Maritime Insurance Law Part 20

Pursuant to the earlier topic of Introduction to Maritime Law in Malaysia, published on 22 February 2021, in the coming series the basis and elements of Marine Insurance claims will be explored.

Implied Warranties

1. Implied Warranties

   Section 33(2) MIA recognises that warranties may be implied. Warranties may be implied into the marine insurance contract either by reason of the parties’ agreement or by law (via MIA).
   A warranty may be implied by reason of the parties’ agreement if the implied warranty is necessary (not merely desirable) for the business efficacy of the operation of the insurance contract, or if it is so obvious that any third party if asked about whether the term should be included would say ‘of course, it should’. There is no authority providing for such implied warranties.
   In addition to such implied warranties, a warranty may be implied by law by the provisions of the MIA. There are two warranties which are implied into a contract of marine insurance by the MIA, subject of course to the parties’ contrary agreement and to the other terms of the policy:

   1. The warranty of seaworthiness (sections 39 and 40 MIA).
   2. The warranty of legality (section 41 MIA). Before considering these two implied warranties, it should be noted that the MIA also makes provision in respect of other (possible) warranties, either: (a) by stating that there are no implied warranties about certain matters; or (b) by providing for the consequences if the parties agree a particular warranty. These other provisions however, do not impose any warranties on the parties.
   3. The MIA states that there is no implied warranty as to the nationality of a ship or that its nationality shall not be changed during the risk (section 37). It is open to the parties to agree such a warranty (The Tiburon).
   4. The MIA states that there is no implied warranty of seaworthiness in a time policy on a ship (section 39(5)) and no implied warranty of seaworthiness of goods in a voyage policy on goods (section 40(1)).
   5. Where the policy contains an express warranty of neutrality (no such warranty being implied), then the following consequences will occur: (i) If the policy is on ship or goods, there is an implied condition that the property shall have a neutral character at the commencement of the risk and that the neutral character shall be preserved during the risk, as far as the assured can control the matter (section 36(1)). Note that the consequences of breach of this condition are not set out, although it is likely to follow the same consequence as is set out in section 36(2). (ii) If the policy is on ship, there is an implied condition that, as far as the assured can control the matter, the ship shall carry the necessary papers to establish neutrality and that the vessel shall not falsify or suppress her papers or use simulated papers. If a loss occurs by reason of a breach of this condition, the insurer may ‘avoid’ the contract (section 36(2)). This condition does not apply to policies on goods.
   6. Where the subject-matter insured is warranted ‘well’ or ‘in good safety’ on a particular day, it is sufficient if the subject-matter be safe at any time during that day (section 38 MIA).
   7. These implied warranties will apply subject to sections 10 and 11 of the Insurance Act 2015

2. Seaworthiness

   Sections 39 and 40 MIA set out a number of provisions regulating the assured’s and insurer’s position concerning seaworthiness.
   Even where sections 39 and 40 provide for a warranty of seaworthiness, it is open to the parties to agree that there will be no such warranty (section 87 MIA). Such warranties were often, at least in the past, excluded by a provision called a ‘seaworthiness admitted’ clause in the policy (Cantiere Meccanico Brindisino v Janson). However, in order to exclude the warranty, clear language is required (Institute Cargo Clauses 1/1/82 and 1/1/09, clause 5, which essentially changes the warranty of seaworthiness of a ship in a policy on goods to a provision similar to section 39(5) MIA). In addition, a ‘held covered’ clause might be relied upon to avoid the consequences of a breach of this warranty (Greenock Steamship Co v Maritime Insurance Co).

   1. Meaning of seaworthiness
      Section 39(4) MIA provides: ‘A ship is deemed to be seaworthy when she is reasonably fit in all respects to encounter the ordinary perils of the seas of the adventure insured.’
      It is a question of fact in each case whether or not a ship is ‘seaworthy’
      for the purposes of section 39(4). There is no fixed standard of seaworthiness; it depends on the exigencies of the voyage (including the nature of the vessel, the course of the voyage, the nature of the voyage, the time of year, the expected conditions). In Garnat Trading & Shipping (Singapore) Pte Ltd v Baominh Insurance Corporation, the Court formulated one test of seaworthiness as follows:
      Note the following considerations in determining whether or not the vessel is seaworthy (reference is made below to some charterparty and carriage of goods cases; however, these cases should not be applied too rigidly to the insurance context):
      1. It is not necessary for the vessel to have the latest technology and be up to date in all respects. All that the vessel need have is that which a prudent shipowner would consider the vessel should have to be seaworthy (The Westerdok, The Kriti Rex).
      2. Seaworthiness does not mean that the vessel is in such a condition that it can perform the voyage without delay (The Aquacharm).
      3. Seaworthiness is concerned with attributes of the vessel and is not concerned with activities undertaken on board (The Apostolis, whether a reasonably prudent owner would have required that a particular defect, if he had known of it, must be made good before sending the ship to sea…In that context, a reasonably prudent owner should take into account the probable circumstances of the voyage and the weather and sea conditions likely to be encountered on it), unless the activity in question is necessary to ensure that the vessel’s attributes are seaworthy.
      4. A vessel will not be seaworthy if the cargo is stowed in such a manner as to render the vessel unstable (Daniels v Harris, Hogg & Co v Black Sea & Baltic General Insurance, compare Paterson, Zochonis & Co Ltd v Elder Dempster & Co Ltd).
      5. A vessel may be unseaworthy if it has incompetent or insufficient crew (Walker v Maitland, Thomas v Tyne & Wear Insurance Association, The Clan Gordon, The Star Sea).
      6. Seaworthiness is concerned not only with the vessel’s hull and machinery, but also its equipment and supplies, including bunkers (Greenock Steamship Co v Maritime Insurance Co, Project Asia Line Inc v Shone (The Pride of Donegal)).
      7. The vessel’s navigational equipment, including her charts, must be sufficient for the voyage (The Isla Ferdinanda).
      8. A vessel will not be seaworthy unless it has those documents necessary for the legal and efficient performance of the voyage and has complied with the requirements of its classification society (Stewart v Wilson, Project Asia Line Inc v Shone (The Pride of Donegal).

      Because seaworthiness may be warranted, it should be recalled or noted that:

      1. The warranty of seaworthiness must be exactly complied with (The Star Sea).
      2. A breach may occur and thereby discharge the insurer even if the breach was not causative of the loss (compare section 39(5) MIA); however, this is subject to the operation of sections 10 and 11 of the Insurance Act 2015 in respect of contracts agreed on or after 12 August 2016.
      3. Any breach cannot be remedied so as to reinstate the insurer’s liability (Forshaw v Chabert).
      4. Any delay or deviation in prosecuting the voyage necessary to ensure compliance with an express or implied warranty of seaworthiness will give rise to a defence under sections 46 or 48 MIA (section 49(1)(c) MIA). The insurer bears the burden of proving unseaworthiness (Ajum Goolam Hossen & Co v Union Marine Insurance Co, Blackett, Magalhaes & Colombie v National Benefit Assurance Co). However, the assured must be able to prove that an insured peril caused the loss (The Marel).
   2. Voyage Policies
      Warranties of seaworthiness are set out in sections 39 and 40 MIA. The warranty in section 39 applies to all voyage policies, including voyage policies on goods or moveables (‘cargo’). Section 40 provides for an additional warranty, but only in respect of voyage policies on goods or moveables.
      In a voyage policy, the following warranty or warranties are implied under section 39 MIA:
      1. It is warranted that at the commencement of the voyage the ship shall be seaworthy for the purpose of the particular adventure insured (section 39(1)).
      2. Where the policy attaches while the vessel is in port, it is warranted that it shall, at the commencement of the risk, be reasonably fit to encounter the ordinary perils of the port (section39(2)).
      3. Where the voyage is to be performed in different stages (e.g. the vessel proceeds from Georgia, USA to Kingston, Jamaica to Southampton, UK), it is warranted that at the commencement of each stage the vessel is seaworthy in respect of such preparation or equipment for the purposes of that stage (section 39(3)). It may be that during each stage the vessel requires different kinds of, or further, preparation or equipment, such as refitting, additional crew or bunkers. Just because the vessel is lost or damaged by an attribute which renders the vessel unseaworthy, there is no breach of warranty in respect of the stage of the voyage which has not (yet) been commenced when it was lost.
         The following characteristics of sections 39(1)–(3) MIA should be noted:
         1. The warranty applies at the beginning of the risk/voyage (although there is a supplementary warranty in respect of the beginning of each ‘stage’ of the voyage if there are such ‘stages’). Therefore it is not a breach of warranty if the vessel is seaworthy at the beginning of the risk/voyage, but had been unseaworthy beforehand or becomes unseaworthy afterwards. However, unseaworthiness may be presumed if the vessel is found to be unseaworthy within a short period of time after the commencement of the voyage, risk or stage.
         2. The warranty is concerned with the vessel. It is not concerned with the cargo or the lighters or other craft which assist the loading or discharge of the vessel.
         3. The warranty is implied in respect of all voyage policies, whether on ship, freight, etc. Section 40 imposes an additional warranty in respect of voyage policies on cargo.
         4. Whether or not the warranty has been breached is not dependent on the assured’s knowledge, unless the warranty itself makes the assured’s knowledge relevant (compare section 39(5) MIA). (Garnat Trading & Shipping (Singapore) Pte Ltd v Baominh Insurance Corporation).
   3. Time policies
      Under section 39(5) MIA, there is no implied warranty that a ship shall be seaworthy at any stage of the adventure.
      However, under a time policy, the insurer is not liable for any loss if he or she can show that:
      1. The loss is attributable to unseaworthiness.
      2. The ship is sent to sea in an unseaworthy state (section39(4) MIA).
      3. The ship is sent to sea in an unseaworthy state ‘with the privity of the assured’. ‘Privity’ means actual knowledge or it means that, although the assured did not have actual knowledge, he or she deliberately closed his or her eyes to those facts which he or she suspected led to the truth, to ensure he or she would not learn the truth. In the context of corporate assureds, a particular individual whose knowledge may be said to be that of the company will have to be identified in order to prove privity.
      4. It appears to be necessary that the unseaworthy attribute to which the assured is privy when the vessel is sent to sea must be the same unseaworthy attribute which led to the loss. As to section 39(5) of the MIA, see Versloot Dredging BV v HDI-Gerling Industrie Versicherung AG (The DC Merwestone). It is open to the parties to agree a warranty of seaworthiness in a time policy (The Lydia Flag)
   4. Voyage policies on cargo
      In a voyage policy on goods, there is no implied warranty that the goods are seaworthy (section 40(1) MIA).
      However, there is an additional implied warranty that at the commencement of the voyage the vessel is not only seaworthy as a ship but also that it is reasonably fit to carry the goods or other moveables to the destination contemplated by the policy (i.e. the vessel is cargo- worthy) (sections 40(2) MIA). The warranty will have to be construed by reference to the nature of the cargo.
      Section 40(2) suggests that the vessel’s cargo-worthiness is an additional requirement to the ordinary warranty of seaworthiness of the vessel as provided for in other voyage policies in sections 39(1)–(3) MIA. Under the law concerning the carriage of goods, ‘seaworthiness’ often includes ‘cargo-worthiness’ (The Benlawers, The Gudermes).
      However, the subject-matter of section 40(2) suggests that cargo-worthiness does not come within the warranty provided for in sections 39(1)–(3). Of course, if the carriage of a particular cargo might endanger the vessel, then the vessel may be said to be unseaworthy (Stanton v Richardson – a charterparty case).

3. Warranty Of Legality

   Section 3(1) MIA provides that ‘every lawful marine adventure may be the subject of a contract of marine insurance.’ This provision suggests that an unlawful adventure may not be the subject of a marine insurance contract. Consistently with this analysis, section 41 MIA provides that the adventure insured is a lawful one and that, so far as the assured can control the matter, the adventure shall be carried out in a lawful manner. There are two limbs to this warranty, namely:

   1. The adventure must be a lawful one. ‘Adventure’ is defined non-exhaustively in section 3(2) MIA.
   2. The adventure must be carried out lawfully, as far as the assured can control the matter. The fact that the unlawful act was committed by the master or crew, as opposed to the assured, would not prejudice the assured’s insurance, provided that the assured could not control the master’s or crew’s conduct.
      When section 41 refers to the adventure being lawful and being carried out in a lawful manner, which law is being referred to? It is likely that the law is that of England and Wales; it is not referring to any foreign law.
      If the adventure is illegal (under English law) from the time of the contract, the policy is unenforceable (Redmond v Smith). This is so either because the warranty has been breached from the outset or because only lawful marine adventures may be the subject of a marine insurance contract.
      There is no equivalent warranty in non-marine insurance contracts (Euro-Diam Ltd v Bathurst).
      There are several principles of the common law, which operate independently of section 41, concerned with the validity of contracts (as opposed to the adventure) which are contrary to English law, foreign law and English public policy (Euro-Diam Ltd v Bathurst, Royal Boskalis Westminster NV v Mountain).

   The following general contractual principles should be noted:

   1. The law will not permit a person to profit from his or her own criminal conduct. The law will not enforce a contract where the claimant must, in order to establish his or her claim, rely on an illegal contract or his or her own illegal conduct.
   2. The making of the contract itself may be illegal or against public policy and thereby void.
   3. The performance of the contract may be illegal either by English law or by the law of the place of performance. In such cases, the contract will be unenforceable unless it is possible to perform the contract lawfully. Even in the latter case, the contract may be void or unenforceable if the parties’ intention was to subvert the law. In addition, note that as a matter of public policy, an insurance contract will not be enforced where the loss was caused by the assured’s own criminal or (serious) tortious act (Beresford v Royal Insurance Co).
      It may be asked whether the warranty of the legality, or any breach, may be waived by the insurer. There is no reason why such a warranty might not be waived or negatived. Given that there is no equivalent implied warranty in non-marine insurance contracts, it is unlikely that there is a public policy against the absence of the warranty. Further, the common law rules concerning the enforceability of contracts will ensure that any illegality will not allow a tainted contract of marine insurance to be enforced. Finally, there is no suggestion in the MIA that such a warranty might not be waived (section 87 MIA). Similarly, there is no reason why the insurer might not waive a breach of the warranty of legality (section 34(3) MIA).
      As to the meaning of section 41 MIA, in particular the meaning of ‘adventure’ and ‘lawful’ (Sea Glory Maritime Co v Al Sagr National Insurance Co (The Nancy)). In this case, the Court also considered the scope of the rule of public policy as to whether illegality will render the insurance contract unenforceable.
      The circumstances in which the illegality will affect the enforceability of a claim as a matter of English law underwent substantial change by the decision of the majority of the Supreme Court in Patel v Mirza, when the Court overruled the ‘reliance’ test of illegality. At para.120, Lord Toulson said:
      ‘The essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system (or, possibly, certain aspects of public morality, the boundaries of which have never been made entirely clear and which do not arise for consideration in this case). In assessing whether the public interest would be harmed in that way, it is necessary (a) to consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim, (b) to consider any other relevant public policy on which the denial of the claim may have an impact and (c) to consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts.’

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This article is written by our Principal Associate, Chakaravarthi