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	Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Moodiesburn House Hotel Ltd v Norwich Union Insurance Ltd & Anor [2001] ScotCS 301 (21 December 2001) URL: http://www.bailii.org/scot/cases/ScotCS/2001/301.html Cite as: 2002 SCLR 122, [2001] ScotCS 301

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[1] This action relates to a fire that took place at the Moodiesburn House Hotel on 13 November 1997. The pursuers are and were at all material times the occupiers of the hotel. They were, at the time of the fire, insured in respect of property risks, including fire, with the first defenders. The policy was effected through the second defenders, who were the pursuers' insurance brokers. The first defenders have refused to indemnify the pursuers for the loss sustained as a result of the fire, on the ground that the pursuers were in breach of a condition of the policy. In this action the pursuers seek (1) declarator that the first defenders are obliged to indemnify them for those losses and (2) payment by the first defenders of the amount of the losses, or alternatively (3) payment by the second defenders of the like sum as damages for breach of the contractual duty of care incumbent on them.

[2] The pursuers' primary case against the first defenders is that they were not in breach of the condition founded on. Alternatively they maintain that the first defenders have waived compliance with that condition, or are personally barred from founding on it. The first defenders contend that the pursuers' averments of waiver and personal bar are irrelevant. They argue further that, if those averments are excluded from probation, the pursuers have in their averments accepted that they were in breach of at least one aspect of the condition founded on, and accordingly have made no relevant averment of entitlement to indemnity. On that basis the first defenders plead that the action, so far as laid against them, should be dismissed. It is only if the pursuers fail in both aspects of their case against the first defenders that any question of a claim against the second defenders arises. In those circumstances the case was appointed to debate on the first defenders' plea to the relevancy of the pursuers' pleadings. The second defenders took no part in that debate.

[3] The pursuers' averments about the policy are complicated by averments dealing with their lack of knowledge of the existence of the condition founded on by the first defenders. That is a matter that is relevant principally to the case against the second defenders, who are blamed for failing to draw the terms and significance of the condition to the pursuers' attention. For the purposes of the case made by the pursuers against the first defenders it is sufficient to note certain aspects of the narrative. In 1994 at the pursuers' request the second defenders obtained from various insurers including the first defenders quotations for property insurance cover in respect of the hotel. The business was placed with the first defenders, who issued policy No. 9487W70420. The perils insured against included fire. The initial period of insurance was to expire on 30 June 1995. Thereafter, the policy was renewed annually on 1 July in each of the years 1995, 1996 and 1997, and was therefore current at the time of the fire.

[4] In this action the first defenders found on a Frying and Cooking Equipment Condition ("FCEC"). The pursuers in their pleadings are silent as to whether that condition formed part of the policy when it was first issued in 1994. They do, however, aver that at the time of renewal in July 1996 the Property Schedule forming part of the renewal documents made express reference to the FCEC and bore to incorporate it into the contract of insurance for the ensuing year. Although they aver that they were not aware of the terms of the FCEC at any time prior to the date of the letter by which the first defenders repudiated liability for the claim in respect of the fire, they aver that when the policy was renewed in July 1997 the first defenders again included reference to the FCEC in the policy schedules for the then ensuing year. The pursuers' case therefore proceeds on the basis that, although they deny that prior to the fire they had any knowledge of the FCEC, they accept that it did form part of the policy at the material time.

[5] The FCEC was in the following terms:

1. all frying and other cooking ranges, flues and exhaust ducting are securely fixed and free from contact with combustible material,
2. all flues, exhaust ducting, grease traps, sumps and filters are cleaned at least once a month ...".

[6] The pursuers aver that on 13 November 1997 the hotel was badly damaged by a fire, which started in the kitchen and spread to other parts. They lodged a claim with the first defenders under the policy. The amount of the claim is stated at a total of £364,796, made up of (i) £230,000 in respect of buildings, (ii) £101,296 in respect of business interruption, and (iii) £33,500 in respect of contents.

[7] By letter dated 9 December 1997 addressed to the second defenders the first defenders repudiated the pursuers' claim. In that letter the first defenders made reference to the FCEC, observed that it was a condition precedent to liability, and alleged that the pursuers were in breach of it. In respect of paragraph (a) of the condition, they alleged in particular that the exhaust ducting was in contact with combustible material in that (i) it was in contact with and fixed to timber strapping, and (ii) polystyrene boxes were stored on top of it. In respect of paragraph (b), they alleged separately that the flues and exhaust ducting had not been cleaned for at least five months prior to the fire.

[8] The pursuers dispute the factual basis of the first defenders' repudiation of their claim. So far as the allegation of breach of paragraph (a) of the FCEC is concerned, they aver that the exhaust ducting was not in contact with or fixed to combustible material. In relation to the fixing aspect, they aver:

(I understand that gyproc is a non-combustible material.) In relation to the contact aspect, they aver:

[9] So far as the allegation of breach of paragraph (b) of the FCEC is concerned, the pursuers aver:

[10] The cases of waiver and personal bar which the pursuers seek to advance are largely founded on averments about two surveys of the hotel carried out on behalf of the first defenders. The first was carried out by the first defenders' senior surveyor, Mr R. Wilson, on 29 June 1994. The second was carried out by their surveyor, Mr D. Douglas, on 19 April 1996. The averments (in article 3 of the condescendence) are in the following terms:

[11] The pursuers go on to aver (in article 4 of the condescendence):

[12] In article 8 of the condescendence the pursuers admit that:

Later in the same article they add:

In article 9 they aver:

[13] The pursuer's case of waiver and personal bar is focused earlier in article 9 of the condescendence in the following terms:

[14] Mr Moore for the first defenders began his submissions with a survey of the law of personal bar and waiver. He referred to the treatment of those subjects in McBryde, The Law of Contract in Scotland, second edition, at paragraphs 25-06 to 25-17.

[15] So far as personal bar was concerned, Mr Moore submitted that the modern law was founded on the well-known observation of Lord Birkenhead LC in Gatty v Maclaine 1921 SC (HL) 1 at 7:

What the law required was (1) words or conduct by A, (2) which gave rise to a justifiable belief on the part of B, and (3) actings by B in reliance on that belief to his prejudice. The principle to be applied was, as Professor McBryde observed (op. cit., paragraph 25-08), the inference which one party was reasonably entitled to make from the conduct of the other. The examples given by Professor McBryde (op. cit., paragraph 25-10) included one case decided in an insurance context, namely Donnison v The Employers' Accident and Live Stock Insurance Company Limited (1897) 24 R 681 (which Mr Moore suggested was properly a case of waiver, although cited by McBryde as an example of personal bar). In that case a policy of accident insurance provided that it was a condition precedent to recovery that notice should be given of the accident within fourteen days. It was also a condition precedent that in case of death the personal representatives of the deceased should consent to a post-mortem examination. Notice was given late. The insurers thereafter sought and were given leave to have a post-mortem examination carried out. It was held that the insurers, by demanding a post-mortem examination, had waived the defence of want of timeous notice (per Lord Young at 686). Mr Moore submitted that, if the case was viewed as one of personal bar, the prejudice lay in the granting of consent to the post-mortem examination.

[16] Turning to waiver, Mr Moore submitted that the law was to be found in Armia Limited v Daejan Developments Limited 1979 SC (HL) 56. He relied in particular on the speeches of Lord Fraser of Tullybelton at 68-69 and Lord Keith of Kinkel at 71-72. From those passages he drew the propositions that waiver involved the abandonment of a right; that whether there had been waiver was a question of fact; and that for a case of waiver it was unnecessary that the party alleging waiver should have suffered prejudice as a result of the actings founded on, but sufficient that he should have conducted his affairs on the basis that those actings implied abandonment of the right in question.

[17] Mr Moore then submitted that for a relevant case of waiver it required to be averred that the party who was said to have impliedly abandoned his right had knowledge of that right at the time of the actings from which abandonment was to be inferred. The knowledge had to be actual knowledge; constructive knowledge was not enough. In support of that proposition Mr Moore relied upon Porteous's Trustees v Porteous 1991 SLT 129. In that case Lord Sutherland said (at 131L to 132E):

Mr Moore submitted that that position was consistent with the approach taken in English law to the concept of election to affirm an insurance policy (Insurance Corporation of the Channel Islands v Royal Hotel Limited [1998] Lloyd's Rep IR 151, per Mance J at 161: "What is required for affirmation is knowledge, not any form of constructive knowledge"). The high watermark in terms of latitude in relation to knowledge in the context of waiver had been reached in Murray v Scottish Boatowners Mutual Insurance Association 1986 SLT 329. In that case it was common ground that the pursuers' contention was that the defenders had waived their right to hold the policy forfeited on the ground that in breach of a policy condition the vessel was unseaworthy (see page 330G and J). The defenders argued that waiver by the defenders required full knowledge by them of the pursuers' breach of the policy conditions. The pursuers argued that the defenders, having taken charge of the raising of the sunk vessel and the procuring of tenders for its repair, were put on their inquiry into all aspects of its seaworthiness. They could not assert its unseaworthiness two years later. Lord Murray (at 330K) said:

His Lordship went on to hold that the averments were insufficient to satisfy that test. Mr Moore submitted that Lord Murray was right, so far as a case of personal bar was concerned, but that actual knowledge was necessary for a case of waiver.

[18] Mr Moore then returned to the proposition that a plea of waiver required the support of averments that the party taking the plea had conducted his affairs on the basis that the right had been abandoned. In addition to Armia v Daejan he cited James Howden & Company Limited v Taylor Woodrow Property Company Limited 1998 SC 853 per Lord Kirkwood at 868, Presslie v Cochrane McGregor Group Limited 1996 SC 289 at 291F, Barratt Scotland Limited v Keith 1994 SLT 1337, per Lord Penrose at 1342F-H, Oceaneering International Services Limited v Project Management Support Services Limited 1999 SLT 1045, per Lady Cosgrove at 1045L, and Porteous's Trustees, per Lord Sutherland at 132F. Mr Moore also made reference to English authority that affirmation requires unequivocal communication to the other party of the making of the choice (Insurance Corporation of the Channel Islands, at 162, and Callaghan and Hedges v Thompson [2000] Lloyd's Rep RI 125, per David Steel J at 134).

[19] From those legal submissions, Mr Moore turned to address the pursuers' averments. He made one preliminary point, which was that since the pursuers did not aver that the FCEC was incorporated in the policy prior to July 1996, and both surveys on which they founded took place before that date, the pursuers were seeking to set up a case of what he called "waiver in advance". He submitted that as a matter of law, the first defenders could not be held to have waived their right to found on breach of a condition which they imposed only after acquiring knowledge of the circumstances which, if they continued, would constitute the breach. To make a relevant case of waiver or personal bar, the pursuers required to aver that, at a time when the FCEC was in force, the first defenders learned that it was being breached and acted in such a way as to justify the pursuers in believing either that it was not being breached, or that the first defenders would not rely on the breach. Alternatively, it was necessary for the pursuers to aver that, by the date when the condition was imposed, the first defenders already knew that it was incapable of being complied with and acted so as to justify the pursuers in believing that, despite incorporating it into the contract, they did not insist on compliance with it.

[20] Mr Moore then submitted that the pursuers' averments were wholly inadequate to set up a case that the first defenders had knowledge that the circumstances were such as to constitute breach of the FCEC. Such knowledge was an essential element both of the case of waiver, and of the case of personal bar, but in the case of waiver actual knowledge was essential. If Lord Murray was to be construed as having held in Murray v Scottish Boatowners that imputed knowledge was sufficient for a case of waiver, that was erroneous. In any event, however, there were neither sufficient averments of actual knowledge on the part of the first defenders, nor sufficient averments of circumstances justifying imputing knowledge to them. The averments on which the pursuers relied for the purpose of establishing knowledge on the part of the first defenders all related to the surveys carried out in June 1994 and April 1996. There was, however, no attempt to make any averments about the purpose of the surveys, or either party's understanding of that purpose. In particular, nothing was said to suggest that any part of the purpose of the surveys was to investigate compliance with the FCEC. In that context averments that the first defenders had the opportunity of observing that there was breaches of the FCEC and the bland averment that they therefore "ought to have been aware" of them would not do. Moreover, the averment to the effect that direct contact between the cooker hood, grill or ducting "would have been obvious" to the surveyors was lacking in specification. Such an averment might be sufficient in a context in which it was the pursuers' primary position that there was such contact. It was not, however, adequate, where a party's primary position was that a state of affairs did not exist, to go on to say that, esto it did exist it would have been obvious.

[21] Further, Mr Moore submitted, there were no relevant averments either (i) that the pursuers had acted to their prejudice in the belief that the first defenders did not seek to rely on the FCEC (necessary for the case of personal bar), or (ii) that they conducted their affairs on the basis that that was the first defenders' position (necessary for the case of waiver). All that the pursuers averred was that if the terms of the FCEC and the need to comply with it had been drawn to their attention they would have taken steps to do so or to arrange alternative insurance with which they could comply. But they said nothing to the effect that they did or refrained from doing anything as a result of the actings of the first defenders and their surveyors in relation to the surveys. Their position was that the incorporation of the FCEC in the policy was unknown to them. That being so, it could not be that they had acted on the basis that the first defenders' actings had led them to believe that the compliance with the condition was not to be insisted on.

[22] For those reasons, Mr Moore submitted, the averments of waiver and personal bar in support of the pursuers' second plea-in-law were irrelevant, and the plea should therefore be repelled and the relative averments excluded from probation.

[23] Mr Moore then went on to submit that, in the absence of a relevant case of waiver or personal bar, the pursuers' averments that they were entitled to indemnity were irrelevant. They accepted that the FCEC was a part of the policy at the date of the fire. They accepted that the FCEC was a condition precedent to liability. It followed that if they were in breach of it in any respect, they were not entitled to indemnity. Mr Moore's submission was that, on a proper reading of the pursuers' pleadings, they accepted the existence of circumstances which, on a proper construction of the condition, placed them in one respect in breach of it. He accepted that the pursuers had properly put in issue whether they were in breach of paragraph (a) of the condition. They had averred that the cooker hood, the grill and the exhaust ducting were all fixed to non-combustible material (gyproc), and that they did not come into contact with structural timbers or other combustible material. They averred that there were no polystyrene boxes in contact with the ducting, and that cardboard boxes in the attic were not in contact with the ducting at the time of the fire. It was in respect of paragraph (b) that the pursuers were to be taken to have accepted that they were in breach of the FCEC. That paragraph required the cleaning of all flues and exhaust ducting at least once a month. In the passage from the pursuers' pleadings quoted in paragraph [9] above, they began with a general assertion that the flues and exhaust ducting were cleaned at least once a month throughout the period of insurance cover prior to the fire, but when they came to particularise that averment, they said that the process involved "cleaning all parts of the flue and exhaust ducting which could be reached manually from the kitchen" (emphasis added). That involved acceptance that there were parts of the flue and exhaust ducting that could not be reached manually from the kitchen, and were therefore not regularly cleaned. In these circumstances the pursuers were by concession in breach of paragraph (b) of the FCEC, and that was sufficient to entitle the first defenders to repudiate liability. The claim for indemnity was therefore irrelevant, and the action, so far as laid against the first defenders, should be dismissed.

[24] Mr Clancy for the pursuers presented their second plea-in-law as based primarily on waiver. His submission was that an unequivocal abandonment of a right was sufficient of itself to found a case of waiver. There was, he said, no additional requirement for averments that the party pleading waiver had conducted his affairs on the basis that there had been such abandonment. If, however, there was a requirement that the pursuers had so conducted their affairs, he submitted that there were sufficient averments that they had done so.

[25] In the present case, Mr Clancy argued, the renewal of the policy by the first defenders in July 1996 constituted waiver of their right to insist on compliance with the FCEC, because by then they knew that it was a condition with which the pursuers had not complied and could not comply (see paragraphs [31] et seq. below). In that connection he referred to Ivamy, General Principles of Insurance Law, sixth edition, 319:

although that statement is qualified by the following sentence:

(See also MacGillivray on Insurance Law, ninth edition, paragraph 10-105.) Mr Clancy also referred to two cases cited by Ivamy, namely The Sulphite Pulp Company Limited v Faber (1895) Com Cas 146, and Handler v Mutual Reserve Fund Life Association (1904) 90 LT 192. In the former, the policy in question was one of two policies covering the same interest. There was a condition that notice required to be given if the other policy ceased, that cover would cease until such notice was given, and that it was then in the option of the insurers to cancel the policy. The policy also provided that in the case of loss the insurers would settle "according to the adjustment adopted by the [other] company". The other policy ceased. No notice was given. On the subsequent making of a claim, it was held that cover had ceased because of the failure to give the required notice. Lord Russell of Killowen CJ (at 153) observed, however:

In Handler, a life policy contained a condition requiring payment of the premium within thirty days of the due date. The policy holder sent a premium late, and received back a receipt containing a condition stating that the policy had lapsed and that payment was accepted on condition that the insured was in continuous good health for the past twelve months. The insured subsequently died of an illness which had affected him during the relevant twelve month period. The insurers repudiated liability, on the ground that the policy had lapsed, and that the condition on which late payment had been accepted had not been fulfilled. An attempt to argue that acceptance of the late premium estopped the insurers from resisting liability was rejected, because the insured had not been misled by the receipt, but had misled himself by failing to read the condition attached to the receipt (see per Collins MR at 193 and Mathew LJ at 194).

[26] Furthermore, Mr Clancy argued that the first defenders' acceptance of the premium for the year of cover current at the time of the fire also constituted waiver of the right to insist on compliance with the FCEC. In that connection he referred to MacGillivray at paragraph 10-101, and also to Compagnia Tirrena Di Assicurazioni SpA v Grand Union Insurance Company Limited [1991] Lloyd's Rep 143. That case concerned three reinsurance contracts which contained premium payment warranty clauses. The defendants failed to pay claims submitted by the plaintiffs. The plaintiffs accepted that there had been breaches of the premium warranty clauses, in that the second instalments had not been paid on the due date, but argued that the conduct of the defendants in sending demands for the adjusted premium or premium reserves or demands for the second instalments amounted to affirmation of the contracts. It was held that by those acts the defendants had affirmed the contracts. Waller J said (at 153):

and (at 154):

Mr Clancy also cited Ayrey v British Legal and United Provident Assurance Company Limited [1918] 1 KB 136. In that case the proposal form for a life policy contained a clause providing that if information that ought to have been made known to the insurers were withheld, the policy would be void. The assured was described in the proposal form as a fisherman, but was in fact also a member of the Royal Naval Reserve, which increased the risk. Although the fact that the assured was a member of the RNR was not disclosed in the proposal form, it was communicated verbally to the district manager of the insurers. Premiums due under the policy were subsequently paid to and accepted by the district manager. It was held that that constituted waiver of the breach of the clause in the proposal form. Lawrence J (at 140) said:

(See also at 141 per Atkin J, who expressed the point in terms of estoppel rather than waiver.)

[27] Mr Clancy then elaborated his submission that a relevant case of waiver did not require averments that the party pleading waiver had conducted his affairs on the basis that the right founded on by the other party had been abandoned. He began with an analysis of the following well-known passage from the speech of Lord Fraser of Tullybelton in Armia at 68-69:

Mr Clancy submitted that, properly understood, Lord Fraser's remarks about the need for the party pleading waiver to have conducted his affairs on the basis of the abandonment were no more than a reflection of the hypothesis that Lord Denning's dictum in Alan v El Nasr was correct and did not signify that Lord Fraser accepted that that hypothesis was sound. They were in any event obiter, since Lord Fraser held that there had been no abandonment, and the question of the respondents' actings therefore did not arise. There was, moreover, no support for the need for averments of actings on the basis of the abandonment in the speech of Lord Keith of Kinkel at 71-72, where his Lordship said:

His Lordship then pointed out that the English law of estoppel emerged as an attempt to mitigate the rigours of the doctrine of consideration, and continued:

His Lordship then examined a number of Scottish cases and concluded from them:

Mr Clancy therefore submitted that on a sound view of the speeches in Armia, that case did not constitute binding authority for the proposition that there could be no relevant case of waiver without averments that the party taking the plea had conducted his affairs on the basis of the other party's abandonment of the right in question.

[28] Mr Clancy also sought to draw support for his proposition from Donnison. There, he submitted, the view that the insurers had waived their right to rely on the want of timeous notice was based wholly on the making of the demand for a post-mortem examination, and not on the widow's having conducted her affairs on the basis that the demand implied waiver of the notice clause.

[29] The plea of waiver has been discussed on a number of occasions since Armia was decided. Mr Clancy cited several of those cases. First, he referred to Lousada & Co. Ltd. v J. E. Lesser (Properties) Ltd. 1990 SC 178, which he recognised did not support his proposition. There Lord Justice-Clerk Ross (at 189) said:

(See also per Lord Dunpark at 193.) The next case which Mr Clancy cited did, however, he submitted, provide support for his contention. That was Presslie v Cochrane McGregor Group Ltd, in which the opinion of the court, delivered by Lord Morison, contained (at 291B-H) the following passage:

Next, Mr Clancy referred to James Howden & Co Ltd v Taylor Woodrow Property Co Ltd. In that case, Lord Kirkwood said (at 868A-F):

His Lordship went on to consider that matter and concluded (at 869C):

Lord Marnoch (at 873E-H) observed:

Finally, Mr Clancy referred to William Grant & Sons Ltd v Glen Catrine Bonded Warehouse Ltd 2001 SLT 1419. That case was concerned with the concept of acquiescence, but at 1428D-F, paragraph [33], Lord President Rodger referred to Armia as the first proper recognition of the doctrine of waiver in Scots law. The main purpose of the reference, however, was to note Lord Keith's warning that the Scots doctrine of personal bar and the English doctrine of estoppel do not necessarily coincide.

[30] Mr Clancy in effect relied (1) on his analysis of Lord Fraser's speech in Armia as vouching the proposition that his Lordship's observations on the need for a party pleading waiver to aver that he had acted on the basis that the right in question had been abandoned was obiter, and (2) on the expressions of doubt in Presslie and James Howden as to the soundness of Lord Fraser's reasoning as providing ground on which the obiter dictum should not be followed in this case. In the result he submitted that the pursuers' case of waiver was relevant, without any averment that they had relied in the conduct of their affairs on the first defenders' abandonment of the right to found on the breach of the FCEC.

[31] From that analysis of the law, Mr Clancy turned to the facts on which the pursuers' case of waiver was based. He maintained that the pursuers were offering to prove that the first defenders had actual knowledge of the pursuers' inability to comply with the FCEC by, at the latest, the date of the second survey, which was carried out on 19 April 1996. That knowledge was obtained for the first defenders by their surveyors who conducted the surveys. As previously submitted, it was the fact that the first defenders, despite having that knowledge, had renewed the policy and accepted premiums that amounted to abandonment of their right to found on the pursuers' breach of the FCEC.

[32] In relation to paragraph (a) of the FCEC ("... free from contact with combustible material ..."), the surveyors' knowledge that the pursuers were unable to comply could, Mr Clancy submitted, be inferred from:

[33] In relation to paragraph (b) of the FCEC (the cleaning requirement), the surveyors' knowledge of the pursuers' inability to comply could, Mr Clancy submitted, be inferred from:

(1) the factors set out in paragraph [32](1) to (3);

[34] The matters of fact raised in those averments, Mr Clancy submitted, were best resolved by proof before answer. The fact that the pursuers made no averments as to the purpose of the surveys was not determinative. Although the first defenders said that the purpose was the assessment of risk factors, there was an inevitable overlap between such assessment and assessment of the pursuers' compliance with policy conditions. It was accepted that there was no obligation on the first defenders to inquire into or monitor compliance with policy conditions, but if non-compliance was apparent on surveys conducted for another purpose, waiver could nevertheless result from renewal of the policy and acceptance of premiums in light of such knowledge. It was not maintained that there was a duty to inquire into compliance with policy conditions, but the more obvious it was that there was non-compliance, the less scope there was for renewal without abandonment of reliance on the condition.

[35] Mr Clancy further submitted that, if reliance on the part of the pursuers on the first defenders' waiver of compliance with the FCEC was necessary, there were relevant averments of such reliance. Such reliance could be found in the pursuers' assumption that there was nothing about the design, construction or location of the cooker grill, hood or ducting which was of concern to the first defenders during the period of insurance. Had the pursuers been alerted to the possibility that the first defenders would found on their non-compliance with the FCEC, they could have taken steps to comply with it or to obtain alternative cover.

[36] Finally, Mr Clancy submitted that, if the pursuers had failed to make relevant averments that the first defenders had actual knowledge of the pursuers' breaches of the FCEC, they had at least averred circumstances from which it could be inferred that they ought to have known of those breaches. Imputed knowledge, if insufficient for a case of waiver, was sufficient for a case of personal bar (Murray v Scottish Boatowners). The pursuers could in those circumstances fall back on their case of personal bar.

[37] Although the pursuers' second plea-in-law is expressed in terms of both waiver and personal bar, it was clear from the way in which their submissions were developed that their primary position is that the first defenders have waived their entitlement to rely on any breach by the pursuers of the FCEC as ground for repudiating the pursuers' claim. It is therefore convenient to begin by considering the relevancy of the pursuers' averments in support of the plea of waiver. Although the parties were in dispute as to other aspects of the doctrine of waiver, there was no dispute that the essence of waiver is the abandonment of a right (Armia v Daejan, per Lord Fraser of Tullybelton at 69 and Lord Keith of Kinkel at 72). As Lord Keith pointed out (loc. cit.), waiver may be express, or it may be inferred from facts and circumstances. There is no suggestion in the present case that the first defenders expressly waived their right to found on any breach by the pursuers of the FCEC. The relevancy of the pursuers' case of waiver therefore depends on there being averments which relevantly support the inference that the first defenders abandoned their right to repudiate the pursuers' claim on the ground of breach of the FCEC.

[38] The case of waiver made against the first defenders is that their abandonment of the right to found on breach of the FCEC is to be inferred from (i) their renewal of the policy in July 1996 and July 1997 and (ii) their acceptance of the renewal premiums due on those dates, all in knowledge that the pursuers "could not" comply with FCEC (see article 9 of the condescendence). I have no difficulty in accepting that renewal of a policy of insurance, or acceptance of a renewal premium, in knowledge that the policyholder has already acted in breach of a condition of the policy may amount to waiver of the accrued right to rely on that breach for the purpose of avoiding liability (see for example Compagnia Tirrena Di Assicurazione SpA v Grand Union Insurance Co Ltd; Ayrey v British Legal and United Provident Assurance Co Ltd). That is not, however, the position in which the first defenders find themselves in the present case. The breach of the FCEC on which the first defenders seek to found is not a breach committed once and for all before the renewal and the acceptance of premiums. It seems to me that where the breach in question is of a continuing obligation (such as the obligation to clean the flues and exhaust ducts, and also, arguably, the obligation to secure that the ducts are not in contact with combustible material), the knowledge of the first defenders must go beyond mere awareness of breaches committed prior to the renewal and the acceptance of premiums, and must extend to knowledge that the breaches will continue and cannot be avoided. The pursuers, in my view, properly recognise this, by couching their averments (in article 9 of the condescendence) in terms of a statement that the first defenders knew or ought to have known that the pursuers "could not" comply with either paragraph of the FCEC. It therefore seems to me to be essential to the pursuers case that they aver circumstances which go to show that the first defenders were aware not merely of past breaches of the FCEC, but also of the fact that those breaches would continue after renewal and after the acceptance of the renewal premium, because they were of such a nature that they could not be avoided. To put the matter another way, renewal of the policy and acceptance of the renewal premiums are not acts inconsistent with future reliance on breaches of the FCEC if all that the first defenders were aware of were past curable breaches. Such renewal and acceptance would be inconsistent with reliance on such breaches in the future only if the first defenders knew that the breaches would continue.

[39] The relevancy of the pursuers' case of waiver therefore depends essentially on the relevancy of their averments that the first defenders possessed the requisite state of knowledge prior to the renewals in July 1996 and July 1997 and the relative acceptance of renewal premiums. At this stage it is necessary to consider the first defenders' submission that what are required are averments of actual knowledge, and that averments of imputed knowledge are not sufficient. Actual knowledge can, in my opinion, be established either by direct evidence, or as a matter of inference from facts and circumstances. Therefore, if there were averments of facts and circumstances which did not directly prove knowledge, but from which it might be inferred that the party in question did actually know of the relevant state of affairs, those would be relevant averments of actual knowledge. Averments of that sort would, in my view, be sufficient to support a case of waiver. In my view, however, one category of imputed knowledge would also be sufficient for that purpose. That category is where there are averments of facts and circumstances putting the party on his inquiry, and also averments that he has deliberately chosen to refrain from such inquiry, and has so refrained in order to avoid the risk of acquiring the knowledge which the inquiry would bring. Such cases of wilful blindness would, in my view, fall to be equiparated with actual knowledge. That seems to me to be the category that Lord Murray sought to include in Murray v Scottish Boatowners at 330K. I am prepared to accept, however, that other categories of imputed knowledge would not suffice to found a plea of waiver. Save for the case of wilful blindness, I agree with Lord Sutherland in Porteous's Trustees at 132E that a party cannot be said to have abandoned a right the existence of which was in fact wholly unknown to him. The fact that he "ought to have known" is not, for this purpose, equivalent to his actually knowing. On the other hand, if the circumstances show that he "must have known", that is proof of actual knowledge.

[40] What knowledge on the part of the first defenders do the pursuers offer to prove? It is in my view necessary to consider each paragraph of the FCEC separately. Paragraph (a) required "all frying and other cooking ranges, flues and exhaust ducting [to be] ... free from contact with combustible material". The first defenders, in their letter of 9 December 1997, alleged breach of that paragraph in two respects, namely (i) that the exhaust ducting was in contact with and fixed to timber strapping, and (ii) that polystyrene boxes were stored on top of the duct. Both aspects of the allegation are maintained in the first defenders' defences - see answer 8. The pursuers' primary position is not an acceptance of the truth of those allegations combined with an explanation that the alleged circumstances were known to the first defenders. On the contrary, the pursuers' primary position is (i) that the cooker hood, grill and exhaust ducting were all fixed to or resting on (non-combustible) gyproc boarding, and (ii) that there were no polystyrene boxes stored on top of the ducts. The averments of knowledge on which this aspect of the plea of waiver is founded thus proceed on an esto basis, i.e. on the hypothesis that (contrary to the pursuers' primary contention) the defenders are correct in saying that the ducting was in contact with combustible material. In effect, the pursuers say to the first defenders: "The ducting was not in contact with combustible material, but if it was, you knew that it was". That is not an impossible position to adopt, but it is a difficult one. Although the averment in article 9 of the condescendence of knowledge of breach of paragraph (a) is couched in the stock phrase "were or ought to have been aware", which suggests reliance on actual or imputed knowledge, in his submissions Mr Clancy submitted that there were relevant averments of actual knowledge. In my opinion, that submission was not well-founded. Mr Clancy accepted that the first defenders were under no obligation to inquire into or monitor compliance with policy conditions such as the FCEC. He suggested, however, that there was an inevitable overlap between the assessment of risk factors (the purpose for which the first defenders averred that the surveys were carried out) and the assessment of compliance with policy conditions. The pursuers (perhaps unsurprisingly, since they would not have been privy to the first defenders' thinking at the time they were carried out) offer no averment as to the purpose of the surveys. It seems to me that, in that situation, the scope of the surveys was a matter for the first defenders to determine, and that the pursuers cannot go further than to infer that information bearing on compliance with the FCEC might (but not necessarily would) be obtained in the course of conducting them. The pursuers' averments of knowledge therefore, it seems to me, come to this: (1) the surveyors had unrestricted access to the whole premises, including the kitchen; (2) it is not averred that the surveyors actually took access to the attic space, or otherwise traced the route followed by the ducting, but it is averred that they were at liberty to do so, and may have done so; (3) in his report in June 1994 Mr Wilson (in commenting about cleaning) made reference to the ducts above the cookers; and (4) if, contrary to the pursuers' primary contention, the ducting was in contact with combustible timber material, that "would have been obvious" to the surveyors. The pursuers make no attempt to suggest that, if the first defenders' averment about the ducting being in contact with polystyrene boxes is correct, that was something of which the first defenders must have been aware by reason of the surveys. That aspect of the allegation of breach of the FCEC is simply not addressed in the averments of knowledge in support of the case of waiver. The circumstances on which the pursuers rely do not seem to me to support the inference that the first defenders must have known, and therefore did know, that the equipment and ducting was in contact with combustible material. The most that can be inferred from them is that there is a possibility that the surveyors became aware of that fact. That is not, in my view, sufficient. The closest that the pursuers come to averring a basis for an inference of actual knowledge is in the averment that the situation "would have been obvious", but in face of the first defenders' detailed averments of the steps that would have had to be taken by the surveyors to detect the contact, and in view of the fact that it is an assertion that it would have been obvious that the situation was the opposite of that which the pursuers primarily assert, that bare averment is in my view insufficiently specific. Mr Clancy also sought to rely on the first defenders' own averments about the ways in which the equipment and ducting were in fact in contact with timber, but the fact that they aver that that was so at the time of the fire in my view lends no support to the inference that they knew that it was so at the time of the surveys. In my opinion, the pursuers have not averred circumstances that yield the inference that as a result of the surveys the first defenders had actual knowledge that the equipment and ducting were in contact with or fixed to combustible material. Indeed, I do not consider that the pursuers' averments are even sufficient to support a case of imputed knowledge. The fact that, in some respects, the first defenders had means of discovering the contact between the equipment and ducting and combustible material does not establish that they "ought" to have been aware of it. Had the purpose of the surveys been to check for compliance with the FCEC the position might have been different, but in the absence of any averments that they were for that purpose I do not consider that the mere existence of an opportunity to discover is a sufficient basis for an imputation of knowledge.

[41] Paragraph (b) of the FCEC required that "all flues, exhaust ducting, [etc] ... are cleaned at least once a month". In their letter of 9 December 1997 the first defenders alleged that the flues and exhaust ducting had not been cleaned for at least five months before the fire. The pursuers' position in their pleadings is that the flues and ducting were cleaned once a month, but that they were cleaned only so far as could be reached manually from the kitchen. They plead that if more than that was required by the condition, the first defenders were aware as a result of the survey that compliance was impossible. The basis of that contention is to be found in the averment that the photographs taken in the second survey show where the extraction duct emerged from the gable wall, and that there could thus be seen to be a significant length of ducting passing through various rooms and spaces between the kitchen and the outer end of the ducting at the gable. It appears to be implicit in the pursuers' position that the defenders must therefore have been aware that manual cleaning of the whole length of ducting was impracticable. They do not, however, aver that no other means of cleaning was practicable. The first defenders aver that specialist contractors clean exhaust ducting that cannot be reached manually by chemical means. The also make averments about the possibility of inspection hatches and grease traps. The pursuers' response to those averments is "not known and not admitted". They suggest that the surveyors could have investigated the presence of inspection hatches and grease traps. The pursuers' averments must again, however, in my view, be assessed in the context that they do not suggest that the purpose of the surveys was to monitor or investigate the practicability of compliance with policy conditions. Without suggesting that the surveyors had any duty to apply their minds to the practicability of complying with a cleaning condition, they say: "You could have seen that the ducts were too long to be cleaned manually; we do not know if means of cleaning the ducts otherwise than manually were available, but you did not pursue the point; you must therefore be taken to have known and accepted that we would not be able to comply with the cleaning condition." That reasoning is not, in my opinion, sound. It does not in my view support the inference that the first defenders actually knew that the pursuers could not comply with paragraph (b) of the FCEC. The pursuers do not attempt, in relation to paragraph (b), to make a case of imputed knowledge, but had they sought to do so, it would not in my view have been well-founded on the averments which they make.

[42] The result is, in my opinion, that the pursuers have not made relevant averments that the first defenders, at the time when they renewed the policy in July 1996 and 1997, and accepted the renewal premiums, actually knew that the pursuers could not comply with the FCEC. The case of waiver therefore in my opinion fails on that account. Even if I am wrong in holding that waiver requires actual knowledge, the case of waiver still fails, because in my opinion there are no relevant averments which would justify imputing such knowledge to the first defenders. For want of relevant averments of knowledge, actual or imputed, the case of personal bar also, in my opinion, fails.

[43] Although that is sufficient for disposal of the pursuers' plea of waiver and personal bar, it is appropriate that I should deal with the other aspects of the parties' submissions. The first defenders contend that the case of waiver is also irrelevant for want of averments that the pursuers conducted their affairs on the basis that the first defenders had abandoned their right to rely on breaches of the FCEC. They support that submission by relying on Armia v Daejan, and on various other cases in which the need for such averments is affirmed (Lousada & Co Ltd v J E Lesser Properties Ltd, James Howden v Taylor Woodrow, Barratt Scotland Ltd v Keith, Oceaneering International Services Ltd v Project Management Support Services Ltd, and Porteous's Trustees). The pursuers, on the other hand, maintain that on a proper understanding of Armia, the observations about the party pleading waiver having to conduct his affairs on the basis that the right in question has been abandoned is obiter, and therefore not binding on me, and that in light of the criticism of that aspect of Armia to be found in James Howden and Presslie, I should hold that such averments of reliance are unnecessary for a case of waiver.

[44] In my opinion, Mr Clancy's analysis of Armia is unsound. It seems to me that Lord Fraser of Tullybelton (at 69), after referring to the opinion expressed by Lord Denning in W J Alan & Co Ltd v El Nasr Export and Import Co, adopted that reasoning as his own, and founded on it as forming part of the reason for the failure of the plea of waiver in that case. He said:

Lords Diplock and Edmund-Davies (at 62) and Lord Russell of Killowen (at 69) all expressed agreement with Lord Fraser of Tullybelton's speech. Lord Keith, although he reached the same result by holding that there had been no abandonment of the right in question, expressed no view on the reliance issue. In those circumstances, I am of opinion that it is not open to me, in the Outer House, to take the view that Lord Fraser's dictum about reliance is not part of the ratio of Armia. That aspect of the decision in Armia was endorsed in the Inner House in Lousada v Lesser Properties. Moreover, in James Howden v Taylor Woodrow, notwithstanding the doubt which he expressed as to why waiver had to be accepted before becoming effective, Lord Kirkwood (at 868B) expressed the view that Armia and Lousada were binding authority for the need for the party pleading waiver to show that he had conducted his affairs on the basis that there had been abandonment of the right. I am therefore of opinion that I am bound to proceed on the basis that for a relevant case of waiver there must be averments that the pursuers conducted their affairs on the basis that the right to found on breach of the FCEC had been abandoned by the first defenders.

[45] I recognise that doubt has been expressed about that aspect of the decision in Armia, notably in Presslie (at 291) and in James Howden (per Lord Kirkwood at 868D and per Lord Marnoch at 873H). The common feature shared by those expressions of doubt is the question: why, if abandonment of the right is established, should there be an additional requirement to show reliance? In James Howden it appears to have been argued that reliance was necessary because it was the factor that made it inequitable to allow the party against whom waiver was pled to depart from his abandonment of the right (see per Lord Kirkwood at 868E), but Lord Kirkwood said that equitable considerations play no part in the Scots law of waiver. For my part, I express no view on that point. It occurs to me, however, that the need for reliance may arise in this way. As Lord Marnoch pointed out in James Howden (at 873H), "Express waiver ... would not require reliance to make it effective". It seems to me, however, that perhaps express waiver would require to be intimated to the other party before it became irrevocable, rather in the same way as delivery of a disposition is necessary to transfer ownership of heritable property or intimation of an assignation is necessary to transfer a moveable right. Something would be necessary to make the abandonment overt. That would be consistent with the English cases cited by Mr Moore as illustrating that affirmation of a policy of insurance requires unequivocal communication of the making of the choice (see paragraph [18] above). If it is right to apply that approach to waiver, what matters is communication of the fact of abandonment. If attention is then turned to implied waiver, where the abandonment has to be inferred from facts and circumstances, the question arises how it is to be tested whether the facts and circumstances have communicated the fact of abandonment to the other party. It seems to me to be possible, in that context, to see conduct of that other party's affairs on the basis that the circumstances have disclosed abandonment as affording the requisite basis for objective inference that the circumstances have indeed communicated to him an understanding of the fact that the right has been abandoned. That is, however, no more than a tentative suggestion of an answer to the question posed in Presslie and James Howden about why there should be a need to show reliance in a case of waiver. It is sufficient for the disposal of the issue which I am presently considering that I regard myself as bound by Armia to take the view that averments that the pursuers have conducted their affairs on the basis that the right in question has been abandoned are necessary for the relevancy of a case of waiver.

[46] It is in my view clear that there are no such averments in the present case. Given that the pursuers' position is that they were wholly unaware that the contract of insurance incorporated the FCEC, they cannot in my view say that, while in that state of ignorance, they conducted their affairs on the basis that the first defenders had abandoned their right to found on breaches of that condition. The averments relied on by Mr Clancy in that connection (see paragraph [35] above) are in my view wholly inadequate for the purpose. Accordingly, in my opinion the case of waiver fails for the additional reason that there are no relevant averments that the pursuers conducted their affairs on the basis that the circumstances showed that the first defenders had abandoned their right to found on breaches of the FCEC.

[47] So far as the case of personal bar is concerned, it is in my view clear that it requires averments that the pursuers not only acted in reliance on an implied representation that the first defenders would not rely on the breaches of FCEC, but did so to their prejudice. For the same reason as is mentioned in the preceding paragraph, I am of opinion that the pursuers' averments cannot be regarded as meeting that requirement. For that reason, in addition to the absence of relevant averments of knowledge, the case of personal bar is in my opinion irrelevant.

[48] It follows, in my opinion, that the pursuers' second plea-in-law falls to be repelled. The issue that then remains for consideration is whether, once that plea has been repelled, any relevant defence remains. Mr Moore's submission that that issue fell to be answered in the negative was based on the pursuers' averment that the parts of the flue and exhaust ducting that could be reached manually from the kitchen had been regularly cleaned. It was, he submitted, implicit in that averment that there were other parts of the flue and ducting that had not been cleaned. Mr Clancy accepted that that was indeed the pursuers' position. In those circumstances, I am of opinion that Mr Moore was correct in his submission that, since the pursuers accepted that they were in that respect in breach of the FCEC, the defenders were entitled to repudiate the claim, and the pursuers' averments in support of the first and second conclusions of the summons were therefore irrelevant. It follows, in my opinion, that the action, so far as laid against the first defenders, should be dismissed.

[49] For those reasons, I shall sustain the first defenders' first plea-in-law, repel the pursuers' second plea in law, and dismiss the action so far as laid against the first defenders. I shall reserve the question of expenses.

[50] I shall put the case out By Order for the purpose of discussing future procedure in the action so far as laid against the second defenders.