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IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
OF JUSTICE COMMERCIAL COURT
(The Hon. Mr. Justice David Steel.)
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 20 July 2000.
B e f o r e :
LORD JUSTICE ROCH
LORD JUSTICE TUCKEY
and
LORD JUSTICE MANCE
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|
(1)
GROUPAMA NAVIGATION ET TRANSPORTS
(2) CONTINENT SA
(3) MUTUELLES DU MANS
(4) ZURICH INTERNATIONAL FRANCE SA
(5) GIE GENERALI TRANSPORTS
(BODIES CORPORATE)
|
Claimants/
Appellants
|
|
-
and -
|
|
|
CATATUMBO
SEGUROS (a body corporate)
|
Defendants/
Respondents
|
-
- - - - - - - - -
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - -
MR. DAVID DONALDSON QC (instructed by Messrs Stephenson Harwood,
London EC3N 8SH) for the Claimants/Appellants
MR. JONATHAN HIRST QC and MR. RICHARD LORD (instructed by Messrs Norton
Rose, London EC3A 7AN) for the Defendants/Respondents
- - - - - - - - - - - - - - - - - - - - -
Judgment
As Approved by the Court
Crown Copyright ©
LORD JUSTICE TUCKEY:
Introduction.
1. Under English law breach of warranty in a contract of insurance discharges
the insurer from liability for the loss in question whether or not the breach
causes the loss. Under many other laws the insurer will only avoid liability
if the breach is causative of the loss. In Vesta -v- Butcher
[1989] AC 852 a contract of insurance and a facultative reinsurance, under
which part of the original risk was reinsured, contained warranties in
identical terms. The House decided that the warranty in the reinsurance, which
was governed by English law, should be construed so that it had the same effect
as the warranty in the insurance which was governed by Norwegian law which
required the breach to be causative of the loss.
2. The question in this case is whether the same applies where the warranty is
stated in the reinsurance itself and has not simply been incorporated into it,
is in similar but not identical terms to the warranty in the insurance and has
not been broked as part of an insurance and reinsurance package as was the case
in Vesta. It arises on appeal from David Steel J. who applying
Vesta held on a trial of preliminary issues that it did. [2000]
1 Lloyds Rep. 266.
The Contracts.
3. By the insurance the Respondent, a Venezuelan insurance company (" the
Insurer") provided hull and machinery cover to its Venezuelan insured for a
fleet of vessels which included the coal barges Guasare xi and Guasare xii
working on Lake Maracaibo. The cover which was for one year was extended from
20 June to 20 September 1997. The appendices to the policy (written in
Spanish) which extended the cover said:
3. Clauses and Conditions
a. American Institute Hull Clause 02.06.77 .........
d. Seaworthiness guarantee in all vessels on the part of the insured
during the whole insurance period.
e. Guarantee of maintenance of class according to the ABS (American Bureau
of Shipping) Standards and Rules.
The American Institute Hull clauses provide that :
....... if the class (of the vessel) be changed, cancelled or withdrawn then,
unless underwriters agree thereto in writing this policy will automatically
terminate ........
4. By the reinsurance which was written facultatively in the London market the
Appellant companies ("the Reinsurers") agreed to reinsure the Insurers against
50% of their liability in respect of the two vessels. The reinsurance was
written on a slip, the relevant terms of which were :
FORM : MAR 91 (Slip Policy).
PERIOD : 12 months from 20 June, 1997 as original.
CONDITIONS : All terms, clauses, conditions, warranties .... as original
and to follow all decisions, settlements, agreements of same in
every respect......
CESAM Claim Handling Procedu ....
Warranted existing class maintained.
Warranted maximum lifting capacity not exceeded.
INFORMATION : Original Conditions (Say) :-........
A number of the terms of the insurance are then referred to but not those
relating to class. CESAM were the Reinsurers' claims handling agents.
5. No further information is available about how the reinsurance came to be
placed other than the fact that it was broked to the Reinsurers by London
market brokers. The slip is dated 24 June 1997 but was scratched by the
Reinsurers' French underwriting agents on 30 June 1997. Since ultimately the
outcome of this case depends upon the proper construction of the reinsurance,
it is unfortunate that we do not know more about its placement. For example it
is asserted on behalf of the Reinsurers that they knew nothing more about the
terms of the insurance than the information given on the slip and that they did
not have or see a copy of the policy, but there was no evidence about this
before the Judge.
The Loss.
6. On about 27 August 1997 the two vessels were badly damaged in a storm. The
Insured claimed more than US$5m. for repair costs. On investigation of their
claim it emerged that although the vessels had been regularly surveyed, they
were not classed at the time of the casualty or at any time during the period
of cover. However, the Insurers said that they were minded to pay the claim
because under Venezuelan law the cover was probably not affected by the breach
of warranty because it was not causative of the loss. For the purposes of this
appeal we are to assume that this is the position. However these matters are
still in issue in proceedings in Venezuela between the Insurers and their
insured.
7. In these proceedings the Reinsurers ask for a declaration that whatever the
position is under the insurance they were discharged from liability because of
the failure to maintain the vessels in class in breach of the warranty in the
reinsurance slip. The Insurers contend that this warranty should be construed
as having the same meaning and effect as the similar warranty in the
insurance.
The Judgment Below.
8. Before the Judge it was common ground that English law was the proper law of
the reinsurance. The Reinsurers contended that the warranty in the reinsurance
was free-standing: in other words that the reinsurance cover was not
back-to-back with the insurance cover. The Judge rejected these submissions.
Of the express warranties he said :
As regards the warranty "maximum lifting capacity not exceeded" there is
nothing inconsistent with the underlying warranty of seaworthiness which
presumably encompassed overloading. Equally there is no conflict between the
warranties of "existing class maintained" and the guarantee of maintenance of
ABS class. Indeed both the warranties in the reinsurance, far from restricting
the scope of the cover, are more lax than the scope of the underlying
warranties.
9. He recognised that on one view this made the warranties mere surplusage but
said that at least this precluded any argument as to whether the warranties in
the insurance were incorporated in the reinsurance and as to the meaning of
those warranties. In short he said there was nothing in the reinsurance from
which it could be inferred that the cover was not to be back-to-back. The
words "as original" and "follow all decisions" were to the contrary. This was
to be presumed in a reinsurance of this kind following Vesta
which he was unable to distinguish from the circumstances of this
case.
Vesta _v_ Butcher.
10. In Vesta the insurance contained a warranty that the insured
would maintain a 24 hour guard on the fish farm the subject of the insurance.
The reinsurance was "as original" which it was accepted incorporated the
warranty in the reinsurance (although Lord Griffiths would have held
otherwise). The fish farm was damaged by a storm at a time when it was
unguarded although this was not causative of any loss. However the insurance
and the reinsurance had been put together by London brokers as part of a
package to sell insurance of fish farms worldwide. The insurance would be
written directly in the London market or fronted by a local insurance company
and reinsured in London, but each contract would contain the standard terms
which included the warranty in question as part of the package.
11. The reasons for the decision can be found in the well-known passage from
Lord Templeman's speech at page 892, where he said:
The provision incorporated in the reinsurance policy that upon breach of
warranty the reinsurance policy shall become null and void, is identical with
the insurance policy that upon a breach of warranty the insurance policy shall
become null and void.
In my opinion, in the absence of any express declaration to the contrary in the
reinsurance policy, a warranty must produce the same effect in each policy.
The effect of a warranty in the reinsurance policy is governed by the effect of
the warranty in the insurance policy because the reinsurance policy is a
contract by the underwriters to indemnify Vesta against liability under the
insurance policy. The reinsurance policy could have provided expressly that
the warranties were to have different effects in the two policies. The
reinsurance policy could have limited the liability of the underwriters by
providing that a breach of warranty by Vesta would absolve the underwriters
even if an identical breach of warranty by the fish farmer did not absolve
Vesta. Any such limitation would however, have been inconsistent with
the concept of reinsurance, unacceptable as a basis for the business
relationships between brokers, insurers and reinsurers and contrary to the
language of the reinsurance policy which insists on the identity of terms,
subject matter and risk involved in both the reinsurance policy and the
insurance policy.
12. In the course of his speech Lord Griffiths said at page 895 :
In the ordinary course of business reinsurance is referred to as "back-to-back"
with the insurance, which means that the reinsurer agrees that if the insurer
is liable under the policy the reinsurer will accept liability to pay whatever
percentage of the claim he has agreed to reinsure. A reinsurer could, of
course, make a special contract with an insurer and agree only to reinsure some
of the risks covered by the policy of insurance, leaving the insurer to bear
the full cost of the other risks. Such a contract would I believe be wholly
exceptional, a departure from the normal understanding of the back-to-back
nature of reinsurance and would require to be spelt out in clear terms. I
doubt if there is any market for such a reinsurance.
This statement cannot apply to all reinsurance but has not been doubted where
the reinsurance is proportionate such as the reinsurance in this case and in
Vesta where the reinsurer shares a proportion of the underlying
risk written by the insurer. (See Lord Mustill in Axa -v- Field
[1996] AC 1026 at 1033H - 1034B).
13. Lord Lowry's speech sets out the facts in detail but his conclusion follows
the same reasoning as Lord Templeman although it is expressed less trenchantly.
Each of the other judges agreed with Lord Templeman and Lord Lowry.
Submissions.
14. Mr. Donaldson, QC Counsel for the Reinsurers, submits that this is a simple
case. The Reinsurers stipulated for and the Insurers agreed to the warranty
which appears in the slip. It should be given effect according to English law,
the governing law of that contract. This does not involve considering what, if
any, of the terms of the insurance are incorporated into the reinsurance or
their meaning and effect. There is no logical reason why the effect of the
warranty in the reinsurance should depend upon whether there is a similar
warranty in the insurance and if so its effect according to the governing law
of that contract. Thus, in this case, if there was no class warranty in the
insurance, the warranty in the reinsurance would be fully effective. Why
should the position be different if there is a similar warranty in the
insurance which the Reinsurers might be unaware of ? The fact that there are
two warranties in the reinsurance which are not identical to the warranties in
the insurance shows that it was not intended that the cover afforded by each
contract should be identical. To treat them as if they are and to construe
them so that they have the same effect makes the warranties in the reinsurance
surplusage. They could and should have been given an independent life of their
own.
15. Vesta did not compel the conclusion which the Judge reached.
The facts in that case were very different. The insurance and the reinsurance
had been marketed as a package and were on identical terms. In this case the
risk was brought to the London market and written facultatively and it appears
that the Reinsurers knew nothing of the warranties in the insrance or their
effect. The warranty in question appears in the reinsurance slip and is not
identical to the warranty in the insurance. Vesta should only
apply to a case where to the knowledge of reinsurers the terms of the insurance
and the reinsurance are identical.
16. Mr. Hirst, QC., Counsel for the Insurers submits that in construing the
reinsurance one should start with the presumption that the scope and extent of
the cover is the same in both contracts. The first sentence of the conditions
in the slip makes it clear that this was the intention of the parties in this
case. If the parties had intended exceptionally that there should be
circumstances or events where the Insurers would have to bear the entire risk
this had to be spelt out clearly and it was not. In the event this conclusion
does mean that the warranties in the slip are surplusage, but there is nothing
surprising about that in this market. Vesta lays down
principles which apply to this case which does not involve an extension of
those principles but merely their application to slightly different facts.
Discussions and Conclusions.
17. I did not understand Mr. Donaldson to quarrel with the presumption that in
a proportionate reinsurance of the kind with which this case is concerned,
there is a presumption that, in the absence of clear words to the contrary,
the scope and nature of the cover afforded is the same as the cover afforded by
the insurance. That at least I think is the effect of Vesta and
it makes obvious commercial sense. As the cases show, the same does not
necessarily apply to provisions relating to ancillary or procedural matters
such as claims control, law and jurisdiction and arbitration. So no
significance can be attached to the fact that such provisions are not the same
in the two contracts
18. The presumption to which I have referred is carried through into the
wording of the slip in this case by the words of the first sentence of the
conditions which are unequivocal. This had the effect of incorporating the
warranties in the insurance into the reinsurance. Like the Judge I do not
think there is any significant difference between these warranties and the two
warranties in the slip. The Spanish word "garantia" translates as warranty as
well as guarantee, so here the two warranties are identical except for the fact
that the classification society is named in the insurance. There was some
debate about what is meant by "lifting capacity" in the slip, but I think the
obligation referred to must be encompassed in the warranty of seaworthiness
contained in the insurance.
19. So in this reinsurance there are warranties incorporated from the insurance
and warranties in the slip which are essentially the same. But following
Vesta it seems to me (and was not argued to the contrary by Mr.
Donaldson) that the incorporated warranties must have the same effect in both
contracts. Thus they must be construed to mean that the Reinsurers' liability
will be discharged only where the breach was caused by the loss in question if
this is what Venezuelan law decrees.
20. So should the warranties in the slip be construed so as to have a different
effect? I do not think so. This cannot have been the intention of the
parties. If it had been they could and should have said so. To look at these
warranties in isolation is unrealistic. If a reinsurer of this type of risk
requires a warranty which can only be fulfilled by the insured the broker who
is acting for the insurer is bound to advise the insurer to extract a similar
warranty from his insured to ensure that the two covers match. If this is
done, reinsurers conducting international business must be taken to have
intended that the warranties in the two contracts will have the same effect.
They will be aware that the laws of some countries give more restrictive effect
to warranties than English law, but that is a risk they must be taken to have
assumed by writing international business. They will be protected to the same
extent as the insurer. Of course in the unlikely event that the insurer has
not extracted a similar warranty from his insured, the reinsurer is entitled to
the full protection afforded by English law.
21. On this analysis I do not think that the warranties were surplusage. If,
as they contend, the Reinsurers did not know whether the insurance contained
similar warranties, the warranties in the slip were obviously there for a
purpose. In the event, as there were such warranties, they have to be
construed in the same way as these warranties. This makes them repetitive but
I do not find this the slightest bit surprising in view of the way wordings
such as those which appear in this slip are put together in the London market.
This has been the subject of much uncomplimentary judicial comment in the past
which I need not repeat.
22. My analysis also means that the effect of the warranties in the slip is
dependent upon whether there are similar warranties in the insurance and I
understand that this may seem illogical. But I think this illogicality is much
mitigated by the reality of the situation which I have tried to explain. The
reinsurer can expect the insurer to extract a similar warranty from his insured
in which case he has to expect and accept that his warranty will have the same
effect as the one given to his insured, the insurer.
23. Vesta has propelled me towards the conclusion I have reached
in this case as I have made clear, but it has not compelled me to it. The
facts in that case are clearly different from those in this case. In searching
for the answer to the question "What did the parties intend ?", given that the
reinsurance was part of a package, the House could scarcely have reached a
different conclusion. At the end of the day each of these cases depend upon
the construction of the contracts in question in their context and so each case
must depend upon its own facts. On the facts of this case I conclude that the
judge reached the right conclusion. I would therefore dismiss this appeal.
LORD JUSTICE MANCE.
24. I agree. The present issue arises not from any material difference in
wording between the insurance and reinsurance, but because the former is
subject to Venezuelan while the latter is subject to English law. Venezuelan
law, we are asked to assume, would hold the claimant insurers liable unless the
breach of the garantia (in translation, as is common ground, warranty)
of maintenance of class in the original insurance proves to have been causative
of the loss. English law is expressed in the Marine Insurance Act 1906:
33-(3) A warranty .... is a condition which must be exactly complied with,
whether it be material to the risk or not. If it be not so complied with, then,
subject to any express
provision in the policy, the insurer is discharged from liability as from the
date of the breach of warranty, but without prejudice to any liability incurred
by him before that date.
34-(2) Where a warranty is broken, the assured cannot avail himself of the
defence that the breach has been remedied, and the warranty complied with,
before loss.
87-(1) Where any right, duty, or liability would arise under a contract of
marine insurance by implication of law, it may be negatived or varied by
express agreement, or by usage, if the usage be such as to bind both parties to
the contract.
(2)The provisions of this section extend to any right, duty, or liability
declared by this Act which may be lawfully modified by agreement."
25. Neither the insurance nor the reinsurance expressly states its governing
law. Despite the potential relevance, governing law appears rarely to be
expressly addressed in such contracts. But in this case, to legal ears, it
speaks for itself. The insurance was issued in Venezuela in Spanish covering a
Venezuelan risk and provided for the jurisdiction of the Maracaibo court if
arbitration was not agreed. The reinsurance was placed by London brokers with
the appellant reinsurers through their French underwriting agents for their 50%
share, and the Mar 91 slip policy form which is incorporated provides for the
English courts to have exclusive jurisdiction.
26. The reinsurance is however a contract which in terms relates to and must be
read in conjunction with the terms of the original insurance. The two contracts
were clearly intended to be back-to-back. As regards the vessel(s) covered, its
period, its terms and all decisions, settlements and agreements, the
reinsurance expressly follows the original. In particular it provides under the
head of "Conditions":
"All terms, clauses, conditions, warranties, additional premiums, return
premium, as original and to follow the decisions, settlements, agreements of
same in every respect."
27. On its face, therefore, the reinsurance incorporated original insurance
clauses 3(d) and 3(e) - that is the seaworthiness guarantee and the
garantia of maintenance of class with ABS - which Tuckey LJ has set out
in translation. When so incorporated, those warranties must retain the same
significance as they had in the original insurance. If causation is relevant
when applying them under that insurance, it must remain relevant under the
reinsurance.
28. It is said, however, that the last two Conditions expressed in the
reinsurance - "Warranted existing class maintained" and "Warranted maximum
lifting capacity not exceeded" - are subject to the English legal principles
set out in the Marine Insurance Act; and that, even if causation is relevant to
any warranty of class found in the original insurance, it remains irrelevant to
the application of the first of the reinsurance warranties that class will be
maintained. Mr Donaldson QC's argument had a certain remorseless logic,
although not explicitly carried to the length of a suggestion that the presence
of the express warranty of class in the reinsurance precluded incorporation
into the reinsurance of the garantia. To my mind, however, reinsurers'
case ignores the structure and realities of these contracts. While I note that
the rate of premium on the reinsurance appears to have been very low compared
with the original rate, no-one suggests, nor is it remotely likely, that this
reflects any dilution of the basic expectation that this proportional
reinsurance would operate back-to-back with the original insurance. The
information section of the reinsurance suggests that the reinsurers had limited
direct information about the original insurance terms, and none about any
warranties in the area of these two express warranties. Mr Donaldson directed
our attention to some subsequent correspondence which would tend to confirm
this. Be that as it may, the most obvious purpose of including specific
warranties such as the two additional Conditions was not to produce a situation
where the two contracts were not back-to-back, but to specify terms which
reinsurers would expect to be included - either already or by amendment - in
the original insurance.
29. To my mind the garantia regarding class in the original insurance
was exactly what reinsurers were in this situation entitled to expect to find
in the original insurance. It constitutes, in Spanish, precisely the warranty
of maintenance of existing class which would be expected. Yet it is said that
the two contracts are not back-to-back, not because of any significant
difference in wording, but because they are subject to different laws, which
attach to them different significance. To a lawyer, it may be that words only
acquire significance in the context of a particular legal system. But I doubt
whether that would be the first thought of insurance market practitioners when
considering whether these two contracts were in terms back-to-back.
30. In my judgment, the warranty of existing class maintained in the present
reinsurance must take its precise meaning and application from any equivalent
warranty incorporated in the original insurance, when as here (a) the two
contracts were on their face intended to be back-to-back and moreover (b) the
equivalent warranty was itself also incorporated in the reinsurance by the
words "All terms, clauses, warranties ... as original". A harmonious result is
thus achieved. The contrary submission that the warranty of existing class
maintained in the reinsurance retains a stubbornly domestic English
significance, trumping any limited significance of such a warranty included in
the original and also incorporated by reference into the reinsurance is, to my
mind, both commercially and legally unattractive.
31. Mr Donaldson objected that this meant that reinsurers would have to include
express provision preserving the effect of s.33(3) and 34(2) if they were not
to lose rights which they would expect to possess under the law governing their
reinsurance, and that it was impossible to envisage or recall such a provision
in any reinsurance. But that argument, if it has any basis in relation to the
French reinsurers underwriting the present risk, cuts both ways. The reason why
no such provision is included may be that international reinsurers accept the
back-to-back nature of the reinsurances which they underwrite. Mr Donaldson
sought to reverse this argument by suggesting that the insurers must, at least
through their London brokers, be taken to know of and accept the risk of the
stringent English legal rules governing warranties. This amounts to saying that
it was incumbent on the present insurers, if they wanted to obtain reinsurance
through London brokers, to adapt the terms (or perhaps the whole governing law)
of their original insurance so as to make it equate not merely in terms but
also in effect with any English law reinsurance. In my judgment, that is
commercially unrealistic and amounts to suggesting that the tail should wag the
dog.
32. In Vesta v. Butcher [1989] AC 852 the Aquacultural No. V
wording was marketed worldwide as part of a scheme for promoting fish farm
insurance, and the particular reinsurance the subject of the litigation was
written before the particular Norwegian insurance on which the original claim
arose. Yet the 24-hour watch warranty in the reinsurance still took its effect
from the particular original insurance, being shaped in its application by the
provision of Norwegian law which enabled the original insureds to recover from
insurers because there was no causative connection between the breach of
warranty and the loss claimed. Here too it seems to me that the reinsurance
warranty must respond to and reflect the interpretation put on the equivalent
warranty by Venezuelan law in the original insurance.
33. The conclusion to which I have come applies because the warranties in the
insurance and reinsurance were in terms effectively identical. It is only the
differing proper laws of the two contracts which opens the argument that,
whatever the warranty's effect in the original insurance, the express warranty
in the reinsurance has a different, overriding effect. Had the two contracts
contained warranties expressed in different and irreconcilable terms, different
considerations could have arisen. Likewise, if the reinsurance had contained a
warranty which had in terms no counterpart in the insurance. It would then be
clear that the two contracts were not and could not to that extent be treated
as back-to-back. There would be no possibility of reconciling them, or of
deriving the meaning or scope of the reinsurance warranty from any equivalent
in the original insurance. The reinsurance warranty would in that situation be
and remain a term to be viewed purely through the eyes of English law and
s.33(3) of the Marine Insurance Act. But that is because the insurers would,
contrary to normal contemplation, have so arranged affairs that the insurance
they issued and the reinsurance they had were not back-to-back. It is, as
Tuckey LJ has said, unnecessary to determine the subject-matter (vessels, as I
would have been inclined to suppose, or cranes) of the last warranty in the
reinsurance Conditions regarding maximum lifting capacity. Even if this
warranty has (contrary to my own impression) no counterpart in the original
insurance, insurers' failure (quite probably by oversight) to align the terms
of the two contracts in one respect does not mean that the two contracts were
not aligned in the present different respect relating to class.
34. For these reasons as well as those given by Tuckey LJ, I agree that this
appeal fails.
Lord Justice Roch:
35. I also agree that this appeal should be dismissed for the reasons given in
both judgments.
Order: Appeal dismissed with costs; permission to appeal to the House of
Lords refused.
(Order does not for part of approved judgment.)
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