K/s Merc-scandia Xxxxii v Certain Lloyd's Underwriters and Others
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE LONGMORE,MR JUSTICE CARNWATH,LORD JUSTICE ROBERT WALKER |
| Judgment Date | 31 July 2001 |
| Neutral Citation | [2001] EWCA Civ 1275 |
| Docket Number | Case No: A3/2000/2501 |
| Court | Court of Appeal (Civil Division) |
| Date | 31 July 2001 |
[2001] EWCA Civ 1275
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION (Mr Justice Aikens)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Robert Walker
Lord Justice Longmore and
Mr Justice Carnwath
Case No: A3/2000/2501
JONATHAN HIRST Esq QC and ANDREW LYDIARD Esq (instructed by Clyde & Co for the Appellant)
SIMON RAINEY Esq QC and DAVID FOXTON Esq (instructed by Jackson Parton for the Respondents)
Introduction
In this appeal from Aikens J. the court is concerned with the ambit of section 17 of the Marine Insurance Act 1906 which provides: -
"A contract of marine insurance is a contract based upon the utmost good faith and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party."
The extent to which this section applies once a contract of insurance has been concluded has never been authoritatively determined, but it has recently been considered by the House of Lords in Manifest Shipping Co Ltd v. Uni-Polaris Insurance Co ( The Star Sea) [2001] 2 W.L.R. 170 in the context of a hull and machinery policy where the allegation was one of culpable non-disclosure during the currency of the contract. The House held that culpable non-disclosure was insufficient to attract the drastic consequence of avoidance provided by section 17. The result was that the insured shipowner could recover under the insurance policy despite such culpable non-disclosure and a consequent purported avoidance by the insurers.
The present case differs from The Star Sea in two important respects. In the first place, the contract was not a property insurance contract but a liability insurance contract. The assured were ship repairers in Trinidad and have been found liable to the claimant shipowners under the ship repair contract. The assured have subsequently gone into liquidation and the claim is thus brought by the claimant shipowners as statutory transferees pursuant to the provisions of the Third Parties (Rights against Insurers) Act 1930 under which the insurers can avail themselves of any defence which was available against their assured. As is common with liability policies, there were express conditions of the policy set out under the heading of General Conditions including in particular
"In the event of any occurrence which may result in a claim … the assured shall give prompt written notice … and shall keep underwriters fully advised""Underwriters shall be entitled (but not obliged) … to control or take over the conduct of the investigation defence and settlement of any claim …"
Clause 7 of the standard form ship repairers liability clauses also provided that the limit of liability set out in the policy included
"liability for costs … incurred with the written consent of the underwriters".
The assured in this case did give notice to the underwriters that a claim had been made against them; the underwriters, moreover, did take over the conduct of the defence of the claim and appointed solicitors for that purpose. This was a recognition by the insurers of the fact that, if the insured were liable to the shipowners, the insurers would themselves be liable to indemnify the insured. The solicitors, Elborne Mitchell & Co ("Elbornes"), although appointed by underwriters, were solicitors on the record on behalf of the assured and, on the principles set out in Groom v. Crocker [1938] K.B. 194, owed the assured all the duties that a solicitor owes to his client. Thus the assured, not the underwriters, were the clients of Elbornes but for the purposes of the policy they began incurring costs with the consent of the underwriters.
The second respect in which the present case importantly differs from The Star Sea is that the conduct of the assured about which the underwriters complain was fraudulent instead of merely culpable.
The facts, on which the finding of fraud was based are fully set out in the judgment of Aikens J reported at [2000] 2 Lloyds Rep 357. For present purposes a brief recapitulation is all that is necessary. In September 1990 Mr Nicholas Bourke of Elbornes decided to ask a Trinidadian lawyer whether the statutory limitation available to ship repairers in Trinidad was still that enacted by the Imperial Merchant Shipping Act of 189The Trinidadian lawyer (wrongly as it turned out) advised that it was. On that basis it became advantageous to both the assured and to the underwriters to try to ensure that the action was fought in Trinidad rather than in England where (from a Claimant's point of view) there were more generous provisions as contained (for the purposes of this case) in the Merchant Shipping Act 1979. The shipowners were, however, able to obtain an order of an English judge on 17 January 1992 for service of English proceedings on the insured shipowners in Trinidad by relying on an agreement, apparently made in May 1989 between the shipowners and a Mr Thor Torressen, the assured's assistant general manager, agreeing that the dispute should be referred to the jurisdiction of the High Court of London and be determined according to English law. Mr Bourke, in his capacity as the assured's solicitor, opposed English jurisdiction by asserting in general terms Mr Torressen's want of authority in an affidavit and asked his clients in March 1992 for disclosure of documentation on the question whether Mr Torressen had authority to make the jurisdiction agreement. The result of that request was that Mr Kayan Baboolal or his brother Dr R Baboolal, the Managing Director and Chairman of the insured respectively, concocted a letter (purportedly dated 1st July 1988) which they claimed had been sent by Mr Kayan Baboolal to the shipowners' technical director Mr Allen Hansen stating that only Mr K Baboolal or his brother had authority to discuss the claim. The insured alleged that Mr Hansen had countersigned the letter and returned it to them. That countersignature was, in fact, a forgery. Once the letter was produced it did not take very long to establish that the letter was a concoction and the signature a forgery and the application to set aside the service of the writ, which had been issued for service out of the jurisdiction, was not pursued and ultimately abandoned. Meanwhile the underwriters had decided that an issue about cover under the policy had arisen, withdrew their consent for incurring further costs and instructed Clyde & Co ("Clydes") to look after their interests. Ironically, it soon also became apparent that the advice of the Trinidadian lawyer was wrong and Trinidad had exactly the same limitation provisions, applicable to ship repairers, as had England, so that there was not in truth any advantage for the assured to litigate in Trinidad over and above that advantage which any litigant might feel in defending a claim against him in his own domestic courts. Soon after this, Clydes (on 6th July 1993) wrote to Elbornes who were still acting for the assured saying that the underwriters avoided the policy for the relevant (1987) year. The claim proceeded slowly. It appeared that the case of the insured shiprepairers was that the damage to the engine of which the shipowners complained had been caused by a failure to tighten the bolts to the required tension. According to the shiprepairers that was not a failure by their employees but a failure on the part of the employees of the shipowners. In due course Elbornes came off the record for the assured ship repairers shortly before the trial, which took place, in their absence, on 14th January 1997 before Colman J. He gave judgment in favour of the shipowners. On 17th September 1997 the insured were wound up and the claimant shipowners then launched the current action against underwriters.
The course of the case below
Before Aikens J. the underwriters argued that the duty of the utmost good faith applied after the insurance contract had been made (1) when the assured was making and pursuing a claim on the policy and (2) when there was an express or implied contractual duty to supply information to enable the insurers to make a decision. The judge, however, held that the duty of utmost good faith did not apply post-contract unless (a) the insurer was being invited to renew or vary his "speculation" or "risque" or (b) the assured was prosecuting or pursuing a claim on the policy. He held that neither of these two situations had occurred in the present case. No occasion requiring "good faith" had therefore arisen and the insurers could not rely on section 17 of the 1906 Act to avoid the policy. He also decided that the fraud perpetrated by the insured was not material to underwriters' liability. He further held that, although there was a breach of the express obligation to keep the underwriters fully advised, the underwriters had suffered no serious consequence as a result of the breach; the result of that was that they were not entitled to reject the claim.
The argument before this Court
Mr Jonathan Hirst QC presented the case for the insurers on a wider front than it appears to have been presented below. He submitted: -
(1)
that it was inappropriate and wrong for the judge to have identified post-contract "good faith occasions" and then to have decided that the events of this case did not constitute such an occasion; the duty of utmost good faith was expressed as a general concept in section 17 of the 1906 Act and applied in general terms throughout the contract; breach of good faith and, certainly, any fraudulent conduct entitled insurers...
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