Socony Mobil Oil Company Inc. v West of England Ship Owners Mutual Insurance Association (London) Ltd (No 2) (Padre Island)

I have had the opportunity of considering in draft the speech to be delivered by my noble and learned friend Lord Brandon of Oakbrook. I agree with it and for the reasons he gives would allow both these appeals.

These two appeals, which have been heard together, raise the same important question of law in the field of marine insurance. It is a question which has been long debated but never until now come before the courts for decision.

The question arises in this way. It is the long-established practice of shipowners to enter their ships in Protection and Indemnity Associations ("P. & I. Clubs") for the purpose of insuring themselves against a wide range of risks not covered by an ordinary policy of marine insurance. By so entering one or more of their ships in a P. & I. Club shipowners become members of that club. P. & I. Clubs operate on a system of mutual insurance under which the successful claim of one member is paid out of the contributions of, and the calls made on, all the members including himself. Each member is accordingly both an insurer and an insured. Among the wide range of risks covered by P. & I. Clubs is liability incurred by members to cargo owners for loss of or damage to cargo carried in an entered ship.

P. & I. Clubs have bodies of rules governing the relationships between the club and its members and between one member and all the other members. When shipowners enter one of their ships in a P. & I. Club there comes into being a policy of marine insurance relating to that ship on the terms of the club's rules.

The rules of most, if not all, P. & I. Clubs contain what is commonly called a "pay to be paid" provision. That is a provision, capable of being expressed in a variety of different terms, which stipulates that a member, in order to be entitled to an indemnity in respect of liabilities or expenses incurred by him, must first himself have discharged the liabilities or expenses concerned. It may happen, however, that, after a member of a P. & I. Club has incurred an insured liability, for example a liability for loss of or damage to cargo carried in an entered ship, he is disabled by insolvency from discharging it. The question then arises whether the owners of the cargo lost or damaged are entitled, under the Third Parties (Rights against Insurers) Act 1930 ("the Act of 1930"), to recover an indemnity directly from the P. & I. Club in which the ship concerned is entered. That is the question which arises for decision by your Lordships in each of these two appeals.

In the first appeal the ship in relation to which a cargo claim arose was the motor vessel Fanti, owned by a Ghanaian company called Central Shipping Lines ("the member") and entered by it in the Newcastle Protection and Indemnity Association ("the club"). The rules of the club in force at the material time provided:

"4. … a member shall be protected and indemnified against all or any of the following claims and expenses which he shall have become liable to pay and shall in fact have paid …( g) for loss or damage caused to … property … carried on board a ship entered in this class .…"

In March 1983 the Fanti left Rostock on a voyage to Nigeria with a cargo of cement in bags owned by Firma C-Trade S.A. ("the third party"). About eight days later the ship developed serious leakage resulting in the entry of sea water into certain of her cargo holds and other spaces. A distress call was sent out and the Fanti was escorted into Portuguese waters off Cascais by a salvage tug. Subsequently both ship and cargo were abandoned to the salvors. Soon after the casualty the third party began an action against the member in the High Court here claiming damages for loss of its cargo. The member did not defend the action and in due course the third party obtained a default judgment against it for $748,953 including interest. The judgment was not satisfied and on 30 July 1984 the Companies Court, on the petition of the third party, ordered the member to be wound up. The third party then instituted arbitration proceedings against the club claiming an indemnity against them under the Act of 1930. The umpire made an award in favour of the club against which the third party appealed by leave to the Commercial Court. The appeal came before Staughton J. [1987] 2 Lloyd's Rep. 299 by whom it was allowed.

In the second appeal the ship in relation to which a cargo claim arose was the steam tanker Padre Island, owned by Steam Tanker Padre Island Inc. ("the member") and entered by them in the West of England Ship Owners Mutual Insurance Association (London) Ltd. ("the club"). Under rule 2 of its rules the club undertook to:

"Protect and indemnify members in respect of losses or claims which they as owners of the entered vessel shall have become liable to pay and shall have in fact paid… ."

A long list of losses and claims followed, including (J) cargo claims.

The original respondents in the second appeal ("the third party") asserted cargo claims against the member arising out of voyages of the "Padre Island" in the later part of 1965. These claims were eventually litigated in Florida and in 1975 the third party obtained judgment there against the member for damages including interest. That judgment was not satisfied and on 26 April 1982 the Companies Court ordered the member to be wound up. Subsequently the third party began two actions against the club in the Commercial Court claiming a direct indemnity in respect of its losses under the Act of 1930. Those two actions were dismissed by Leggatt J. on the ground (now agreed to have been erroneous) that the rules of the club in force at the material time contained an arbitration clause of the Scott v. Avery kind. The third party then pursued its claim against the club in an arbitration. Mr. Nicholas Phillips Q.C. was the arbitrator and in July 1984 he made an award in favour of the club. The third party then appealed by leave to the Commercial Court. The appeal was heard by Saville J. [1987] 2 Lloyd's Rep. 529 by whom it was dismissed.

As is apparent there was a direct conflict between the judgment of Staughton J., which was given on 24 April 1987, and that of Saville J., which was given on 23 July 1987. Saville J. had the decision of Staughton J. before him but declined, as he was entitled to do, to follow it.

Before I state the reasoning on which the decisions of Staughton J. and Saville J. were founded, it is necessary for me to set out the material provisions of the Act of 1930 as applicable at the material time. In its long title the Act of 1930 is described as "An Act to confer on third parties rights against insurers of third party risks in the event of the insured becoming insolvent, and in certain other events." Section 1(1) provided at the material time:

"Where under any contract of insurance a person (hereinafter referred to as the insured) is insured against liabilities to third parties which he may incur, then — ( a) in the event of the insured becoming bankrupt or making a composition or arrangement with his creditors; or ( b) in the case of the insured being a company, in the event of a winding-up order being made, or a resolution for a voluntary winding-up being passed, with respect to the company, or of a receiver or manager of the company's business or undertaking being duly appointed, or of possession being taken, by or on behalf of the holders of any debentures secured by a floating charge, of any property comprised in or subject to the charge; if, either before or after that event, any such liability as aforesaid is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall, notwithstanding anything in any Act or rule of law to the contrary, be transferred to and vest in the third party to whom the liability was so incurred ….

(3) In so far as any contract of insurance made after the commencement of this Act in respect of any liability of the insured to third parties purports, whether directly or indirectly, to avoid the contract or to alter the rights of the parties thereunder upon the happening to the insured of any of the events specified in paragraph ( a) or paragraph ( b) of subsection (1) of this section … the contract shall be of no effect.

(4)Upon a transfer under subsection (1) … of this section, the insurer shall … be under the same liability to the third party as he would have been under to the insured…"

The reasoning of Staughton J. [1987] 2 Lloyd's Rep. 299 in his judgment in favour of the third party can be summarised as follows. First, upon the winding up of the member there were transferred to the third party all the contractual rights of the member against the club, so far as they concerned the claim in issue, even though the member as yet had no cause of action against the club; among those rights was the term that the member must have paid the claim before it had a remedy against the club; once the winding-up order had been made there ceased to be any requirement that the claim should be paid before the club could be liable; the rights of the member had been transferred to the third party and it would have been impossible or anyhow futile for the third party to pay itself (see p. 306, cols. 1 and 2).

Secondly, the "pay to be paid" provision in the club's rules had the effect of...