. Be that as it may, it cannot in my view affect the pleading. Moreover the Judge’s decision on the pleadings on this point is at variance and inconsistent with his ruling on a similar plea of no effective loss on the basis of illegality. The defence is pleaded in substantially similar terms in para 16 of the Re-Re-amended points of defence to that in para 18, yet the Judge did not exclude argument upon it. There was no dispute that the Finalisation contract was obtained by duress and duress of the most extreme kind. Not only was their entire fleet seized; but the Iraqis were threatening to use the 123 European employees of the Joint Venture as part of the human shield policy, to say nothing of the fate of the 356 non-European employees.

Mr. Aikins did not seriously dispute that as a matter of English public policy an English Court would not give effect to the Finalisation Agreement and the waiver of claims at the behest of the Iraqis. The principle was established in Kaufman -v- Gerson [1904] 1 KB 591. Moreover whether or not a Court today would regard the degree of coercion exercised in that case as sufficient to constitute duress and so affect the enforceability of the contract, there can be no doubt the degree of duress was so great in the present case that it comes within any application of the principles. Indeed I think that any civilised tribunal would refuse to give effect to it. In my opinion this affords a complete answer to the Plaintiffs’ claim on the basis that they failed to prove that they had suffered any effect loss to form the basis of their sue and labour charge. That being so, it is unnecessary to consider the Defendants’ alternative submission under issue 3A(ii).

In these circumstances it is not strictly necessary to consider the further issues raised by Mr. Clarke which he contends afford further answers to the Plaintiffs’ claim. But since we have had extensive argument addressed to us on the issue of illegality, I will state my conclusions as shortly as I can.

Issue 3B(i )

Does the fact that the repayment of Dutch Fl. 24,250,000 was illegal by Dutch law and the repayment of Dutch Fl. 12,000,000 (being part of the Dutch Fl. 24,250,000 channelled through the Swiss Bank) was illegal by Swiss law render the waiver of rights under the Finalisation Agreement unenforceable in a Paris arbitration?

It is necessary to set out the Judges findings of fact that bear upon this issue.

(1) There was a breach of the sanctions legislation of both the Netherlands and Switzerland in the processing and effecting the transfer of Dutch Fl. 24,250,000 from the Bank, through HBU Bank for the credit of the Bank of Jordan as nominees for the Iraqis. This rendered the Finalisation Agreement null and void and the payments themselves unlawful both under Dutch and Swiss civil (but not criminal) law. This was because, although formal exemption could have been obtained from the Dutch and Swiss governments, it was neither sought nor obtained.

(2) The Finalisation Agreement required, and the parties jointly intended, that payments would be made to the Iraqis by steps to be taken in the Netherlands (as to 100%) and in Switzerland (as to 50%).

(3) The Joint Venture did not know that it would break, and it did not intend to break , either Dutch or Swiss law and was not reckless in that regard. So far as Dutch law was concerned this was because they had been given what the Judge called “the green light” by the relevant ministers; although this did not amount to a formal exemption.

These findings are not challenged by the Defendants. The Judge made no finding of fact as to the Iraqis knowledge and intent as to the breach of Dutch or Swiss law. He declined to do so for three reasons. First because he considered, as in the case of duress, that the question of enforceability of the waiver was irrelevant. For reasons I have already given I consider he was wrong on this point. Secondly he considered that the relevant principle which had been argued before him, namely that the case of Foster -v- Driscoll [1929] 1 K.B. 470 and Regazzoni -v- Sethia [1958] A.C. 301 required a mutual intention of both parties to perform a contract, not illegal on its face, in a manner which was contrary to the law of the place where it was to be performed. And since he had held that the Joint Venture had no such intention, it was unnecessary to consider whether, if the Iraqis alone knew of Dutch (and Swiss) sanctions law and intended the Finalisation Agreement to be performed in such a way as to breach that law, the “Finalisation Agreement” would not be enforceable in the suit of the Iraqis in a Paris arbitration. Thirdly this point had not separately been argued by Defendant’s counsel. It is unfortunate that the point was not separately argued, though it is understandable in a case with so many complex issues and where the Judge’s findings were not yet known, how it came to be overlooked . Since however Defendants’ counsel did argue that both parties to the Finalisation Agreement knew of Dutch and Swiss sanctions law and intended to break them in the performance of the agreement, it necessarily follows that the Iraqis knowledge and intention was an issue raised for decision and all relevant material which the parties wished to adduce before the Court was in evidences. It seems to me therefore that this Court is in as good a position as the Judge to make a finding on this point. If that finding is that the Iraqis knew of the Dutch sanction laws (I do not think it is necessary to consider the Swiss law position separately) and intended that they should be broken in performance of the Finalisation Agreement, the consequences of that finding are a matter of law, which it is open to the Defendants to argue in this Court.

What finding should be made upon this point? Mr. Aikens submitted that there was no evidence that the Iraqis knew of, let alone intended to break Dutch sanctions law; if they did know of them they might have supposed that the Joint Venture would perform the contract lawfully by obtaining an exemption. I find these submissions wholly unconvincing for the following reasons:

(1) United Nations sanctions were a matter of evident concern to the Iraqis and Law 57 was a deliberate response to the “seizure” or “freezing” of Iraqi assets in the West.

(2) The United Nations sanctions required member states to give effect to them in their own domestic law.

(3) The Bank’s letter of credit was blocked in the sense that the Iraqis knew that they could not openly obtain a reduction in their letter of credit or reimbursement.

(4) The genesis of the demand for reimbursement of the balance of the letter of credit was in early November 1990, in particular at the meetings on 6 and 9 November where it was stressed by the Minister that “in view of the special circumstances in which [Iraq] finds itself, it is necessary to retrieve as much money as possible from the letter of credit.”

(5) The arrangements for effecting the repayments were set and frequently altered by the Iraqis who were clearly concerned to conceal the fact that a repayment was being made to Iraq so as to prevent the transaction failing. There can be no other explanation for these concerns and manoeuvres other than the conscious need to evade sanctions. A direct banking transfer to Iraqi interests was known to be impossible. The original proposal was for payment to be made to the Iraqi Ambassador in Holland: but on 10 November Dr. Yourself, Director of the National Bank of Iraq, advised that this was “too risky” and a different solution would have to be found. The risk can only have been the sanctions breaking would have been discovered. At one time the possibility was considered of cash being flown to Iraq by private plane. Eventually the solution of making payments to the Central Bank of Jordan was adopted, this being described as presenting “no risk whatever” Again the risk was obviously of detection of sanctions breaking.

(6) The release of the funds from the Bank was intended to be and was in fact procured by means of a false “Final Certificate” purporting to show that the whole balance on the letter of credit namely Dutch Fl. 36,267,506 was due to the Joint Venture. This was to deceive the Bank, since any dealing with Iraqi money was a breach of Dutch sanctions law.

(7) The Iraqis required complete secrecy and confidentiality as to the terms of the Finalisation Agreement. This requirement was reinforced by the threats to Mr. Huisman’safety. This requirement precluded any approach to the Dutch authorities to obtain an exemption in the Iraqis’ favour and shows quite clearly in my judgment that the Iraqis were well aware of the effect of Dutch sanctions and intended that they should be evaded.

Mr. Aikens also submitted that the Plaintiffs were prejudiced by the Defendants’ failure to advance the separate argument based on the Iraqis unilateral intentions; he suggested that the Plaintiffs witnesses Mr. Huisman and Mr. Don could and should have been cross-examined as to the state of the Iraqis knowledge and intention. I cannot accept this submission. First, as I have already pointed out, this was in any event in issue. Secondly I do not see how these witnesses could speak on this question. And thirdly it is evident that when Mr. Don was cross-examined on these lines, he said, unsurprisingly, that he couldn’t answer it. (Evidence Day 5 p54)

What is the law so far as the English Court is concerned? In St.John Shipping Corporation -v- Joseph Rank Ltd. [1957] 1 Q.B. 267 at p283 Devlin J. Stated the law in relation to illegal contracts as follows:

“There are two general principles. The first is that a contract which is entered into with the object of committing an illegal act is unenforceable. The application of this principle depends upon proof of the intent, at the time the contract was made, to break the law; if the intent is mutual the contract is not enforceable at all, and, if unilateral, it is unenforceable at the suit of the party who is proved to have it.”

And in Archbolds (Freightage)Ltd. -v- S. Spanglett Ltd. [1961] Q.B. 374 Devlin LJ said at p388:

“The effect of illegality upon a contract may be threefold. If at the time of making the contract there is an intent to perform it in an unlawful way, the contract, although it remains alive, is unenforceable at the suit of the party having that intent; if the intent is held in common, it is not enforceable at all. Another effect of illegality is to prevent a plaintiff from recovering under a contract if in order to prove his rights under it he has to rely upon his own illegal act; he may not do that even though he can show that the time of making the contract he had no intent to break the law and that at the time of performance he did not know that what he was doing was illegal. The third effect of illegality is to avoid the contract ab. Initio and that arises if the making of the contract is expressly or impliedly prohibited by statute or is otherwise contrary to public policy.”

Those are both cases where the proper law of the contract was English law whereas in this case the proper law of the Finalisation Agreement is Iraqi law. But the principle that where one party to the contract intends it to be performed in an unlawful way it will not be enforced at his behest is only part of the wider principle that if both parties have that intent, neither can enforce it. This is the principle enunciated in Foster -v- Driscoll [1929] 1 K.B. 470 and Regazzoni -v- Sethia [1957] A.C. 301. In the application of this principle it is immaterial whether the contract is governed by English or foreign law. Rix J accepted this at p207. He was in my opinion clearly right. (See per Viscount Simonds in Regazzoni at p317, per Lord Reid at p323. Dicey and Morris at p1282/3 and Cheshire and North Private international Law 12th Ed. at p504.

Finally under this head I must deal with a further submission made by Mr. Aikens. While accepting the principle that English law will not enforce a contract at the behest of a party who knows and intends that it will be performed in a way which is illegal in the place where it is to be performed, he contended that this only applies where the illegal act is to be done by that party. In this case he submitted that the only illegal acts were to be performed by the Joint Venture, the Iraqis took no part in it. I do not need to decide whether Mr. Aikens’ submission is correct as a matter of law though it appears to be inconsistent with the judgment of Devlin J in Edler -v- Auerbach [1950] 1 K.B. 359. It is plainly wrong as a matter of fact. The false final Payment Certificate was the first and essential step in the sanctions breaking exercise. The certificate was an Iraqi Ministry document signed by Mr. Mahmood on behalf of GEIP. Moreover the transfer of the Dutch Fl. 24,250,000 was only illegal because the destination was Iraqi interests. That involved the setting up by the Iraqis of the Central Bank of Jordan as nominee for those interests.

In Mackender -v- Feldia [1967] 2 Q.B. 590 in a passage cited by Phillips LJ in his judgment Diplock LJ pointed to the distinction between a contract that was void for illegality and one that was unenforceable in English law on grounds of public policy. In many cases that is an important difference; in Mackender’s case it affected jurisdiction; in other cases it may affect property rights or third party rights acquired as a result of the contract. But Diplock LJ was not purporting to explain what is meant by enforceable or unenforceable. We are here dealing with a contract, the Finalisation Agreement, which because the Iraqis intended that it should be performed in a manner that breached Ductch sanctions law, is unenforceable in an English court or Tribunal (and for these purposes the position is presumed to be the same in a Paris arbitration under ICC Rules). Enforcement means compelling compliance with, in this case, contractual obligations. The Court or Tribunal compels compliance by its order or judgment. In order that the waiver shall defeat the Plaintiffs’ claims, the Court or Tribunal must at the request of the Iraqis compel the Plaintiffs to comply with the obligation to waive, since otherwise the Plaintiffs’ claims are untrammelled by this defence and there is no effective loss. By applying the same reasoning that we have adopted on the first issue, there is no difference in principle between giving effect to the waiver of the Joint Venture’s valid claims and enforcing an unwarranted claim in favour of Iraqis. In these circumstances it seems to me to be plain that if GEIP were seeking in an English Court or tribunal to set up the waiver of claims in the Finalisation Agreement as a defence to the Plaintiffs’ claims, they could not do so, unless the illegal part of the contract, i.e. the repayment of the Dutch Fl. 24,250,000 could be severed.

Severance will not be permitted unless it accords with public policy to do so. Thus contracts which are illegal in circumstances involving trading with the enemy will not be severed. Kuenigl -v- Donnersmarck [1955] 1 Q.B. 515 at p537 per McNair J. I think there is force in Mr. Clarke’s submission that a payment in breach of United Nations sanctions as enacted in the relevant domestic law is in the circumstances akin to trading with the enemy and it would be contrary to English public policy to sever this part of the contract. Moreover this is to look at the question illegality in isolation from the duress. But in considering public policy the two aspects of the case are cumulative.

But severance will also not be permitted where the illegal covenant forms a main part of the consideration or where the provisions in the agreement are all closely related that to sever one will completely re-write the contract. I have no doubt that the repayment of the Dutch Fl. 24,250,000 was a main part of the consideration and was inextricably linked to the waiver of claims. Indeed the waiver of claims was part and parcel of repayment, since the repayment could not properly be made under the original terms of the Dredging Contract while claims by the Joint Venture were outstanding.

For these reasons I am satisfied that an English Court or tribunal would not give effect to the waiver of claims at the behest of the Iraqis. In the absence of evidence of French law it must be presumed to be the same. Therefore in a Paris arbitration the waiver defence would be ineffective and the Plaintiffs’ claims unaffected thereby.

Having reached this conclusion I do not need to decide the difficult and complex questions that arise as a result of Mr. Clarke’s’s submissions based on Ralli Brothers -v- Compania Navieria Sota [1920] 2 K.B. 287. Foster -v- Driscoll and Regazzoni -v- Sethia (so far as bilateral intentions of both parties are concerned) or Lamenda Ltd. -V- African Middle East Co. Ltd. [1988] 1 Q.B. 448.

I have had the advantage of reading in draft the judgment of Phillips LJ on the fourth issue, namely the questions of ex turpi causa , and S41 and 78 of the Act and I agree with his conclusions. The fifth issue no longer arises; nor does the cross appeal.

For these reasons I would allow the appeal and dismiss the cross appeal.

LORD JUSTICE PILL: I have had the advantage of reading the judgments of Stuart-Smith LJ and Phillips LJ in draft and confine my remarks to those subjects headlined below.

1. Procedural Issues as to points which could be taken

The plaintiffs put their sue and labour claim to the judge as the value of the claims waived under the Finalisation Agreement of 6 December 1990 between the Joint Venture and the General Establishment of Iraqi Ports (“GEIP”) in the sum of Dfl 84,419,868. The claim was on war risks underwriters (“the defendants”) and the particular risks relied on were “seizure ¼ restraint or detainment of all kings, princes and peoples”. GEIP was an arm of the Iraqi Ministry of Transport and Communications (“the Ministry”) and the plaintiffs argued successfully that their claim against the defendants should be assessed on the basis that a claim against GEIP could have been enforced. The plaintiffs’ rights against GEIP were, it was submitted, lost by virtue of the waiver in the Finalisation Agreement and should not be treated as defeated by difficulties in enforcement.

The claim having been put in that way, it is not in my view open to the plaintiffs, now to put a claim based on loss of security by reason of the payment of Dfl 24,250,000 to GEIP following the Finalisation Agreement. That sum was what remained of a deposit placed by GEIP in a bank account in the Netherlands pursuant to a letter of credit opened by them as security for payments to be made by them to the Joint Venture under the Dredging Contract. A claim could have been based upon the loss of security which resulted from the Finalisation Agreement. Both potential claims are money claims for losses said to be covered by the policy but the claim based on a loss of security is incompatible with the former assertion, now supported by findings of the judge, that the larger claim would not be defeated by difficulties of enforcement.

The question also arises whether the defendants are entitled in this appeal to base a case upon a case put forward in terms only during closing submissions at the trial. It is that no loss resulted from the Finalisation Agreement because, had the plaintiff proceeded to the ICC arbitration in Paris contemplated in the Dredging Contact, they would not have been prejudiced by the Finalisation Agreement. That agreement would have been treated by the Arbitrators as, in counsel’s words “not worth the paper it was written on”. In the absence of a case based on loss of security, the plaintiffs were in no worse position after the Finalisation Agreement than they had been before it. For reasons given by Stuart-Smith LJ, it is in my judgment open to the defendants to pursue that case upon this appeal. However, I add that I well understand the plaintiffs’ reluctance at the trial to base a claim upon the loss of security represented by a payment from the Netherlands to GEIP by way of payments to accounts of the Central Bank of Jordan held in Swiss and Austrian banks. Such payments were perceived as tainted with illegality in that they were unlawful under Dutch and Swiss law by reason of legislation enacted to implement resolutions of the UN Security Council following the invasion of Kuwait. As the main plank of a claim against insurers, the payments presented obvious problems.

2. Did the plaintiffs suffer a loss which is recoverable ?

Under the Dredging Contract, the Joint Venture had a right to an ICC Arbitration in Paris. Once the dredgers and the men were safely out of Iraq, there was no impediment to exercising that right. The Court has to consider what the outcome of such an arbitration would have been. It is common ground that the Joint Venture entered into the Finalisation Agreement under what would be regarded in English law as duress and I agree that GEIP could not successfully have invoked the Finalisation Agreement as a defence to a claim for sums due under the Dredging Contract.. It is also submitted by the defendants that GEIP could not have relied upon the Finalisation Agreement to defeat the claim of the Joint Venture in the arbitration because the agreement was illegal. The defendants submit that the claims of the Joint Venture would not have been affected adversely by the terms of the Finalisation Agreement because the arbitrator would have disregarded it as being made under duress or was illegal or both. I agree that the question should be considered as if the arbitrator had applied English law because there was no evidence that French law under these heads is any different from English law.

Mr Aikens QC for the plaintiffs submits that under the Finalisation Agreement the Joint Venture had lost their rights under the Dredging Contract. They had lost the right to receive money without going to arbitration. Before the Finalisation Agreement they had valuable rights and after it they had no rights. An attempt to assert rights would have been an attempt to recover what had been lost. It was a different chose in action and the Court should approach the present claim against the insurers on the basis that rights under the Dredging Contract had been lost with the Finalisation Agreement and it was irrelevant to consider what happened subsequently.

I cannot accept that submission. There was a course of dealing between the Joint Venture and GEIP. It began with the Dredging Contract which conferred rights upon the Joint Venture, including the right to an arbitration. The Finalisation Agreement was of course a relevant dealing and was a complication in terms of enforcing rights conferred by the Dredging Contract. The right to arbitration continued however and in an arbitration it would have been necessary for the Joint Venture, if it was to establish rights under the Dredging Contract, to nullify the purported waiver of those rights in the Finalisation Agreement. That opportunity remained open to the Joint Venture and, notwithstanding its title, the Finalisation Agreement cannot be treated as finally determining rights under the Dredging Contract.

I agree that an arbitrator would not have permitted the claims of the Joint Venture under the Dredging Contract to be defeated by the purported waiver of claims in the Finalisation Agreement. That agreement was made under duress. Given the judge’s findings upon enforcement, the Joint Venture was in no worse position following and as a result of the Finalisation Agreement. The purported waiver of rights was ineffective. On the assumption that waiver of a claim is capable of amounting to expenses incurred pursuant to a sue and labour clause, the Joint Venture have no claim under the clause because the waiver in this case was of no effect. I would allow the appeal on that ground

3. Can a ransom be recovered as sue and labour ?

The defendants raised the question whether entering into an agreement providing for the renunciation or waiver of claims amounts to the incurring of sue and labour expense. S 78(1) of The Marine Insurance Act 1906 confirms that where a policy contains a sue and labour clause the assured can recover “any expenses properly incurred pursuant to the clause”. The policy included the usual sue and labour clause:

“and in case of any loss or misfortune it shall be lawful to the assured, their factors, servants and assigns, to sue, labour and travel for, in and about the defence, safeguard and recovery of the said goods and merchandises and ship etc. or any part thereof, without prejudice to this insurance; to the charges whereof we, the assurer, will contribute.¼

Mr Clarke QC, for the defendants, submits that only an expense which can be quantified on a quantum meruit basis can be recovered under a sue and labour clause. He relies upon the statement of the Lord Chancellor (Earl Cairns) in Aitchison v Lohre (1879) 4 App. Cas. 755 where it was held that salvage did not come within the suing and labouring clause of a policy of marine insurance. Earl Cairns stated at p 766:

“I will only make one observation with regard to salvage expenses. It appears to me to be quite clear that if any expenses were to be recoverable under the suing and labouring clause, they must be expenses assessed upon the quantum meruit principle. Now salvage expenses are not assessed upon the quantum meruit principle; they are assessed upon the general principle of maritime law, which gives to the persons who bring in the ship a sum quite out of proportion to the actual expense incurred and the actual service rendered, the largeness of the sum being based upon this consideration ¾ that if the effort to save the ship (however laborious in itself, and dangerous in its circumstances) had not been successful, nothing whatever would have been paid. If the payment were to be assessed and made under the suing and labouring clause, it would be payment for service rendered, whether the service had succeeded in bringing the ship into port or not.”

The object of the clause was stated by Lord Blackburn, with whose view Earl Cairns stated that he entirely concurred, at p 765:

“And the object of this is to encourage and induce the assured to exert themselves, and therefore the insurers bind themselves to pay in proportion any expense insured, whenever such expense is reasonably incurred for the preservation of the thing from loss, in consequence of the efforts of the assured or their agents. The object was to encourage exertion on the part of the assured; not to provide an additional remedy for the recovery, by the assured, of indemnity for a loss which was, by the maritime law, a consequence of the peril.”

Aitchison decided that salvage charges were not recoverable under the sue and labour clause because the owners of the ship doing the services did so as “salvors acting on the maritime law ¼ quite independently of whether there is an insurance or not; or whether, if there be a policy of insurance, it contains the suing and labouring clause or not (per Lord Blackburn).” I read the statements of the Lord Chancellor as underlining the difference between a salvage claim under maritime law and a claim under a sue and labour clause. In that context, the manner in which a salvage claim is assessed, as set out by Earl Cairns, underlines the difference between it and a sue and labour claim. I do not consider that the Lord Chancellor was purporting to lay down that in all circumstances it is a prerequisite of recovery under a sue and labour clause that the expense must be capable of assessment upon the quantum meruit principle.

The effect of a sue and labour was considered in the United States, where similar clauses have long been used in marine insurance, in American Merchant Marine Insurance Company of New York v Liberty Sand and Gravel Company 1922 282 Federal Reporter 514. Circuit Judge Woolley sitting in the Circuit Court of Appeals, 3rd Circuit, stated at p 519:

“The original purpose of the suing and labouring clause in a policy of marine insurance was to permit the insured to take every measure in preserving his vessel without waiving his right later to tender abandonment and claim a total loss. As there enured to the insurer a corresponding benefit from the labour bestowed and money expended, it came about that the insurer, in order to stimulate the insured, assumed liability for a proportion of any reasonable expense incurred in preserving the subject insured from the operation of the perils insured against.”

No mention is made of a requirement for assessment upon the quantum meruit principle and the researches of counsel have revealed no case other than Aitchison in which the possibility is considered.

The fact that a payment cannot be valued as a quantum meruit does not in my judgment prevent a claim under the sue and labour clause. Neither does the fact that the expense is incurred by way of waiving a claim rather than making a payment.

4. Ransom and public policy

What does concern me is a point not taken in the present proceedings; whether a payment which is in effect a ransom is recoverable at all under a sue and labour clause. The payment of ransom was recognised in the Laws of War and English law in the 18th century. Arnould’s Law of Marine Insurance dealt with it in this way (1848 Ed para 304):

“Formerly it was a common practice to ransom British ships when captured by the enemy, by delivering to the captor what was called a ransom bill , which secured to him the price agreed upon, and operated as a bill of sale of the ship and cargo to the original owners, and as a protection to the ship against other cruisers of the enemy during the remainder of her voyage. A hostage was also delivered to the captor, to secure to him the punctual payment of the stipulated sum.

The ransom bill , independently of the hostage, was considered as a contract of the law of nations, and obligatory upon the owners, as well as upon the captain who signed it, and actions have been formerly brought upon such bills in our courts.

In case of insurance the amount of the ransom bill was the measure of the demand which the assured had against the underwriters in respect of the capture.

At length, however, the courts of common law, proceeding on the principle that an alien enemy cannot sue for any right acquired in actual war, decided that no action could be maintained in our courts on a ransom bill; and shortly afterwards the legislature (in the year 1781) wholly abolished the practice, by declaring all ransom by British subjects of ships or goods taken by the enemy as prize to be illegal.

The act, in terms, declares it unlawful “to ransom, or to enter into any contract or agreement for ransoming;” and under these words it has been held that a redemption of his ship by the owner from the captors after capture and illegal condemnation by the enemy’s consul in a neutral port, is a ransom, and illegal; and that if the insured he cannot recover from the underwriters the money paid for such redemption. (Havelock v Rockwood 8 T Rep 268).”

Section 2 of The Ransom Act 1781 provided that “All contracts and agreements which shall be entered into ¼ by any person or persons for ransom of any ship or vessel ¼ shall be absolutely void in law and of no effect whatever.” A note to the report of Cornu v Blackburne 2 Dougl 641 (English Reports Vol 99 p 406) stated that “This statute has put an end to all questions in future, on the law of ransoms”. However, the Ransom Acts, and Orders made under them, have now been repealed, finally by the Supreme Court Act 1981 s 152(4) and Schedule 7.

In his article entitled Ransom Bills (1918 34 LQR 49), W Senior concluded that the practice of giving ransom bills was “obviously defunct”.

“It was largely, through not exclusively bound up with privateering, a practice which has been repudiated by nearly every civilized power.”

The last heard of ransom bills had been during the American Civil War.

Ransom had been marked by formal and recognised procedures remote from modern conditions and I do not consider the old cases of much assistance (save that they support the proposition that assessment by quantum meruit is not a pre-requisite) but the underlying problem of reconciling ransom payments with public policy remains and is not in my view concluded by the repeal of Ransom Acts enacted to deal with very different circumstances.

The learned editors of the current edition of Arnould (16th Ed 1981) recognise the continuing problems. They state that

“No difficulty arises where the payment of ransom or similar demands are illegal under the proper law of the policy or the law of the forum where the claim is brought. In such cases, it is plain that the assured cannot recover the expenditure under the suing and labouring clause... There appears to be little doubt that where a payment which is not illegal under any relevant law is made to secure the release of the property, this can be recovered even though the persons demanding the payment are not acting lawfully in so doing. Thus, for example, payment to recover property from pirates or hijackers must, it is submitted, in general be recoverable.”

Having considered the “difficult question” which arises where the release of the property can be obtained by bribing officials in the country of detention, the editors continue by stating that

“It could scarcely be said that there was a duty to make any payment which the assured knew or might reasonably suppose it to be illegal for him to make either under the laws of the government to which he is subject, or under those governing the policy, or under those in force where the property is detained.”

I should like to leave open for further consideration the question not taken in the present case; whether a sue and labour clause covers payments made under threats of total loss, from whatever source, which are totally repugnant to English law notions of legality. Is the payment of a type the law should recognise as entitling the payer to claim as sue and labour, given a public interest in the issue of extortion of money from shipowners in circumstances of duress and illegality? Payment in face of such a threat may be reasonable within the meaning of that word in s78(4) of the 1906 Act but knowledge that such payment is recoverable from insurers may have the effect of encouraging such threats. It is a particular danger is circumstances such as the present where the work is to be done at a place under the control of the other party to the contract and threats can readily be made to extort contractual advantage by way of direct payments, the waiver of claims or additional work and expense. The problem is highlighted by the allegations of duress and illegality in the present case. Important questions of protecting life and property will of course also arise.

Reference is made in Arnould (16th Ed) to Dent v Smith (1869) LR 4 Q.B.D. 414 where a Russian ship loaded with gold was stranded in Turkish territory. In Turkish territory, all matters touching ships and their cargoes were decided by the consular court of the country to which the ship belonged and the gold was deposited with the Russian Consul whose curator of the wreck required a substantial payment from the owners of the gold. Lush J stated at p 453, that the Russian authorities:

“had physical power at all events to withhold it from the owners until the owners chose to pay what the authorities considered right to charge for salvage; and rightly or wrongly the statement was made out, the aid of the consular court was invoked, and in the result it was determined that the owners of the gold should contribute their proportionate part of the salvage, though according to the English law they would not have been under any such obligation. The Russian authorities had the entire power in their hands to withhold the gold and to exact any terms they thought proper, and it was therefore under that influence ¾ that vis major ¾ that the money was paid; it was money necessarily paid by the owners of the gold, as they could not get it till they did pay. They paid therefore under that compulsion in order to get possession of the goods which were prima facie lost, or would have been lost if they had not the means of getting them back again. Therefore I think that this was a loss by the perils of the seas, and a salvage loss within the terms of the policy.”

Dent demonstrates that the English courts may uphold payments exacted “by such a degree of superior force that no effective resistance can be made to it” (OED definition of vis major ) but there was in that case an appearance and indeed a substance of due process which, according to English law notions, may be missing in some other situations.

5. Illegality

I have come to the conclusion that GEIP would also have been unable to rely on the Finalisation Agreement on the ground of illegality.

By Article 41 of the United Nations Charter (to which Iraq and the Netherlands are parties), the Security Council may decide what measures not involving the use of armed force are to be employed to give effect to its decisions, and it may call upon the Members of the United Nations to apply such measures. These may include inter alia “complete or partial interruption of economic relations”. By Resolution 661 of 6 August 1990 the Security Council of the United Nations, acting under Chapter VII of the Charter (which includes Article 41):

“4. Decides that all States shall not make available to the Government of Iraq or to any commercial, industrial or public utility undertaking in Iraq or Kuwait, any funds of any other financial or economic resources and shall prevent their nationals and any persons within their territories from removing from their territories or otherwise making available to that Government or to any such undertaking as such funds or resources and from remitting any other funds to persons or bodies within Iraq or Kuwait, except payments exclusively for strictly medical or humanitarian purposes and, in humanitarian circumstances, foodstuffs;

5. Calls upon all States, including States non-members of the United Nations, to act strictly in accordance with the provisions of the present resolution notwithstanding any contract entered into or licence granted before the date of the present resolution;

6. Decides to establish, in accordance with rule 28 of the provisional rules of procedure of the Security Council, a Committee of the Security Council consisting of all the members of the Council, to undertake the following tasks and to report on its work to the Council with its observations and recommendations:

(a) To examine the reports on the progress of the implementation of the present resolution which will be submitted by the Secretary-General;

(b) To seek from all States further information regarding the action taken by them concerning the effective implementation of the provisions laid down in the present resolution;

7. Calls upon all States to co-operate fully with the Committee in the fulfilment of its task, including supplying such information as may be sought by the Committee in pursuance of the present resolution;”

In subsequent resolutions in September 1990, Resolution 661 was re-affirmed and States reminded of their obligation to observe it strictly. Resolution 670 of 25 September 1990, also made under Chapter VII of the Charter, the Council:

“1. Calls upon all States to carry out their obligations to ensure strict and complete compliance with Resolution 661 (1990) and, in particular, paragraphs 3, 4 and 5 thereof;

9. Reminds all States of their obligations under Resolution 661 (1990) with regard to freezing of Iraqi assets, ¼ and to report to the Committee established under Resolution 661 (1990) regarding those assets;

10. Calls upon all States to provide to the Committee established under Resolution 661 (1990) information regarding the action taken by them to implement the provisions laid down in the present resolution;”.

As appears from documents submitted to the Security Council by the Secretary-General of the United Nations the response of member States to the calls upon them was prompt and overwhelming. The Iraqi Government must have been aware of that. Article 7 of their Law No 57 provided that all the assets of the companies of those States which had enacted sanction legislation against Iraq should be seized.

It is against that background that the conduct of the parties of the contract should be considered. The circumstances have been set out by Stuart-Smith LJ. In my judgment the conclusion is inescapable that the central purpose of the Finalisation Agreement was the circumvention by GEIP, an arm of the Iraqi government, of sanctions legislation enacted by many States, including the UK, the Netherlands (and Switzerland). Duress was applied to the Joint Venture and a way found to achieve the payment of Dfl 24,250,000 to GEIP in breach of sanctions legislation. I cannot regard this as a mere technical breach of the civil law, as was submitted.

Mr Aikens submits that GEIP did nothing to break the law. Any breaches of Dutch law were committed by the Joint Venture. There was a complete mismatch between GEIP and the acts of the Joint Venture and those illegal acts would not debar GEIP from relying on the Finalisation Agreement. Mr Aikens also submits that the arbitrator would have had to take account of the fact that under the proper law of the contract between the Joint Venture and GEIP, the law of Iraq, the Finalisation Agreement was lawful. The balance between applying the proper law and the law of the place of performance of the Finalisation Agreement, the law of the Netherlands, should come down in favour of the proper law.

In St John Shipping Corporation v Joseph Rank Ltd [1957] 1 Q.B. 267 Devlin J, as he then was, and in Archbolds (Freightage) Ltd v S Spanglett Ltd [1961] 1 Q.B. 374, Devlin LJ, as he then was, expressed the general principle that a contract which is entered into with the object of committing an illegal act is unenforceable. “If at the time of making the contract there is an intent to perform it in an unlawful way, the contract, although it remains alive, is unenforceable at the suit of the party having that intent” ( Archbolds at p 388).

In the earlier case of Edler v Auerbach [1950] 1 K.B. 359 a lessee claimed rescission of a lease which the lessor had told him could be used for office purposes when to the lessor’s knowledge such use would be contrary to the Defence (General) Regulations 1945. Giving judgment for the plaintiff lessee, Devlin J stated:

“The general principle of law is expressed by the Court of Appeal in Alexander v Rayson [1936] 1 K.B. 169 at 182: ‘but is often happens that an agreement in itself is not unlawful is made with the intention of one or both parties to make use of the subject matter for an unlawful purpose ¼ in such a case any party to the agreement to have the unlawful intention is precluded from suing upon it.’ Counsel for the defendant submits that I ought not in the circumstances of this case to apply that principle at all ¼ he distinguishes it in three ways: first he says that there is here no question of the defendant himself using the demised premises illegally: the only person who could use them is the plaintiff. This is a distinction of form but not, of substance. If both parties intend to use the subject matter illegally, it is clear that the agreement is enforceable by neither. If one party intends to use the subject matter illegally, it is clear that the agreement is not enforceable by him. If one party intends that the other should use the subject matter illegally, I think that it is a logical and necessary extension of the principle that the agreement should be unenforceable by the first party. The plaintiff in this case is the innocent instrument through which the defendant sought to effect his intention that the law should be broken and the defendant’s position is, therefore, no better than if he were using the subject matter himself.”

Devlin J later referred to the “illegal scheme conceived by the defendant” and to the fact that the scheme was “conceived in wrongdoing which debarred the defendant from invoking the aid of the Court”.

Those statements of principle, which would appear to prevent enforcement of the Finalisation Agreement by GEIP were made in the context of contracts where the proper law of the contract was English law. In present circumstances, the English courts (and ex hypothesi the Paris arbitrators) would apply them notwithstanding the fact that the proper law of the Finalisation Agreement is Iraqi law. In Regazzoni v K C Sethia (1944) Ltd [1958] A.C. 301, Lord Reid stated:

“To my mind, the question whether this contract is enforceable by English courts is not, properly speaking, a question of international law. The real question is one of public policy in English law: but in considering this question we must have in mind the background of international law and international relationships often referred to as the comity of nations. This is not a case of a contract being made in good faith but one party thereafter finding that he cannot perform his part of the contract without committing a breach of foreign law in the territory of the foreign country. If this contract is held to be unenforceable, it should, in my opinion, be because from the beginning the contract was tainted so that the courts of this country will not assist either party to enforce it.”

While English law was the proper law of the contract in Regazzoni, the principle stated by Lord Reid does not appear to me to be confined to such contracts and would apply also to contracts where the proper law is foreign.

Phillips LJ, by reference to Mackender v Feldia [1967] 2 Q.B. 590 draws a distinction between enforcing the Finalisation Agreement and simply recognising its effect. The English courts would not decline to recognise its effects on this ground, Phillips LJ concludes.

In Mackender, underwriters who issued an insurance policy covering diamond merchants against loss or damage to their stock anywhere in the world sought to avoid liability on the ground that the insured had made a practice of smuggling diamonds into a friendly foreign country and had not disclosed this practice. The policy was governed exclusively by Belgian law and disputes were subject to Belgian jurisdiction. The court declined leave to serve a writ out of the jurisdiction on the ground that the merchants’ illegality did not affect the formation of the contract but only made it unenforceable and the dispute remained within the foreign jurisdiction clause. Lord Denning MR stated at p 599:

“It all comes to this: the English courts have discretion whether or not to give leave to serve this writ out of the jurisdiction. Seeing that the underwriters have agreed to a foreign jurisdiction clause which gives exclusive jurisdiction to the Belgian courts, I think we should allow these disputes to be decided in the courts of Belgium.”

Diplock LJ, in the passage from his judgment cited by Phillips LJ, contrasted a contract which under its proper law is illegal, and may properly be said not to be a contract at all, with a contract which is unenforceable in the English courts. The Court held that because the contract was not void, the dispute should be decided in the courts of Belgium.

It is not suggested that the Finalisation Agreement was void. It was a valid contract under its proper law, that of Iraq. Its existence must be recognised by the English courts. Agreeing, as I do, with Stuart-Smith LJ that severance of the illegal clauses would not be permitted, the Finalisation Agreement would not be given effect in an English court. In my view, holding it unenforceable does not mean only preventing the Iraqis from suing upon it. It also means, upon a claim brought under the Dredging Contract, preventing GEIP from relying upon the waiver of claims contained in it. In different circumstances, the Finalisation Agreement might have required a payment to GEIP rather than a waiver of claim (and loss of security). A distinction cannot be drawn, in terms of enforceability in the English courts, between relying on the contract to make a money claim and relying on it to enforce the waiver of an otherwise valid claim. That distinction did not arise in Mackender and the analysis of Diplock LJ did not bear upon it. The fact that an English court would recognise the Finalisation Agreement as a contract valid by its proper law does not in my view require the English court to permit it to be relied on in present circumstances. By seeking to rely upon the waiver, GEIP would be invoking the aid of the Court. The situation is quite different from that in an action brought to assert a property right already acquired under an illegal agreement considered in Alexander (p 185 to 187) and Regazzoni (per Lord Keith at p 328).

I see no merit in Mr Aikens’ submission that the illegal acts were performed only by the Joint Venture. Their acts were intimately linked with enabling acts of GEIP, as specified by Stuart-Smith LJ. Further, applying the language of Devlin J in Edler, the Joint Venture was, in the prevailing circumstances, the innocent instrument through which GEIP sought to break sanctions. The unlawful acts necessary to achieve the intentions of GEIP could only be performed by the Joint Venture under whose control the funds were. It follows that an English court would not, on the ground of illegality, give effect to the waiver of claims in the Finalisation Agreement and, in the absence of evidence that French law is different from English law, the waiver defence would have been ineffective before the Paris arbitrators on that ground also.

6. Conclusion

For the reasons given, I too would allow the appeal. I also agree with the conclusions reached by Phillips LJ on the separate defences raised under s 41 and s 78 of the 1906 Act and that ex turpi causi does not require separate consideration.

LORD JUSTICE PHILLIPS:

The background facts to this unusual case are set out at the beginning of the first Judgment of Rix J. handed down on the 18th December 1995 as follows:

"The five plaintiffs owned a dredging fleet with ancillary dredging equipment ('the fleet') which was contracted to a dredging project at Umm Qasr in Iraq, close by the Iraq-Kuwait border. The fleet was insured against war risks by the defendants. The dredging project was a joint venture between Boskalis International BV (the third plaintiffs) and Volker Stevin Dredging BV (the fifth plaintiffs). These two companies combined forces to contract with the General Establishment of Iraqi Ports (or 'GEIP'), which was an arm of the Iraqi Ministry of Transport and Communications (the 'Ministry'), for the Umm Qasr project.

The Dredging Contract was made on 28th October 1989, and it provided for Iraqi law and Paris arbitration under ICC rules. At the time of the invasion of Kuwait by Iraq the project was scheduled to be completed at the end of September 1990. In the light of the invasion the plaintiffs sought to agree with GEIP that the project should be terminated or at any rate suspended and the fleet demobilised; but GEIP was unwilling to recognise that the conditions at Umm Qasr were other than normal and insisted on the completion of the Contract first. Other contractors working in Iraq abandoned their projects and deserted their equipment; but the plaintiffs decided to work on and to complete their Contract, while negotiating all the time for the demobilisation of their fleet together with its personnel.

The invasion and the international sanctions against Iraq which it brought immediately in its train delayed the progress of the work, so that the project was not in the event completed until 30 October 1990. In the meantime on 16 September 1990 the Iraqi Revolutionary Command Council resolved to promulgate Law No. 57 which took effect upon its publication in the Iraqi Official Gazette on 24 September, but purported to be retrospective to 6 August. Article 7 of Law No. 57 said that all the assets of inter alios the companies of those countries which had enacted sanctions legislation against Iraq 'shall be seized'. This was part of the background to negotiations for the ultimate demobilisation of the fleet which had been progressing more or less successfully: in particular following a critical letter written by the joint venture to GEIP dated 23 September 1990 in which the joint venture had accepted in principle the concept that, in order to secure a prompt and unhindered demobilisation of the fleet and repatriation of all employees, the joint venture would not submit claims for increased costs arising from "Special Risks". These were costs to which the joint venture otherwise believed itself to be entitled under the Contract as a result of the invasion. As it was, GEIP (in effect the Iraqi authorities) progressively ratchetted up the terms on which they were willing to permit demobilisation. Ultimately final approval, and its timing, no doubt depended on President Saddam himself. On 6 December 1990, at any rate, a Finalisation Agreement between the joint venture and the Ministry was signed at a public ceremony in Baghdad and thereafter demobilisation was permitted to take place: but not before the joint venture had sanctioned the payment to accounts of the Central Bank of Jordan held in Switzerland and Austria of some Dutch Fl.24 million, the ultimate balance of a deposit which had been held at the Amsterdam-Rotterdam ("Amro") Bank in Holland under a letter of credit opened by GEIP pursuant to the Dredging Contract as security for payments of sums falling due under that Contract to the joint venture, but which under the terms of the Finalisation Agreement was to be reimbursed to the Ministry. The Finalisation Agreement marked a settling of accounts between the parties to the Dredging Contract, and involved the joint venture in waiving claims, including but not limited to "Special Risks" claims, which it would otherwise have sought to make against GEIP in the sum of Dfl.84 million.

Thus it was that the fleet and all its personnel left Iraq by mid-December 1990 in safety, a month or so before the outbreak of war between Iraq and the USA and its allies on 17 January 1991."

The issue at the heart of this appeal is the effect of the Finalisation Agreement and it is important at the outset to note the nature of this.

The preamble to the Agreement provided that its object was to fix the terms concerning the demobilisation of personnel and equipment of the Joint Venture and to provide for the reimbursement of the balance of the letter of credit security.

Clause 1 recorded that all works had been completed to the full satisfaction of GEIP.

Clause 3 provided that the Joint Venture renounced all their contractual claims.

Clause 4 provided that GEIP renounced all their counterclaims and withdrew the imposition of penalties for delay.

The remainder of the Agreement contained detailed provisions for the recovery of the deposit from the Amro Bank, of which some 12 million Guilders were to be retained by the Joint Venture in relation to outstanding amounts due to them under the Dredging Contract and the remaining 24,250,000 Guilders were to be remitted in two equal portions to accounts in the name of the Central Bank of Jordan in Zurich and Vienna. These payments were to be made in two instalments as preconditions to the phased release of the Joint Venture's personnel and dredgers.

While on the face of it, this Agreement had elements of a conventional finalisation agreement, the reality is, as the Judge found, that the Joint Venture's claims greatly exceeded any cross-claims enjoyed by GEIP and that the Joint Venture were agreeing to waive these claims in order to buy the release of their personnel and their fleet.

The primary claim pleaded by the joint venture was for the constructive total loss of the dredging fleet. This claim was rejected by Rix J. and there is no appeal against that part of his decision. This appeal relates to an additional claim that was pleaded in the following terms:

"The Plaintiffs have incurred sue and labour costs and/or sacrifices in the total sum of Dfl.84,419,868 in order to defend, safeguard and recover the insured property...

The said costs and/or sacrifices and/or expenses are recoverable pursuant to the sue and labour clause and/or pursuant to Section 78(4) of the Marine Insurance Act 1906."

The costs in question were set out in a schedule and consisted largely of the face value of all the claims under the dredging contract that the Joint Venture had waived under the Finalisation Agreement.

The portions of the Points of Defence, as amended, which remain relevant, advanced the following pleas:

"12. (5) ...the Finalization Agreement provided for the issue and signature of a Final Payment Certificate which certified that an amount of Dfl.36,267,506.57 was agreed as due to the Plaintiffs under the Dredging Contract and a Payment Certificate No.9 in that amount and those terms was duly issued and signed. The said Payment Certificate was presented to the Amro Bank and induced the Amro Bank to make a remittance of such amount to the Plaintiffs on 7th December 1990. The terms of the said Payment Certificate were false, and were known by the Plaintiffs to be false. In fact, as at that date there was agreed due and owing to the Plaintiffs under the Dredging Contract a Dutch Guilder sum of only Dfl.12,017,506.57. In accordance with the provisions of the Finalization Agreement, the final Payment Certificate was intentionally countersigned and submitted to the Amro Bank in a false amount with the object and intent of inducing the said Bank to rely on the false certificate and to make a payment to which the Plaintiffs would not otherwise have been entitled and/or which would enable a substantial part thereof to be remitted indirectly to the Iraqis notwithstanding the matters set out in sub-paragraphs (1) to (4) above [Dutch Sanctions Rulings infringed by the payment]

(6) By reason of the matters in (5) above, the Finalization Agreement and/or the performance thereof were illegal under Dutch law, involving fraud within the meaning of Article 326 of the Dutch Criminal Code.

13. Further or in the alternative, at all material times in December 1990 the Finalization Agreement and/or the making or procuring of payments to the Iraqis thereunder was illegal under and/or contrary to English law and/or English public policy. The Defendants will rely on the following facts and matters:

(1) The fact that the Finalization Agreement and/or the making or procuring of payments to the Iraqis thereunder was illegal under Dutch law and/or Swiss and/or Austrian law, being the law of the place of performance or substantial performance.

(2) The fact that the Finalization Agreement and/or the making or procuring of payments to the Iraqis thereunder

(ii) was illegal under English law on account of the matters set out in Paragraph 12(5).

(3) The fact that the Finalization Agreement and/or the making or procuring of payments to the Iraqis thereunder was in contravention of the United Nations Resolution of 6th August 1990 to which Resolution both the aforesaid Dutch Sanction Rulings, the Swiss and Austrian decrees and the English statutory instrument were intended to give effect.

15. Further or in the alternative, by entering into the said Finalization Agreement and/or by countersigning and presenting to the Amro Bank the false Payment Certificate and/or by obtaining and transmitting to the Iraqis the sum of Dfl.24,250,000 in the circumstances set out above, the adventure was being carried out in an unlawful manner, both as a matter of Dutch law and/or Swiss and/or Austrian law and/or as a matter of English law and/or public policy as set out in Paragraphs 12 and/or 13 above. The Assured was thereby in breach of Section 41 of the Marine Insurance Act 1906. In the premises the Defendants are discharged from all liability under the contracts of insurances from the date of breach of warranty and, in particular, are under no liability in relation to the alleged sue and labour claim in respect of allegedly waived claims in circumstances where the alleged waiver arose out of the unlawful Finalization Agreement itself.

16. Further or in the alternative, even if (which is denied) the waiver of claims can amount to the incurring of costs, sacrifices or expenses for the purposes of sue and labour in the present context, it is expressly denied that there has been any valid and effective waiver of claims under the Dredging Contract such as to deprive the Plaintiffs of whatever contractual rights they had prior to the concluding of the Finalization Agreement. In particular any agreement to waive contractual claims relies upon and is derived from a provision in an agreement, the Finalization Agreement, which was and is unenforceable by reason of illegality under Dutch law and/or Swiss and/or Austrian law (being the law of the place of performance or substantial performance) and/or under English law and/or public policy so that the Plaintiffs would have been and are able to enforce their original rights under the Dredging Contract unaffected thereby. The Defendants refer to Paragraphs 12 and/or 13 hereof. Accordingly it is denied that the Plaintiffs have "incurred" any loss by way of waiver of claims as alleged or at all.

17. Further or in the alternative, the Plaintiffs' claim in respect of the alleged waiver of claims relies upon and is derived from a provision in an agreement, the Finalization Agreement, which was illegal and/or provided for the effecting of illegal acts under Dutch law and/or Swiss and/or Austrian law and/or English law and/or contrary to English public policy as set out in Paragraphs 12 and/or 13 hereof. In the premises the Plaintiffs' suit for sue and labour "costs, sacrifices or expenses incurred" in the form of claims allegedly waived pursuant to the terms of that Finalization Agreement is unenforceable and the alleged claims or losses are irrecoverable at common law and/or pursuant to the provisions of Section 55(2)(a) of the Marine Insurance Act 1906, being attributable to wilful misconduct. Accordingly it is denied that the Plaintiffs have any entitlement to recovery in respect of the alleged waiver of claims herein.

18. Further or in the alternative, on the Plaintiff's own case or evidence, the Finalization Agreement was entered into and any agreement to waive contractual claims contained therein was induced by duress of persons (in the form of the alleged threatened refusal alternatively actual refusal of the Iraqis to permit the evacuation of the Assured's personnel who had been working on the Dredging Contract unless such an Agreement was signed) and/or duress of goods (in the form of the alleged threatened refusal alternatively actual refusal of the Iraqis to permit the demobilisation of the Assured's Insured Property unless such an agreement was signed). In these premises,

(1) the Assured would have been and is able to avoid the Finalization Agreement and/or otherwise enforce its original rights under the Dredging Contract unaffected thereby; and/or

(2) the Finalization Agreement was, by virtue of such alleged coercion, objectionable on grounds of English law public policy so that the Assured's original rights under the Dredging Contract must be treated as unaffected thereby.

Accordingly it is denied that the Assured has suffered any loss by virtue of the alleged waiver of claims contained in the said Finalization Agreement."

Judge Diamond Q.C. made a Consent Order in relation to the conduct of the trial. The effect of this was that issues relating to liability together with any other issues of principle should be dealt with at the first trial and issues of quantum at the second trial. In particular, he directed that the issues to be determined at the first trial should include the following:

"whether the Plaintiffs would have been able to recover the amount of [the waived] claims, whether by way of voluntary payment or enforcement of award or judgment or otherwise (and, if not, whether such claims are capable of recovery as 'sue and labour'.)"

The allegations of fact made in paragraph 12(5) of the Points of Defence were and are not challenged save that it is now accepted that the Plaintiffs did not intend to infringe Dutch law (see below).

The following further facts were found by Rix J. and are not now challenged:

(1) Both Holland and Switzerland had enacted legislation designed to give effect to UN sanctions against Iraq.

(2) The payments sanctioned by the Joint Venture of the funds held by Amro Bank infringed this legislation in each country, but did not, in the circumstances, amount to criminal conduct.

(3) The Joint Venture could have obtained dispensation which would have avoided this infringement in each country.

(4) For this reason the Finalisation Agreement had not necessarily required breaking the law of Holland or of Switzerland, or indeed of any other country.

(5) The Finalisation Agreement was valid and binding under Iraqi law, which was the proper law of that agreement as it was of the Dredging Contract.

(6) The Finalisation Agreement was induced by duress both of goods and of persons.

(7) The Joint Venture had not intended to perform the Finalisation Agreement in a manner that was unlawful, nor appreciated that they had done so.

I now turn to the findings made by Rix J. in the first trial which are challenged on this appeal. I shall outline the issues that they raise.

Rix J. held that the loss suffered by the Joint Venture could be claimed as an expense of suing and labouring. Underwriters contend that this finding was wrong in law.

Underwriters contended that the Finalisation Agreement would have posed no bar to the recovery of an award against GEIP in a Paris Arbitration as it had been obtained by duress and related to an illegal venture. Rix J. held that, if this were so, it was not relevant. The Joint Venture's loss occurred when they signed away their rights under the Finalisation Agreement. Whether they might subsequently have been able to enforce those rights in Paris notwithstanding went simply to the question of whether there was available to them an alternative remedy to seeking an indemnity from underwriters. The existence of such a remedy was no bar to their claim.

Underwriters contend that this analysis by the Judge was erroneous. If entering into the Finalisation Agreement was an act of suing and labouring, it could only be evaluated for the purposes of a claim under the policy by considering its practical effect. This necessitated consideration of whether ICC Arbitrators in Paris would have recognised the Agreement as providing GEIP with a defence to the Joint Venture's claim. Underwriters submit that this Court should find that the ICC Arbitrators would have held that the Finalisation Agreement had no effect, and accordingly that signing the Finalisation Agreement caused the Joint Venture no loss. It is convenient to describe this argument as the "no effective loss" defence.

The Joint Venture contends that "the no effective loss" defence lay latent until final speeches and that the Judge should not have allowed it to be advanced at all. Underwriters argue that the defence was fully raised on the pleadings and that the Judge should have allowed them to base their argument not only upon illegality, but also upon duress.

The Judge gave no consideration to the principles of law relating to duress that were urged by Underwriters. This was because (i) he held that it was not relevant to consider whether ICC arbitrators in Paris would have disregarded the Finalisation Agreement because it was obtained by duress and (ii) because he believed that arguments based on duress were not open on the pleadings and (iii) because he held that there was no presumption that French public policy in relation to duress is the same as English public policy.

Underwriters challenge all three conclusions. They contend that (i) the Judge should have considered the effect of the Finalisation Agreement on an ICC arbitration in Paris, (ii) that it was open to them on the pleadings to argue that the ICC arbitrators would have disregarded the Finalisation Agreement because it was obtained by duress and (iii) that the Judge should have held that French public policy was the same as English public policy, in the absence of evidence to the contrary. These contentions, if sound, require this Court to consider the effect, under English law, of duress in the circumstances of this case.

Before the Judge it was argued that the provisions of the Finalisation Agreement in relation to the recovery of the funds lodged with the Amro Bank necessarily involved the infringement of Dutch and Swiss law, that both the Joint Venture and GEIP were aware of this, and that both the Joint Venture and GEIP intended that Dutch and Swiss law should be infringed. Underwriters contended that this had two consequences:

(i) the Paris Arbitrators, on the presumption that French law is the same as English law, would have held that the Finalisation Agreement was ineffective on the ground of illegality, so that there was no effective loss.

(ii) Underwriters could invoke the illegality as a direct defence to the claim by relying on the provisions of Sections 41 and 78(4) of the Marine Insurance Act 1906 and on the principle that " ex turpi causa non oritur actio ".

The Judge, having held that the “no effective loss” defence was unsound in principle, concentrated on the second way in which Underwriters contended that illegality provided a defence.

Having found that the Finalisation Agreement could have been performed without illegality had dispensations been obtained, and that the Joint Venture did not intend to perform the Finalisation Agreement in a way which infringed Dutch or Swiss law, the Judge held that none of the Defences urged on the basis of the direct application of English law was valid. He went on to observe that his findings would have been equally fatal to the "no effective loss" defence, had that defence been based on an approach which was sound in principle.

Before us Underwriters argued that, notwithstanding the Judge's findings that the Joint Venture were not complicit in any illegality, the "no effective loss" defence should have succeeded on the ground that GEIP had intended that the Finalisation Agreement should be performed in a way which infringed sanctions legislation, as indeed it had, and that this would have precluded GEIP from relying on the Finalisation Agreement in the Paris Arbitration.

Underwriters have also persisted in their contentions as to the direct effect of English law on the Joint Venture's claim, but were driven to accept that the Judge's findings render it difficult to set up a defence in relation to any matter which predated the actual withdrawal, in breach of Dutch law, of the funds deposited with the Amro Bank.

It was Underwriters' case that, having regard to the circumstances prevailing at the time immediately before the Finalisation Agreement was signed, the Joint Venture had no prospect of obtaining any payment from GEIP of sums due under the Dredging Contract, save to the extent that their claims were secured by the deposit at the Amro Bank. This issue fell within the scope of the matters that Judge Diamond had ordered should be determined at the first trial. At the opening of that trial Underwriters submitted that the onus was on the Plaintiffs to establish the commercial value of the claims that they had waived and, in particular, that they would have been able to recover from GEIP such sums as were due to them, in so far as these exceeded the security held by the Amro Bank. In his judgment the Judge rejected this contention. He held, at p.270 of the transcript that:

"it is for the underwriters to prove that without security the joint venture's waived claims were valueless, or of only limited value, and they have neither sought to do so, nor proved such a case."

After judgment in the first trial issues arose as to the ambit of the second trial, for it became apparent that some issues of principle in relation to assessing quantum had not been addressed at the first trial. At a hearing to resolve the scope of the second trial, the Judge ordered:

"It is not open to the Defendants to contend at the second part of the trial that the commercial value of the Plaintiffs' claims waived under the Finalisation Agreement is to be measured taking into account the prospect of successful enforcement of those claims."

At the second trial the Judge held that the Joint Venture was only entitled to recover the commercial value of the claims waived and that, in evaluating each individual claim, the correct approach was to evaluate the chance of such claim succeeding. He also appreciated the possibility that in making the Order that I have just quoted he might have misconstrued the effect of Judge Diamond's Order. Accordingly, lest this Court should so hold, he allowed Underwriters, de bene esse , to argue that a global discount should be made to the commercial value of claims to reflect difficulty of enforcement, but on the premise that enforcement would ultimately prove possible. His express finding at the first trial precluded it seems, even de bene esse , the contention that enforcement of unsecured claims might be impossible. The Judge made a notional discount for difficulties of enforcement of 10% of the value of the claims.

In their Notice of Appeal Underwriters contended that the Judge should have found that the onus of proof was on the Joint Venture to establish that they could have recovered more than the security and that not only had they failed to discharge that onus but, on the evidence, the Judge should have found that no recovery could have been made by the Joint Venture beyond the amount of the Amro security. For reasons which will become apparent, no submissions were made to us in support of this part of the Notice of Appeal.

The Finalisation Agreement was concluded by the Joint Venture both to buy the release of their fleet and to procure the release of their personnel, who otherwise were threatened with being held captive in Iraq as a human shield against any attack on that country. In these circumstances, the Judge accepted Underwriters' argument that, if they were liable, it should only be for that part of the Joint Venture's loss under the agreement which properly fell to be considered as the price of buying the release of their property rather than the freedom of their personnel. The Judge made a 50/50 apportionment. By cross-appeal the Joint Venture contend that the Judge erred in principle and should have taken no account of the fact that their motivation in signing the finalisation agreement was to procure the release of both insured property and personnel.

The complexity of this case led me to set out both the procedural history and the issues in a little detail. I now turn to the resolution of the latter.

constitute a sue and labour expense ?

It is Underwriters' contention that, as a matter of law, an agreement to waive claims cannot amount to or give rise to a charge or expense recoverable under a sue and labour clause.

The Finalisation Agreement was entered into as the price which had to be paid by way of a ransom to procure the release of the fleet and the personnel. In the Court below it was common ground that payment of a ransom to recover insured property could be recovered as a sue and labour expense. Underwriters argued that there was a significant difference between paying a ransom, which was expenditure, and agreeing to waive claims which had to be quantified. On a true interpretation of Section 78 of the Marine Insurance Act 1906 the payment of a ransom could be recovered as an expense or charge of suing and labouring, but the waiver of claims, which was a sacrifice, could not. Rix J. rejected this argument. He held at p. 123:

“In my judgment there is no difference in principle between a sum paid out by way of ransom and a valid claim waived by way of ransom. It is common ground that a ransom paid to recover assured property may be properly the subject of a sue and labour claim. I do not see why a waived claim may not, upon appropriate facts, be just as much regarded as a ransom. Indeed, if one contemplates that the payment of money may be effected by means of book entries in respect of causes of action (viz claims) that a creditor may have in respect of deposited funds, one can readily visualise that the line between out of pocket expenditure and waived claims may in any event become a thin one. Unless, therefore, there is some bar as a matter of law, and I do not think there is, upon sue and labour expenses or charges being incurred in the form of the waiver of valid claims, there is no substantial merit in this point.”

Before us, Mr. Clarke withdrew the concession that a ransom payment could constitute a sue and labour expense. He argued that to sue and labour necessarily involves the exercise of endeavours for the preservation of the insured property that can be assessed on a quantum meruit basis. Where the assured pays agents a fair price for such endeavours, the payment can properly be recovered as the expense of suing and labouring. A payment made by way of ransom of the insured property is not payment for suing and labouring, nor does the act of making the payment itself constitute suing and labouring.

In support of this argument, Mr. Clarke relied exclusively upon passages in the speeches of Lord Blackburn and Lord Cairns L.C. in Aitchison v. Lohre (1879) 4 App. Cas. 755. At issue in that case was the question whether a liability to pay salvage incurred by the shipowners under the law maritime could be claimed as an expense under the usual sue and labour clause. The House of Lords held that it could not. In the course of his speech Lord Blackburn, after referring to the wording of the sue and labour clause, said at p. 765:

“And the object of this is to encourage and induce the assured to exert themselves, and therefore the insurers bind themselves to pay in proportion any expense incurred, whenever such expense is reasonably incurred for the preservation of the thing from loss, in consequence of the efforts of the assured or their agents. It is all one whether the labour is by the assured or their agents themselves, or by persons whom they have hired for the purpose, but the object was to encourage exertion on the part of the assured;”

Mr. Clarke emphasised the requirement that the expense must be incurred in consequence of the exertions of the insured or their agents and submitted that a ransom payment did not satisfy this requirement.

Lord Cairns, in agreeing with the speech of Lord Blackburn, added this observation at p.766:

“I will only make one observation with regard to salvage expenses. It appears to me to be quite clear that if any expenses were to be recoverable under the suing and labouring clause, they must be expenses assessed upon the quantum meruit principle. Now salvage expenses are not assessed upon the quantum meruit principle; they are assessed upon the general principle of maritime law, which gives to the persons who bring in the ship a sum quite out of proportion to the actual expense incurred and the actual service rendered, the largeness of the sum being based upon this consideration - that if the effort to save the ship (however laborious in itself, and dangerous in its circumstances) had not been successful, nothing whatever would have been paid. If the payment were to be assessed and made under the suing and labouring clause, it would be payment for service rendered, whether the service had succeeded in bringing the ship into port or not.”

Mr. Clarke submitted that this clearly demonstrated that expenditure can only constitute an expense of suing and labouring if it is paid for services rendered to the property insured of a kind capable of assessment on a quantum meruit basis. Payment for the release of property held to ransom did not qualify. He submitted that this proposition was the, or at least a, " ratio decidendi " of Lord Cairns.

Mr. Aikens submitted that the passage in Lord Cairns' speech relied upon by Underwriters was the expression of an "obiter" opinion and that, if given the effect contended for by Mr. Clarke, it runs counter to well established practice in the market, both before and after the decision in question.

In my judgment the reason for the decision of the House of Lords in Aitchison v. Lohre is not to be found in the passages relied upon by Mr. Clarke, but in the following passages:

"The owners of the Texas did the labour here, not as agents of the assured, and being to be paid by them wages for their labour, but as salvors acting on the maritime law, which, as explained by Lord Chief Justice Eyre in Nicholson v Chapman (1), already cited, gives them a claim against the property saved by their exertions, and a lien on it, and that quite independently of whether there is an insurance or not; or whether, if there be a policy of insurance, it contains the suing and labouring clause or not. The amount of such salvage occasioned by a peril has always been recovered, without dispute, under an averment that there was a loss by that peril; see Cary v King (2); and I have not been able to find any case in which it was recovered under a count for suing and labouring." [per Lord Blackburn at p. 765]

“Now it may be said that that only goes to the amount sought to be recovered, but it appears to me to go farther, and to go to the very principle upon which the attempt is made to recover the amount in question. It shews that the salvage expenses were not expenses incurred under the suing and labouring clause by the owner of the ship, but were a payment which the ship, as an actual chattel, had to submit to by maritime law, and would be obliged to make good in proceedings against the ship in rem .” [per Lord Cairns at p.767, immediately after the passage relied upon by Mr. Clarke.]

“.....it is equally clear, as it seems to me, that the suing and labouring clause was inserted by the underwriters for the purpose of securing the benefit of any pains that the shipowner might be inclined to take in preserving, for their benefit, as much as he possibly could preserve. But that does not apply to a case like the present, where the salvage seems to have been an ordinary sort of salvage, namely, a ship perceiving another at a distance and in a state of distress comes to the rescue, no bargain being made. We were expressly told in the case that no bargain was made as to any remuneration which should be given, but it was rescued upon the simple and common principle of salvage. There does not appear to be any authority shewing it to be a case coming within the suing and labouring clause.” [per Lord Hatherly at p.768]

I would make the following observations about Aitchison v. Lohre :

1. There was no doubt that the services rendered by the salvors were of a type that could constitute suing and labouring.

2. The services were of a type that could have been evaluated on a quantum meruit basis.

3. The claim did not fail simply because the salvors were not paid on an ordinary quantum meruit basis but on a salvage basis which reflected the risk of "no cure no pay". Had the shipowners contractually engaged the salvors on a "no cure no pay" basis, that would simply, as Lord Cairns remarked, have gone to the quantum of what could properly be recovered on a claim for suing and labouring expenses. Lord Cairns appears to have taken the view that a salvage award on that basis would have exceeded the amount which could properly be recovered on a sue and labour claim. So far as I am aware that is not a point which has ever been taken by underwriters, who regularly indemnify shipowners in relation to awards made under Lloyds Open Form.

4. The reason why the claim in Aitchison v. Lohre failed was that the salvors were not contractually engaged to perform the services at all. They rendered them as volunteers, not as agents engaged by the master under contract. The shipowners could not claim that the obligation to make the salvage payment was one that they or their agent had undertaken by way of exercising exertions for the preservation of the ship. It was an obligation to which they and their vessel had become liable as a result of an obligation under the law maritime which arose independently of their own conduct.

The effect of the decision in Aitchison v. Lohre is reflected in the provisions of Section 65(2) of the Marine Insurance Act 1906, which draws the distinction between salvage charges arising under the law maritime and salvage expenses payable under contract.

Although Aitchison v. Lohre involved services which could have been evaluated on a quantum meruit basis, it remains to consider, having regard to Lord Cairns' observations, whether an expenditure by the assured to avert the consequences of an insured peril can be recovered under the sue and labour clause, even where the benefit purchased by the expenditure does not consist of services which can themselves be described as suing and labouring.

The starting point, as the Judge observed in another context, must be the sue and labour clause itself:

"In case of any loss or misfortune it shall be lawful for the assured, their factors servants and assigns, to sue, labour and travel for, in and about the defence, safeguard and recovery of the said goods and merchandises, and ship, etc., or any part thereof, without prejudice to this insurance, to the charges whereof we the assurers will contribute."

This clause is of venerable antiquity. The authors of O'May on Marine Insurance have traced its use back to 1669. What do the words "sue, labour and travel" mean in this context?

The decision in Aitchison v. Lohre produced from Mr. Machlachlan, the Editor of the 6th Edition of Arnould, an attack as intemperate as it was misdirected, for he does not appear to have recognised the ratio of the decision. His attack is, however, of value, for it contains a scholarly analysis of the origins of the phrase "sue, labour and travel". His conclusion was that the phrase was an idiomatic description of exertions which extended beyond physical labour and comprehended attempts to procure a result by supplication, persuasion or expenditure of money.

Mr. Aikens' submitted that to sue, labour and travel means to use all reasonable endeavours to preserve the subject matter insured from the consequences of an insured peril. Where it is reasonable to spend money for this purpose, the deliberate expenditure itself constitutes suing and labouring and the benefit purchased by the expenditure does not have to consist of services that can be valued on a quantum meruit basis. The payment of a ransom in order to secure the release of property insured against seizure is an example of a sue and labour expense.

I note that the new form of marine policy which, since 1991, has replaced the old SG Form on the London market, schedules a replacement sue and labour clause in terms which echo Mr. Aikens' submission as to the meaning of "sue, labour and travel":

"In case of any loss or misfortune it is the duty of the Assured and their servants and agents to take such measures as may be reasonable for the purpose of averting or minimising a loss which would be recoverable under this insurance .... Underwriters will contribute to charges properly and reasonably incurred by the Assured their servants or agents for such measures."

This, in effect, replaces the old sue and labour clause with the provisions of S.78(1) and (4) of the Marine Insurance Act 1906, and it is an appropriate stage to consider these provisions.

Section 78(1) of the Marine Insurance Act provides:

"Where the policy contains a suing and labouring clause, the engagement thereby entered into is deemed to be supplementary to the contract of insurance, and the assured may recover from the insurer any expenses properly incurred pursuant to the clause, notwithstanding that the insurer may have paid for a total loss, or that the subject-matter may have been warranted free of particular average, either wholly or under a certain percentage."

This subsection codified the law as it had developed, not without some conflict, by 1906.

Section 78(4) also codified a principle of common law:

"It is the duty of the assured, and his agents, in all cases, to take such measures as may be reasonable for the purpose of averting or minimising a loss."

It has sometimes been suggested that Section 78(1) and 78(4) are co-extensive, so that recovery can be made under the sue and labour clause for expenses incurred pursuant to the duty under 78(4), but not otherwise. Counsel for neither party has taken that stance, recognising the possibility of a middle ground where it may be equally reasonable to take action or to do nothing.

It seems plain, however, that the sue and labour clause and Section 78 of the Marine Insurance Act reflect the process of clarification of the circumstances in which the assured is contractually entitled or bound to incur expenditure for the protection of the property insured against insured perils, and in which the assured is entitled to be indemnified for the cost of so doing. In this context it is worth noting the provisions of Section 76(2) of the Marine Insurance Act 1906:

"Where the subject matter insured is warranted free from particular average, either wholly or under a certain percentage, the insurer is nevertheless liable for salvage charges, and for particular charges and other expenses properly incurred pursuant to the provisions of the suing and labouring clause in order to avert a loss insured against."

The Editors of the current edition of Arnould devote, as did their predecessors, some discussion (at paragraph 914A) to the question of whether the right to claim particular charges exists independently of the sue and labour clause, and conclude that it did before 1906 and still does today, although the question is largely academic as most policies contain a sue and labour clause. The authors refer to:

"....many cases reported, both before and after the distinction between particular charges and particular average was first clearly established, in which moneys paid to obtain the return of property under detention appear to have been treated as recoverable as the measure of indemnity for loss by the insured perils, or at all events in which there is no mention of the suing and labouring clause as being the basis for recovery."

Some of the cases referred to by Arnould have been relied on by Mr. Aikens, and I now turn to these to consider the extent to which they advance his case.

Mr. Aikens referred us to an incident of warfare in the earlier part of the 18th Century. If a British ship was captured by the enemy, the captors would release the ship against a "ransom bill" issued by the Master. This operated as a bill of sale of the ship by its captors to the original owners and a guarantee of safe passage during the remainder of the voyage. Actions were sometimes brought on ransom bills in the English courts, which recognised them as giving rise to binding legal obligations. Underwriters of Owners of a vessel insured against capture recognised that the sum payable under the ransom bill was recoverable. This position changed in 1781 when the Ransom Act declared that all ransom by British subjects of ships or goods taken by the enemy as prize to be illegal, after which no claim for such a payment would lie under a policy of insurance - see Arnould 1st Ed. at p.807.

As Arnould observes it is by no means clear on what basis recoveries in respect of ransom payments were made. It seems to me that they fell more logically to be treated as particular charges and/or sue and labour expenses than as particular average, but the reality may be that underwriters recognised the desirability, and indeed the fairness, of encouraging a practice which saved them money and did not concern themselves overmuch with the technical basis of recovery. Their reasoning may have been similar to that of Lord Mansfield in Berens v. Rucker (1761) 1 W.Bl. 313. In that case a Dutch vessel was captured in the West Indies by an English privateer on the pretext that she was carrying French cargo, albeit that the cargo was Dutch owned. Ship and cargo were brought into Portsmouth and, in prize proceedings, the captors were successful at first instance - on something akin to a pleading point. Cargo owners appealed, but were faced with a delay which threatened their perishable cargo. In these circumstances, they settled with the Captors, who agreed to the decision being reversed on being paid £800 plus costs. Cargo owners claimed under the policy on the goods for their expenditure and underwriters refused to pay. In the consequent action Lord Mansfield held that cargo owners had acted reasonably, and ruled:

"I therefore think the insurers liable to answer this average loss, which was submitted to to avoid a total one."

Emerigon, who wrote a Treatise on Insurance, which was translated from the French by Meredith in 1850, had no doubt that the price of a ransom was recoverable under the English sue and labour clause - see p.386 footnote r.

In the current, 16th, edition of Arnould, under the chapter dealing with the suing and labouring clause, a section is devoted to the question of whether recovery can be made in respect of illegal payments. The Editors express the following opinion:

"There appears to be little doubt that where a payment which is not itself illegal under any relevant law is made to secure the release of property, this can be recovered even though the persons demanding the payment are not acting lawfully in so doing. Thus, for example, payment to recover property from pirates or hi-jackers must, it is submitted, in general be recoverable. Similarly, where payment is made to the authorities in a country to obtain the release of property detained by them it can generally make no difference whether or not the laws there in force have been properly applied."

Mr. Aikens informed us that this assumption that ransom expenses are recoverable under a marine policy reflects the approach of the market today, in circumstances where a resurgence of piracy has resulted in a number of such claims. He also relied upon The "Pomeranian " [1895] P. 439 as demonstrating that sue and labour expenses are recoverable even where they are not incurred in respect of exertions that can be assessed on a quantum meruit basis. In that case the shippers of cattle insured them against all risks, including mortality, on the voyage. The vessel was detained in a port of refuge as a result of an insured peril.

The cattle exhausted their feed, and the shippers paid for extra feed to be supplied. In the Admiralty Court Gorell Barnes J. held that the costs incurred were recoverable as the expenses of suing and labouring. He held at p. 353:

"There was under the circumstances danger of total loss unless the expense was incurred, and it seems reasonable to hold that for this extra expense underwriters are liable."

While these words support Mr. Aikens argument, it does not seem to me that the facts of the case do so. The supply of food to livestock is surely a service designed to preserve the insured property that is capable of evaluation on a quantum meruit basis. A more recent and pertinent example of the recovery of expenditure under the sue and labour clause is Integrated Container Services Inc. v British Traders Insurance Co. Ltd [1984] 1 Lloyds Rep 154. That case involved a policy of marine insurance under which the lessors of containers insured them against all risks in the event of their being unable to recover them from lessees or others. A lessee went bankrupt and leased containers were held under lien in respect of port dues or warehouse expenses in a number of ports. The assured were held entitled to recover the costs of discharging the liens under the sue and labour clause. Eveleigh L.J. held at p. 160:

"They were entitled to act under the sue and labour clause and to recover their expenses. The cost of discharging a lien is properly included in these expenses, for if that had not been done the charges would have mounted to the extent where a partial loss became a constructive total loss."

In this case it was not suggested by Underwriters that, because the subject matter of the expenditure was not exertion which could be assessed on a quantum meruit basis, a claim under the sue and labour clause would not lie. I am not aware that such a contention has ever been based upon the dicta of Lord Cairns in Aitchison v.Lohre . The terms in which the duty under Section 78(4) is expressed are wide enough on their natural meaning to embrace expenditure necessary to procure the release of a vessel that has been seized and I see no reason of policy or practice why they should not do so. If that is right, then it would be strange indeed if such expenditure did not fall within the sue and labour clause. In my judgment the assumption of the Editors of Arnould that payment of a ransom, if not itself illegal, is recoverable as an expense of suing and labouring is well founded.

It remains to deal with what was originally Underwriters' only point under this issue but which was thrust into the back-seat behind the more fundamental argument based on Aitchison v. Lohre .

The argument runs thus:

(1) the "charges" for which underwriters accept liability under the sue and labour clause are synonymous with "expenses".

(2) this fact is underlined by the reference in Section 78(1) of the Marine Insurance Act 1906 to the right to "recover from the insurer any expenses properly incurred pursuant to the clause";

(3) the 1906 Act recognises the distinction between sacrifices and expenditure. Thus Section 66(2) provides that "there is a general average act where any extraordinary sacrifice or expenditure is voluntarily and reasonably made or incurred in time of peril for the purpose of preserving the property imperiled in the common adventure".

(4) Neither the sue and labour clause, nor the Act, makes provision for the assured to recover the cost of sacrifices that cannot be quantified without some form of evaluation.

This submission involves making a significant distinction between the acts which are capable of constituting general average, and thus of entitling the assured to a recovery under Section 66 of the Act, and those which are capable of constituting particular charges, entitling the assured to a recovery under Section 65 and the sue and labour clause. Thus the right to recovery in respect of acts designed to preserve the insured property could depend upon the fortuity of whether or not the vessel was carrying cargo when the insured peril struck or even on whether or not, if in ballast, she was on her way to the loading port under a voyage charterparty, so that there was freight at risk - see Carisbrook S.S.Co v. London and Provincial Co [1902] 2 KB 681. That such a distinction exists is a possibility. Although a similar policy underlies the right to recover in general average and the right to recover sue and labour expenses, the source of each right is different. Furthermore, Underwriters' contention receives a modicum of support from a view expressed by Lord Denning M.R. in Australian Coastal Shipping Commission v. Green [1971] 1 Lloyds Rep.16 . In that case, vessels in distress had engaged tugs on terms of the U.K.Standard Towing Conditions. Those terms gave the tugowners rights to indemnities in respect of losses sustained while performing the services. The tugs suffered casualties while performing the services and claimed indemnities. The shipowners reasonably incurred expenses in resisting those claims, and in one instance were held liable to indemnify the tugowners in respect of a salvage award made against the tug. The shipowners sought to recover in respect of the ship's proportion of these costs on the ground that they constituted general average expenditure. They further contended that if the costs did not constitute general average they were entitled to recover them under the sue and labour clause. The Court of Appeal affirmed the judgment of Mocatta J. that the costs were recoverable in general average, but Denning L.J. added at p.22:

"If the shipowners were not entitled to recover their expenditure as a general average loss, they would have sought to recover it under the suing and labouring clause. As we hold that it is a general average loss, this point does not arise, see sect. 78(2) of the Marine Insurance Act 1906. But I may say that in any case I do not think this expenditure was 'charges' within the clause."

Whether this obiter view be right or wrong, I consider that the Court should lean against a construction of the sue and labour clause that draws the distinction that Mr. Clarke seeks to make. This requires a generous construction to be given to the word "charges ...incurred" in the clause so that it covers both expenditure and the quantified loss consequent upon sacrifice. As Mr. Aikens pointed out, such a construction is supported by observations of Willes J. in what has always been considered one of the leading cases in the development of this area of the law, Kidston v. Empire Insurance C (1867) L.R.2 C.P.357. In that case the expenditure incurred to tranship cargo and carry it to its destination after the voyage had been interrupted by an insured peril were held recoverable as sue and labour charges under a policy on the freight. At p.542 Willes J. observed:

"It can make no difference whether the shipowner happens to have at the port of distress a vessel of his own which he can employ in this service, in which case the labour of forwarding would be strictly that of himself, or whether he forwards in the vessel of another shipowner, paying for his labour and that of his servants."

The former alternative is an example of a sacrifice for which the shipowner is entitled to recover the "charges...incurred" on a quantum meruit basis.

For these reasons I consider that the Judge was correct to reject Underwriters' contention that while expenditure can be recovered under the sue and labour clause, the cost of a sacrifice cannot.

The signing of the Finalisation Agreement waiving claims was a sacrifice the financial consequences of which can, in principle and subject to the other defences raised, be recovered as sue and labour charges.

The "no effective loss" defence. Is it sound in principle ?

The Judge held that the "no effective loss" argument had no relevance because it could provide no defence to the Joint Venture's claim. The reasons for this important finding appear in a short passage of his judgment at p.131:

"....if the waiver of the joint venture's claims can, as I believe, properly be regarded as the payment of a ransom, it matters not that there may be good legal remedies for the recovery of that ransom. In seeking to render the plaintiffs' sue and labour claim valueless on the ground that the Finalisation Agreement, although valid by its proper law, would not be enforced by a Paris arbitration tribunal, the defendants are in effect seeking to discount a sue and labour expenses by the value that can be put on the remedies available to recover that expense from the party at fault. There are many factors which might affect the value of such remedies. They do not, it seems to me, affect the essential existence of the sue and labour expense or the validity of the sue and labour claim."

In so finding the Judge acceded to submissions made by Mr. Aikens, which he has repeated before us. These can best be expressed in the form in which they appear in his skeleton argument:

"The fact that the Assured might be able to try to recover the claims in an arbitration in Paris is irrelevant. There will be many occasions where the expense of averting a loss by an insured peril is recoverable by the Assured, but that does not prevent it from being recoverable from Underwriters under the policy. The important matter is the fact that the Assured has taken measures to avert or minimise the loss to insured property by an insured peril. Having taken measures to avert or minimise loss to insured property by an insured peril, the Assured is entitled to an indemnity against the cost of those measures. Indeed this submission is contrary to the whole concept of insurance against losses resulting from the acts or omissions of third parties. The insurance is taken out to avoid the assured having to pursue his remedy against third parties. But (upon payment) the insurer can pursue the remedies by right of subrogation if he wishes.

It is a general principle of marine insurance law that an assured who has sustained loss to insured goods by an insured peril may proceed directly and immediately against the insurers for the whole of his loss. On payment, insurers are thereby subrogated to the rights and remedies of the assured by the exercise of which the loss (against which the assured is insured) can be diminished. The basic principle applies equally to other areas of marine insurance law, e.g. general average sacrifice. It is not a defence open to insurers to contend that the loss (against which the assured is insured) is recoverable from, or can be diminished by the exercise of rights against, a third party. If that were the case then the whole reason for having insurance would be utterly subverted in many cases."

In support of these submissions Mr. Aikens relied upon Dickenson v Jardine (1868) LR 3 CP 639. In that case goods were insured which were jettisoned on the voyage. In due course the vessel completed her voyage, whereupon the owners of the goods became entitled to recover general average contribution from the other interests which had profited from the jettison. Instead they sued underwriters for the totality of their loss and were held entitled to recover this. Willes J. put the matter thus at p.643:

"Mr. Williams argued the case in the only way which was possible when he said that a case of jettison under the circumstances here detailed did not constitute a total loss of the goods, because in point of law the loss was less than total, by the value of the right which accrued to have compensation for part of the loss from the shipowner and the other owners of cargo. It was so in one sense, because if the vessel or any part of the cargo arrived safely in consequence of the jettison, the owners must contribute to the loss sustained by the owners of the goods so sacrificed for the general advantage; but the goods were totally lost at the time, though their owner had a contingent right to recover from certain persons a portion of their value. The result is that the owner has two remedies - one for the whole value of the goods against the underwriters, the other for a contribution in case the vessel arrives safely in port; and he may avail himself of which he pleases...."

In my judgment this decision is not in point, the Joint Venture's submissions are unsound and the Judge's decision in error.

The fallacy lies in treating the waiving of claims in the Finalisation Agreement as being for all purposes equivalent to the payment of a ransom. The Judge, in the second trial accepted that the effect of the waiver had to be evaluated having regard to the commercial value of the claims waived. This required not merely consideration of the face value of the claims, but the fact that, as the Judge found, long before the Finalisation Agreement was signed it had become apparent that recovery of sums due under the Dredging Contract could only be effected by means of obtaining an award from ICC Arbitrators in Paris and enforcing that award. In signing the Finalisation Agreement the Joint Venture acted in a way that was, prima facie, calculated to prejudice the commercial value of their rights. But in order to quantify the extent of that prejudice it was not enough, at least once the point was taken on the pleadings (as to which see below), to assume that the commercial value of their rights was totally destroyed. To suggest that, after the Finalisation Agreement, an ICC Arbitration would have been an attempt to recover rights that had been lost, is simply not accurate. The ICC Arbitration would have been an attempt to enforce the original rights and whether or not those rights had been lost would have depended on the decision of the ICC Arbitrators as to the effect of the Finalisation Agreement on those rights.

Insurance is designed to provide an indemnity against real loss, not notional loss, and in this case quantification of that loss required a realistic comparison between the Joint Venture's position before the Agreement was signed and after it had been signed. If the effect of the Finalisation Agreement on the result of an ICC Arbitration was properly before the Judge, he should have dealt with it, having regard to the points that were taken in relation to both duress and illegality.

The Judge did not make a final finding on this question, for on his approach to the "no effective loss" defence it was academic. He expressed, however, the following views:

(i) In relation to duress that Underwriters case was not open on the pleadings. He said, at p. 131:

"...there was no plea that the matter had to be looked at through the eyes of a French tribunal: rather it was pleaded that the joint venture's rights must be treated as unaffected by the Finalisation Agreement merely because English public policy would find that Agreement objectionable on the ground of duress. Therefore the pleading point seems to me a fair one. Nor is it clear to me that French public policy must be deemed to be the same as English, although in the case at any rate of moral principles which "ought to be universally recognised", there is much to be said for such a principle."

(ii) In relation to illegality that the Joint Venture's point was probably without substance since:

"....paragraph 16 of the re-re-amended points of defence does in terms say that by reason of the illegality of the Finalisation Agreement under (inter alia) Dutch and/or Swiss law

'the Plaintiffs would have been and are able to enforce their original rights under the Dredging Contract unaffected thereby.'

It may be said that this necessarily raises the issue of how a Paris arbitration tribunal would regard the consequences of such illegality."

This distinction drawn by the Judge is puzzling, for the passage to which he refers in relation to illegality is repeated in essentially identical terms in paragraph 18 of the pleading in relation to duress, as can be seen from the extracts from the pleadings set out at the beginning of this judgment.

The Points of Defence allege quite clearly that by reason of principles of law relating to illegality and duress, the Finalisation Agreement would not have posed a bar to the enforcement of the Joint Venture's rights under the Dredging Contract. English law and public policy were relied upon eo nomine . In my judgment these pleas were adequate to alert the Plaintiffs to the fact that the effect of the Finalisation Agreement on enforcement of the rights under the Dredging Contract would be in issue. Had consideration been given to this point, it should have been appreciated that this raised the possible question of how the lex curiae , namely French law, would treat the Finalisation Agreement. I say possible, because the Underwriters had not relied upon any plea of French law. They did not necessarily need to do so. Where foreign law is applicable a presumption will usually arise in an English Action that the foreign law is the same as English law. In these circumstances I am not aware that there is any obligation on the pleader to make any express reference to the foreign law if content to rely on the presumption. It is for the opposing party to raise a plea of foreign law, if it is to be alleged that it differs from English law.

Before the Judge Mr. Aikens submitted that had the effect on the Paris Arbitration been pleaded, the Joint Venture could have investigated what the position would be under French law, but that the significance of that matter did not become apparent until Underwriters' closing submissions. I consider that the Joint Venture were given adequate notice by the pleadings. It was open to the Underwriters, although they had only expressly pleaded that the Finalisation Agreement was ineffective under English law and public policy, to argue that the Court should presume that the same would be the case in France, unless the Joint Venture established to the contrary.

English law apply to principles of public policy ?

At p.131 of his judgment the Judge doubted whether French public policy was to be presumed to be the same as English public policy, although he saw the force of such a presumption in the case of "moral principles which ought to be universally recognised". It seems to me that if the presumption applies in respect of substantive rules of contract, it ought to apply " a fortiori " to principles of public policy which are capable of overriding the effect of the proper law of the contract. In any event the question is determined in favour of the Underwriters by high authority.

In Dynamit AG v. Rio Tinto Company [1918] A.C. 260 the issue before the House of Lords was the effect on contracts, some of whose proper law was English and some of whose proper law was German, of the principle of English public policy that abrogated contracts that involved trading with the enemy. In the case of the German law contracts, this principle was held to override any conflicting German law, but Lord Dunedin added at the end of his speech at p. 294:

"But were it necessary so to decide, I am clear that it is for those who say that the German law is different from the English law to aver it as a fact and to prove it. This they have not done, and that being so the German law must be presumed to be the same as the English."

Lord Atkinson at p.300 and Lord Parker at p.301 expressly endorsed this point and Lord Sumner at p.303 concurred.

At times Mr. Clarke stated that the English Court would not enforce a contract governed by foreign law which was objectionable on grounds of public policy. At other times he stated that the English Court would not recognise the effect of such a contract. An analysis of the "no effective loss" defence reveals, I believe, that there is an important distinction between these two propositions and that only the latter can assist Underwriters.

The position envisaged is one in which the Joint Venture are seeking to enforce rights they claim to enjoy under the Dredging Contract, which is governed by Iraqi law. GEIP raise by way of defence the plea that those rights do not exist because they have been discharged by the Finalisation Agreement, which is valid by Iraqi law. If the Court accepts that plea, it does not, by so doing, enforce the Finalisation Agreement. It recognises the effect of the Finalisation agreement. The importance of this distinction will become more apparent shortly when I come to consider the effect of duress under English law and English public policy.

It was common ground that, although evaluating the prospects that claims would succeed before the Paris Arbitrators, whether before or after the Finalisation Agreement, fell to be approached on a loss of a chance basis, it was to be assumed that the Arbitrators would reach their decision in accordance with the relevant law. That common ground has since been underpinned by the decision of this Court in McFarlane v. Wilkinson , The Times 13th February 1997. Thus, in relation to duress, the question for this Court is simply this: applying English law on the presumption that it is the same as French law, would the duress that occurred in this case render the waiver of the Joint Venture's claims ineffective as a defence to their claims under the dredging contract? It is common ground that the duress in question was not merely duress of goods, but duress of persons who were threatened with being used as human shields.

English law in relation to duress is not as clear as one might wish, as is demonstrated by the following passage from Rule 182 of the 12th Edition of Dicey & Morris on Conflict of Laws, at p.1279:

"A contract may also be void where it is not its substance, but the circumstances in which it was made, which render it incompatible with English ideas of justice and morality. In Kaufman v Gerson [1904] 1 KB 591 (C.A.) it was held that it was contrary to public policy to enforce a contract which had been entered into as a result of coercion, even though the contract was made in France between French parties and was intended to be performed in France, and even though (it seems) the contract was valid by French law, the law governing the contract. It was said to be a universal principle of English law that the courts would not enforce any contract brought about by coercion, and that to enforce the contract would be contrary to the essential moral interests of the community. Today, however, the prevailing view is that whether a contract is void or voidable on the ground of duress depends on the law governing the contract: see Dimskal Shipping Co. S.A. v International Transport Workers Federation [1992] 2 A.C. 152, 168: but no doubt there may be acts of coercion or duress (or fraud) which are so shocking that the court will not enforce the contract irrespective of whether it is valid under its governing law."

Underwriters rely upon Kaufman v Gerson and the Joint Venture rely on Dimskal Shipping . It is necessary to try to reconcile the two.

In Kaufman v. Gerson the Plaintiff, who was domiciled in France sued the Defendant who was domiciled in France on a contract governed by French law. The Defendant's husband had misappropriated funds of the Plaintiff and under the agreement the Defendant agreed to make good these funds in consideration of the Plaintiff refraining from initiating criminal proceedings against her husband. The Defendant claimed, inter alia, that the contract should not be enforced because it had been obtained by duress. This provided no defence under French law. Wright J. at first instance held for the Plaintiff. He said (p.596):

"The second ground on which the Contract in the present case is impeached is that it was obtained by the undue influence or duress of a threat to prosecute the husband for crime. If this objection is to be regarded as based on considerations of public policy, the same answer applies as in the case of the first objection. It seems, however, to be more in the nature of an objection to the proof of consent of the defendant to the contract, a consent induced by duress or undue influence being by English law treated as no consent. If this be the correct view, it would seem that the law of the country in which the contract is made and is to be performed and in which the parties are domiciled, ought to prevail, unless there is such duress as must be considered to avoid the contract under any but unreasonable and uncivilized institutions of law - a description which would be applicable to such a case as that of consent obtained, e.g., by physical torture or by the use of drugs, but which cannot properly be applied to this case."

In reversing the decision Collins M.R. said at p.597:

"The whole point of the judgment appears to be contained in the last few lines. The Judge seems to admit that, if the agreement had been obtained by the threat of physical violence, e.g., by threatening the defendant with a pistol, or something of that kind, the case would be brought within a general principle, upon which the Court would be entitled to refuse to enforce the contract, whatever might be the law of any other country on the subject; and it was not denied by the plaintiff's counsel that this would be so. But, if so, what does it matter what particular form of coercion is used, so long as the will is coerced? Some persons would be more easily coerced by moral pressure, such as was exercised here, than by the threat of physical violence."

He went on to hold at p.598:

"...if the plaintiff is setting up a contract obtained in a manner which, in the case of an English contract, the law deems contrary to morality, an English Court will not help him to enforce it, whatever may be the law of the country in which the contract was made."

The other two members of the Court agreed that these observations applied to the facts of the case.

Dimskal involved a different type of duress: economic duress in the field of labour relations, an activity the lawful bounds of which are regulated by statute in many countries. The Plaintiff shipowners had been induced by industrial action against a vessel in Sweden, which was lawful under Swedish law, to undertake to enter into written agreements with the ITF under which, inter alia , more generous agreements were to be entered into for payment of the crew, back-dated and back pay was to be paid under these. One of the documents signed provided that the undertaking was to be governed by English law. The Plaintiffs purported to avoid the agreements for duress and to recover the monies that they had paid under them. It is important to note that the parties agreed for the purposes of the litigation: (1) that all the agreements were governed by English law; (2) that whether the agreements had been avoided for duress fell to be determined according to English law.

The issue essentially was whether the English court would hold that duress entitled the party subject to that duress to avoid the contract, notwithstanding that in the country where the duress occurred it was legitimised. I find it necessary to quote at some length from the leading speech of Lord Goff, beginning at p.167:

"I start from the generally accepted proposition, embodied in rule 184 set out in Dicey & Morris, The Conflict of Laws, 11th ed. (1987), vol.2, p.1213, that the material or essential validity of a contract is governed by the proper law of the contract, which in the present case is English law. Rule 184 is one of a ground of rules (rules 181-187) concerned with the scope of application of the proper law of a contract. It is expressed to be subject to two exceptions. The first exception asserts that a contract is generally invalid in so far as its performance is unlawful by the law of the place of performance; with that exception we are not, in my opinion, here concerned. The second (which is not strictly an exception to rule 184) concerns the primacy of what used to be called the distinctive policy of English law over any provision of foreign law, in so far as such provision might be relevant to the validity or invalidity of a contract; to that topic, I will briefly return in a moment.

Accordingly in the present case we look to English law, as the proper law, to discover whether the contract may, as a matter of principle, be affected by duress and, if so, what constitutes duress for this purpose; what impact such duress must have exercised upon the formation of the contract; and what remedial action is available to the innocent party. We know, of course, that by English law a contract induced by duress is voidable by the innocent party; and that one form of duress is illegitimate economic pressure, including the blacking or the threat of blacking of a ship. I can see no reason in principle why, prima facie at least, blacking or the threat of blacking a ship should not constitute duress for this purpose, wherever it is committed - whether within the English jurisdiction or overseas; for in point of fact its impact upon the contract does not depend upon the place where the relevant conduct occurs.

It follows therefore that, prima facie at least, whether or not economic pressure amounts to duress sufficient to justify avoidance of the relevant contract by the innocent party is a matter for the proper law of the contract, wherever that pressure has been exerted. Here, of course, the proper law is English law. Moreover in the present case there was at the relevant time no applicable statutory provision of English law which required that blacking or the threat of blacking should not be regarded as duress. So, unencumbered by any such provision, we are left simply with an English contract which is voidable by the innocent party if the formation of the contract has been induced by duress in the form of blacking or the threat of blacking a vessel. The question then arises whether there is any basis in law for rejecting this simple approach, on the ground that the conduct in question was lawful by the law of the place where it occurred, viz. Swedish law.

Before your Lordships, it was the primary submission of Mr. Burton on behalf of the I.T.F. that in relation to any duress abroad, in English law the court should, subject to overriding questions of public policy, look to the law of the place of duress to test its lawfulness or legitimacy. I of course accept that, if Mr. Burton's submission is correct, it must be subject to the qualification that, if it was inconsistent with the distinctive policy of English law to treat the relevant conduct as lawful, the English courts (consistently with the second exception to rule 184 in Dicey & Morris, The Conflict of Laws) would refuse to do so. But the question is whether Mr. Burton's submission is correct. I have to say that I know of no authority which supports his submission which, if correct, would require the recognition and formulation of a fresh exception to rule 184 in Dicey & Morris."

I would make the following comments about this passage:

(1) English law was agreed to be the proper law of the contract, so no question arose of principles of English public policy overriding the proper law of the contract;

(2) Lord Goff treats this type of duress not as a matter governed by overriding public policy but as an activity whose legitimacy and effect can properly be determined under the proper law of the contract.

(3) Lord Goff recognises the potential applicability, in the context of a case of duress, of "the primacy" over foreign law of the "distinctive policy of English law".

Does this then mean, as Dicey and Morris suggest, that there are two classes of duress - duress that is so shocking that the English Court will not enforce the contract irrespective of whether it is valid under its governing law, and a lesser form of duress, whose legitimacy and effect falls to be determined by the proper law of the contract? Mr. Aikens conceded implicitly that this must be so in that he submitted that Dimskal had not overruled Kaufman v. Gerson , though it might have narrowed its effect. I think that he was right to make that concession. The duress in Dimskal was not of such a type as to "violate some moral principle which, if it is not, ought to be universally respected". It would be strange if duress of that type were to be rendered acceptable to the English Court by virtue of the effect of a choice of law clause induced by the same duress, or because the law of the country with which the contract induced by duress had the closest connection regarded the duress as acceptable.

My conclusion is that there remains a class of duress so unconscionable that it will cause the English Court, as a matter of public policy, to override the proper law of the contract.

Two questions remain to be considered: (1) Did the duress in the present case fall into that category? (2) What was the legal consequence of that duress?

So far as the first question is concerned, Mr. Aikens submitted this would have required the Arbitrators to make an assessment of the relevant facts. The Joint Venture was entitled to be compensated on the basis of the possibility that, notwithstanding the duress, the Arbitrators might have held the Finalisation Agreement effective. This fell to be assessed on the "loss of a chance" basis.

I was not persuaded by this submission. The basic facts as to the duress are not in issue. However much the effect of Kaufman v. Gerson may have been narrowed by Dimskal I do not consider that there is any chance that, under English law, the duress to persons that was imposed in this case would be considered a matter for the approach adopted in the latter case rather than the former. The threat to use a large number of personnel as human shields was about as cogent and unconscionable a form of duress as one can imagine.

Chitty on Contracts, 27th ed. paragraph 7-022 states:

"Despite earlier doubts, it now seems clearly established that a contract entered into under duress is voidable and not void; consequently a person who has entered into a contract under duress may either affirm or avoid such contract after the duress has ceased."

It is to be noted that the cases cited by Chitty which have resolved the doubt on this point are cases of economic duress, which would seem to fall into the category to be dealt with according to the proper law of the contract - Dimskal.

Where duress is dealt with under the proper law of the contract, no problem arises. If the proper law is English law, English principles of avoidance and affirmation will apply. Where the proper law is a foreign law, then all incidents of that law will fall to be considered in order to determine the effect of duress.

The position is less simple where the English Court is faced with a contract that has been induced by duress of a type which is offensive to English public policy. Mr. Clarke's submission was that a challenge made in the English proceedings to the validity of the contract procured by duress would constitute avoidance. He submitted that that, in effect, is what occurred in Kaufman v. Gerson .

I have difficulty in accepting that the English Court can hold that a party has avoided a contract governed by and valid under a foreign law in circumstances where the foreign law affords no right of avoidance, nor is there any suggestion that this was the approach of the Court, or its implicit effect, in Kaufman v. Gerson . In that case the Plaintiff was attempting to enforce the contract in question and the reaction of the Court was that it would not help him to do so, endorsing the statement at p.260 of the 3rd Edition of Westlake on Private International Law that:

"Where a contract conflicts with what are deemed in England to be essential public or moral interests, it cannot be enforced here, notwithstanding that it may have been valid by its proper law."

I am not aware of any precedent for the English Court being asked on grounds of public policy not to recognise the effect of a contract governed by and valid under a foreign law, when that effect was being relied upon as a defence to a claim under another contract governed by the same law, or indeed in any other circumstances. There have, however, been cases where the English Court has refused, on grounds of public policy, to recognise the effect of legislation of a country where that legislation has been relied on by way of defence to a claim under a contract governed by the law of that country. In re Fried Krupp A-G [1917] 2 Ch. 188 concerned a claim under a contract governed by German law. Under German law the claim would normally have carried interest. However a German Ordinance had purported to extinguish the right of non-German parties to contracts to recover such interest from German parties. Younger J. refused to recognise the effect of this Ordinance because, inter alia , it was "not conformable to the usage of nations", following Wolf v. Oxholm (1817) 6 M & S 92. In In re Helbert Wagg [1956] 1 Ch. 323 at 351, Upjohn J. remarked that, while effect must be given to foreign exchange control legislation where the law of the foreign State is the proper law of the country, this did not apply to a law passed ostensibly to protect the economy of the country but in reality with some object not in accordance with the usage of nations.

It seems to me that it is a more drastic step for the English Court to disregard the effect of legislation of the State whose law governs the contract than to disregard the effect of a contract governed by the same law. The latter point might well have arisen in Kahler v. Midland Bank [1950] A.C. 24 where the Plaintiff's rights were adversely affected by a contract governed by the law of Czechoslovakia under which he had been compelled under duress to deposit securities with a Czech Bank. He did not seek to challenge the validity of that contract, it seems for tactical reasons, but their Lordships gave some indications that he might successfully have done so and Lord Reid, who dissented, said at p.45 that he had no doubt that this agreement was void having been obtained by duress.

I would not consider these authorities as a firm foundation for holding that the English Court will automatically refuse to recognise the effects of a valid foreign law contract that has been procured by duress of a type which offends against English public policy. I am, however, satisfied that they justify the conclusion that the English Court would not recognise the effects of the Finalisation Agreement. That agreement was not a contract under which meaningful consideration moved from both sides. It was an agreement under which the Joint Venture were coerced into waiving their legal rights under the Dredging Contract in order to procure the release of their property and of their personnel who were being held as hostages. In short, it was expropriation.

I do not believe that any civilised system of jurisprudence would recognise the effect of such an agreement. Iraqi law itself would normally have permitted the Joint Venture to avoid the agreement within three months of its conclusion. But the duress was compounded by Law No.57 and the fact that the effect of this and of the other consequences of Iraq's invasion of Kuwait was such that the rule of law in Iraq no longer prevailed.

I have thus concluded that, as a result of principles of English public policy, the GEIP could not successfully have invoked the Finalisation Agreement as a defence to a claim by the Joint Venture for the sums due under the Dredging Contract.

For these reasons I consider that the Judge should have held that the signing of the Finalisation Agreement did not result either in the loss or reduction of the Joint Venture's prospects of obtaining an ICC Award in Paris against GEIP for such sums as were due under the Dredging Contract. I would add that, although this conclusion is founded on a presumption that a French tribunal would adopt a similar approach to the duress in this case as the English Court, that presumption does not strike me as artificial or unreasonable.

Underwriters contend that, quite apart from any question of duress, Paris Arbitrators would have refused to recognise the effect of the Finalisation Agreement in consequence of principles of law relating to illegality - those principles being presumed to be the same in France as in England. The argument in support of this submission has differed from that advanced before the Judge, for it has been adapted to accommodate findings made by the Judge which are not now challenged. I summarised these findings at the outset of my judgment, I must now set them out in a little more detail.

(1) Dutch legislation had enacted Sanctions Rulings prohibiting, inter alia, the transfer of funds from Holland to the Republic of Iraq, without Ministerial exemption.

(2) Although the Joint Venture had informed the Dutch Government of the proposed transfer of funds from the Amro Bank and received tacit approval, no formal Ministerial exemption was obtained.

(3) In these circumstances, the transfer of funds from the Amro Bank which were destined for Iraq infringed Dutch law.

(4) The Joint Venture neither intended to break Dutch law, nor were reckless in that regard.

(5) The Joint Venture's breach of Dutch law was not criminal, having regard to the defence of " error juris ".

(6) The effect of the breaches of the Sanctions Rulings was to render the Finalisation Agreement illegal, null and void under Dutch law.

Swiss law is relevant in that 50% of the funds withdrawn from the Amro Bank were remitted to Switzerland. The Judge made the following findings in relation to Swiss law:

(1) Swiss legislation to give effect to the UN sanctions prohibited, inter alia, transfers to a Bank in Switzerland for the benefit of Iraq, unless an exemption was obtained on the ground of hardship.

(2) In transferring funds, knowing as they did that they were for the benefit of Iraq, the Joint Venture infringed this legislation.

(3) The Joint Venture could probably have obtained a retroactive exemption on the ground of hardship.

(4) The Joint Venture neither intended to break Swiss law, nor were reckless in that regard.

(5) In these circumstances, the Joint Venture was not guilty of criminal conduct under Swiss law.

(6) The infringement of Swiss law had the effect of rendering the Finalisation Agreement null and void under Swiss law.

Underwriters contend that the Judge should have made the following further findings of fact: GEIP knew that performance of the agreement was likely to infringe sanctions legislation in the places of performance and either intended that it should do so or were reckless whether it did or not.

As to this, the Judge observed at p.217 that the question of knowledge and intention looked at from the Iraqis' point of view was never argued and added:

"If it had been, it might have been submitted that the Iraqi's did not know and intend that there would be a breach of Dutch or Swiss law, even if they suspected that there would be."

The Judge appreciated that these facts raised difficult points of law on which he had not been addressed, and observed that he could not resolve them on his own.

Mr. Clarke submitted that, so far as the facts were concerned, the knowledge and intent of both parties was in issue, and that the Judge could and should have made independent findings in relation to GEIP's position. In my judgment Mr. Clarke is correct to submit that GEIP's knowledge and intent were in issue. At the same time I have some sympathy with the Judge in not dealing separately with GEIP, in circumstances where no submission seems to have been made that their position was of independent significance. Nonetheless I think that it is open to Mr. Clarke to advance before us the arguments that he has, both as to the facts and as to their consequences.

As to the facts, despite Mr. Aikens' valiant submissions to the contrary, I think that on the evidence it is plain as a pikestaff that the Iraqis appreciated that it was at least likely that if they were to get their hands on the money in the Amro Bank, sanctions legislation would have to be breached. The history of negotiations in relation to the manner in which the funds would be transferred, involving, as it ultimately did, the presentation of false documentation to the Amro Bank, permits of no other conclusion. While I do not believe that there is any basis upon which the Judge could have found that GEIP had actual knowledge of the precise sanctions legislation prevailing in Holland and Switzerland, although they may well have done so, there can be no doubt that they were recklessly indifferent as to whether or not there were breaches of Dutch and Swiss law of the type that occurred.

Mr. Clarke relied upon two separate principles of English law in relation to illegality, which he expressed thus:

(1) A contract will be invalid if and insofar as it requires or necessarily involves performance which is unlawful by the place of performance: Ralli Brothers v. Compania Naviera Sota y Azmar [1920] 2 K.B. 287; Regazzoni v. Sethia [1958] A.C.301.

(2) A contract will be invalid if, at the time of its conclusion, the real object and intention was for it to be performed in a way which was unlawful under the place of performance: Foster v. Driscoll [1929] 1 K.B. 470.

Mr. Clarke recognised that he had some difficulty bringing the case within the first principle, having regard to the Judge's finding that, by obtaining exemptions, the Joint Venture could have performed the Finalisation Agreement without infringing the law of either Holland or Switzerland. Accordingly he based most of his argument on the second principle. There also he was unable to argue that this case was on all fours with Foster v Driscoll . In that case both parties had intended the contract to be performed in a manner that both parties knew would infringe the law of the United States. In this case, the Judge found that the Joint Venture were unaware that they would infringe either Dutch or Swiss law. Mr. Clarke sought to overcome this difficulty by two alternative routes.

(i) He argued that it sufficed if both parties intended to perform the contract in a manner which violated the law of a friendly foreign state, even if they were unaware that it would do so.

(ii) He argued that as, unquestionably, Iraq intended to violate sanctions legislation, the principle in Foster v. Driscoll would have prevented Iraq from relying on the Finalisation Agreement before the ICC Arbitrators.

Neither of these propositions is self-evidently correct, and much time and citation of authority were involved in their development before us. I do not intend to explore these matters, for I consider that the short answer to Mr. Clarke's points lies in, what is in this instance, the critical distinction between refusing to enforce and refusing to recognise the effect of a contract.

Mackender v. Feldia [1967] 2 Q.B. involved an issue as to jurisdiction, but in the course of his judgment, at p. 601, Lord Diplock made a valuable analysis of the law of illegality:

"English courts will not enforce an agreement, whatever be its proper law, if it is contrary to English law, whether statute law or common law; nor will they enforce it even though it is not contrary to English law if it is void for illegality under the proper law of the contract. Furthermore, subject to one exception, the English courts will not enforce performance or give damages for non-performance of an act required to be done under a contract, whatever be the proper law of the contract, if the act would be illegal in the country in which it is required to be performed. The exception, the precise scope of which is unsettled and need not be determined in the present case, is where the illegality is a breach of a revenue or fiscal law of a foreign state.

But unenforceability and voidness are not the same concept. To analyse the difference it is convenient to distinguish between an "agreement", which requires no more than a consensus ad idem between the parties, and a 'contract', which is an agreement plus something more. Where an agreement is wholly unenforceable because it is contrary to English law, it may, if the proper law of the agreement is itself English law, accurately be said to be void as a contract, that is, not to be a contract at all. For a contract is a species of agreement which gives rise to legally enforceable rights and duties; and an agreement which is contrary to English law, if that is also its proper law, gives rise to none. But if an agreement, though contrary to English law, e.g. a marriage brokage contract, is not illegal by its proper law, it cannot properly be said to be void and thus not a contract at all. It does give rise to rights and duties which are legally enforceable elsewhere than in England. It is a contract, but one which is unenforceable in the English courts. A fortiori a contract which is not illegal by its proper law, but requires for its performance an act to be done which would be illegal under the law of the country where the act is required to be done, is not void. It is a contract which is, in a particular respect only, unenforceable in the English courts. This is to be contrasted with an agreement which under its foreign proper law is illegal and incapable of giving rise to legally enforceable rights and liabilities under that law. Since the foreign proper law must be looked to for the legal affects of the agreement, such an agreement may properly be said to be void, i.e., not to be a contract at all."

I turn to consider the effect of this passage in the present context. To do so it is helpful and, I believe appropriate, to remove from the picture considerations of duress, which merely make it more difficult to focus clearly on the issues relating to illegality. Assume, then, that the Finalisation Agreement had been an arms length agreement under which each party had waived claims arising under the Dredging Contract and had agreed that the deposit at the Amro Bank would be recovered and divided in accordance with the agreement, but in a manner which, as Iraq but not the Joint Venture intended, would violate Dutch and Swiss law. The agreement was executed and the deposit divided as agreed. Then assume that the Joint Venture brought a claim in the English Court for sums alleged to be due under the Dredging Contract. Assume that GEIP in Defence contended that nothing was due; that their liability had been discharged under the Finalisation Agreement. Such a stance would not constitute inviting the English Court to enforce the Finalisation Agreement. It would simply be inviting the English Court to recognise its effect. I can see no basis upon which the English Court could decline to do so. The principle of comity whereby the Court will not enforce a contract that involves breach of the law of the place of performance does not extend to requiring the Court not to recognise the effect of a contract that has been performed in such a manner.

For these reasons I reject Mr. Clarke's submission that either of the principles on which he relied would have prevented GEIP from relying on the Finalisation Agreement before the ICC Arbitrators.

Mr. Clarke had an allied submission in relation to illegality. He submitted that reliance by GEIP on the Finalisation Agreement as a defence to the Joint Venture's claim would be precluded by the principle in Bowmakers Ltd. v Barnet Instruments [1945] K.B. 65, as applied in Tinsley v. Milligan [1994] 1 AC 340, which renders a claim founded on an illegal contract unenforceable. This founders for the same reason. By relying by way of defence on the Finalisation Agreement, GEIP would not have been founding a claim upon it.

Mr. Clarke further sought to rely upon the principle in Lemenda Ltd v. African Middle East Co. Ltd [1988] 1 Q.B. 448 where the Court refused to enforce an agreement to pay for the use of personal influence to procure an oil supply agreement on the ground that it offended against the public policy both of England and of the place of performance, although it was not illegal by the law of the latter. This argument is a further variation on the same theme, and fails for the same reason. In Lemenda the Court was concerned with whether to enforce a claim under the agreement, not whether to recognise the effect of an executed agreement.

For these reasons, which differ somewhat from those of the Judge, I consider that he was correct to hold that principles of the law of illegality could not properly be invoked to demonstrate that the Finalisation Agreement caused the Joint Venture no effective loss.

I now turn to the respects in which Underwriters rely upon illegality as a direct defence to the Joint Venture's claim.

This Section provides:

"There is an implied warranty that the adventure insured is a lawful one, and that, so far as the assured can control the matter, the adventure shall be carried out in a lawful manner."

Mr. Clarke's submission was that both the conclusion of the Finalisation Agreement and the payments made under it were parts of the insured adventure, that each was illegal and that the conclusion of the agreement, or if that was not illegal, the subsequent withdrawal of funds from the Amro Bank under it, discharged Underwriters from any further liability under the policy. There are many reasons why I consider this submission to be unsound and I propose to state them briefly.

(1) Contrary to the Judge's finding, Mr. Aikens persuaded me that neither the conclusion of the Finalisation Agreement nor the payments made thereunder constituted part of the insured adventure. The insured adventure was the marine adventure involving the Joint Venture's dredgers, and the perils insured against arising from that adventure were those which might threaten the vessels. Arrangements for the payment of money fell outside the scope of the insured adventure.

(2) The warranty that the adventure shall be lawful and carried out in a lawful manner probably refers to English law, not foreign law. This seems implicit from Redmond v. Smith (1844) and other early cases upon which the Section seems to be based, but it is not necessary to express a final view on this question and I do not do so.

(3) The conclusion of the Finalisation Agreement was not an unlawful act under English law, nor under the law of Iraq, where that act was performed, nor indeed under any other law.

(4) If the conclusion of the Finalisation Agreement had been unlawful within the meaning of the warranty, the Joint Venture would have been protected by the proviso "so far as the assured can control the matter".

Section 78(1) states that the assured may recover any expenses "properly incurred" pursuant to the sue and labour clause. Mr. Clarke contended that the illegality attending the performance of the Finalisation Agreement meant that the consequences of that agreement could not constitute expenses "properly incurred". I agree with Mr. Aikens that the word "properly" does no more than underline the fact that the expenses must be reasonably incurred to be recoverable. Mr. Clarke can derive no assistance from that provision.

Mr. Clarke contended that the Joint Venture's claim was tainted by the illegality attending the conclusion of the Finalisation Agreement and the payments made pursuant to it. This contention could add nothing to the other points that Mr. Clarke sought to make in respect of illegality. The conclusion of the Finalisation Agreement was not unlawful and no claim was made in relation to the payments. This has some relevance in relation to the next section of this judgment.

Mr. Aikens submitted that, if the Judge were wrong in concluding that it was relevant to consider the extent to which the Finalisation Agreement had prejudiced the Joint Venture's prospects of obtaining an arbitration award, there would be a further area of enquiry to be undertaken. It might well be that the Finalisation Agreement had rendered it unreasonable for the Joint Venture to pursue the Arbitration. Mr. Aikens referred to threats to the life of Mr. Huisman, the Project Manager of the Joint Venture and to the loss of the security at the Amro Bank as possibly material factors. As to the former, I cannot see how the conclusion of the Finalisation Agreement carried the consequence that the pursuit of an arbitral award would imperil Mr. Huisman. As to the latter, I can see that the loss of the security might well have rendered it unreasonable to pursue an arbitration if the security were the only realistic source of recovery under an award. But that was not the Joint Venture's case. It would have been open to the Joint Venture to allege that the Finalisation Agreement caused them prejudice in ways other than the effect it had in law, but they did not do so and it is too late for them to attempt to do so now.

The one clear prejudice to the Joint Venture that flowed from the Finalisation Agreement was the loss of the 24 million Guilder security at the Amro Bank. It would have been open to them to claim that loss as, in effect, the ransom payment. But had they done so, this would have involved conceding that there was no realistic alternative prospect of enforcing an award for a larger sum. It would also have meant that they were confronted by a much stronger case that their claim was tainted by illegality. No doubt for these reasons, they did not advance such a claim, but contended instead that they would have been able to enforce the totality of any award that they might have obtained. Indeed, Mr. Clarke drew our attention to a passage in the Joint Venture's written submissions in the Court below in which they emphasised that:

"The court must not lose sight of the fact that the Plaintiffs do not claim for the DFl 24 million that has been paid into the accounts of the Central Bank of Jordan."

I fear that the Joint Venture may have backed the wrong horse when the other would have brought them home a more limited prize. Mr. Clarke, who at the start of the appeal was prepared to seek to persuade us that, on the evidence, the 24 million Guilders represented the only prospect that the Joint Venture had of enforcing an award, prudently lowered that particular sail when he saw which way the wind was blowing.

The Judge held at p. 267 of his judgment:

"...at a time when there was danger to both personnel and fleet, the joint venture negotiated, under duress, a price for the safety of both. In these circumstances it seems to me that, following the language of section 78(3) of the Act and the reasoning, so far as it goes, in Cunard v Marten , I should find that the waiver was paid for the purpose of averting a loss not covered by the policies, as well as for preserving the fleet. In my view, and in the language of the plaintiffs' own witnesses, there was "one package" with a "dual purpose".

What effect are those findings to have on the quantum of any sue and labour recovery? It is of course impossible to put a financial value on the safety of the personnel. It seems to me, however, that the only apportionment which in justice I can make is to ascribe, however anomalously, an equal value to the interests preserved by that inextricable dual purpose. Alternatively, I should recognise, whether as a reflection of value or not, that the joint venture's waiver was inspired by two essentially equal and inextricable purposes. In my judgment therefore the plaintiffs should recover only 50% of the ultimately ascertained value of the waived claims."

Section 78(3) of the Act provides that:

"expenses incurred for the purpose of averting or diminishing any loss not covered by the policy are not recoverable under the suing and labouring clause."

In Cunard Steamship v. Marten [1902] 2 KB 624 at 629 Walton J. observed, obiter:

"Again, the suing and labouring clause undoubtedly contemplates and implies that, whilst the underwriters are to bear their share of any suing and labouring expenses, they are to bear such share only in the proportion of the amount underwritten to the whole value of the property or interest insured. If the assured has insured himself or goods to the extent of one-half only of the value of his property or interest in the goods insured, he, in respect of each and every item of suing and labouring expense, recovers one-half and bears one-half himself. This is the perfectly well-established basis of every adjustment of suing and labouring expenses."

I do not believe there to be any doubt that where ship or cargo is under-insured, sue and labour expenses will only be recoverable in the same proportion that insured value bears to actual value. In such circumstances, it is possible arithmetically to apportion the expenses and thus identify, with only a modest degree of artificiality, that portion of the expenses incurred for the benefit of the insured, as opposed to the uninsured, property.

It is also true that lives can be the subject of insurance, and that it is possible to insure against liability to pay life salvage. Those who are interested in ship and cargo do not usually, however, have insurable interests in the lives of crew or passengers. It must frequently be the case that, just as in the case of salvage and general average, sue and labour expenses are incurred, in part, for the benefit of lives which are also at risk as a result of the insured peril. Salvors who save lives as well as property have their award against ship and cargo enhanced to reflect that fact, and Underwriters of ship and cargo between them bear the whole cost - The Bosworth No 3. [1962] I Lloyds Rep. 483. Never before has it been suggested that liability under the sue and labour clause should be reduced to reflect the fact that the exertions in question have been motivated in part by a desire to save lives. In such circumstances, as the Judge recognised, it is impossible to carry out an arithmetical apportionment between property and lives at risk. The reality is that the entirety of the expenditure is directed to two objectives which are different in kind. Preservation of life cannot be equated with preservation of property. Provided that the expenses can reasonably be said to have been incurred for the preservation of the property, it does not seem to me either sound in principle or desirable that the assured should be penalised if they were sufficiently concerned for lives at risk to have been concerned to save not only their property but those lives.

For these reasons I consider that the Judge should have held the Joint Venture entitled to recover the full cost of entering into the Finalisation Agreement rather than only half that cost. As the Joint Venture failed to establish that there was any cost at all, the success of the Cross Appeal can do no more than rub salt in the wound.

Order: Appeal allowed; cross-appeal dismissed; costs be for appellants;

minute of order to be drawn up and submitted; application for leave

to appeal to the House of Lords refused.