May 10, 2017

In Gard Marine and Energy Ltd v China National Chartering Co Ltd, the Supreme Court addressed the impact of a clause requiring the charterers to effect joint insurance on the parties’ rights to recover damage against each other. The Supreme Court’s decision is considered by Mark Cannon QC and Pippa Manby of 4 New Square.

THE INSURANCE ISSUE

The actual decision of the Supreme Court in Gard Marine was as to whether there was a breach of a safe port warranty (“the Warranty”) in a chain of charters of the ‘Ocean Victory’, a bulk carrier (“the Vessel”).  The Court was unanimous in upholding the decision of the Court of Appeal [2015] EWCA Civ 16; [2016] Lloyd’s Rep IR 381 that there was not.

Although they were not obliged to, the Supreme Court went on to consider, had there been such a breach, what remedy the owners of the Vessel would have had against the demise charterers in the light of the following term of the demise charter:

“(a) During the charter period the vessel shall be kept insured by the charterers at their expense against marine, war and protection and indemnity risks in such form as the owners shall in writing approve, which approval shall not be unreasonably withheld. Such marine, war and P & I insurances shall be arranged by the charterers to protect the interests of both the owners and the charterers and mortgagees (if any), and the charterers shall be at liberty to protect under such insurances the interests of any managers they may appoint. All insurance policies shall be in the joint names of the owners and the charterers as their interests may appear.

…

(c) Should the vessel become an actual, constructive, compromised or agreed total loss under the insurances required under sub-clause (a) of clause 12, all insurance payments for such loss shall be paid to the mortgagee, if any, in the manner described in the deed(s) of covenant, who shall distribute the moneys between themselves, the owners and the charterers according to their respective interests. The charterers undertake to notify the owners and the mortgagee, if any, of any occurrences in consequence of which the vessel is likely to become a total loss as defined in this clause.”

The demise charterer (or insurers in its name) wanted to claim damages down the chain of charters of the Vessel, including a time charter.  The only way that it argued it could do so was if it was liable to the owners for breach of the Warranty.  The Court of Appeal had held that the joint insurance provisions meant that there was no such liability.  The Supreme Court agreed by a majority of three to two.  In doing so they provided some welcome clarity and guidance in this area.

JOINT INSURANCE IN THE HOUSE OF LORDS: CO-OP v TAYLOR YOUNG

The potential impact of joint insurance on the parties’ obligations had come before the House of Lords in Co-operative Retail Services Ltd v Taylor Young Partnership Ltd [2002] UKHL 17; [2002] 1 WLR 1419.  The case concerned a claim for contribution under the Civil Liability (Contribution) Act 1978 by architects and engineers who were sued by a building owner for negligently causing a fire which damaged an office block during its construction.  The contribution claim was against the main contractor and the electrical sub-contractor, both of whom were insured under joint names insurance.  Both the main contract and the sub-contract excluded damage to the works themselves from indemnities given to the building owner and main contractor in respect of damage to property.  Both contracts contained provisions as to joint insurance of the works against damage by specified perils, including fire.  Both contracts contained provisions as to how damage to the works by those perils was to be made good.  The electrical sub-contractor had also given a deed of warranty to the building owner by which it warranted that it had exercised all reasonable skill and care in the design of the sub-contract works and so forth.  That warranty did not refer to the joint names insurance or as to how damage to the works by an insured peril was to be made good.

The House of Lords held that the claims for contribution were not open to the architects and engineers.  It held that the effect of the contractual scheme was to exclude the ordinary rules of contribution for negligence and breach of contract and replaced them with a scheme for making good the damage.

The architects and engineers had accepted that there was no right of subrogation by insurers under a joint names policy in the name of one co-insured against another.  The House of Lords concurred with the view expressed by Mr Recorder Jackson in Hopewell Project Management Ltd v Ewbank Preece Ltd [1998] 1 Lloyd’s Rep 448 that:

“it would be nonsensical if those parties who were jointly insured under a contractor’s all risks policy could make claims against one another in respect of damage to the contract works, that such a result could not possibly have been intended by those parties and that had it been necessary for him to do so he would have held that there was an implied term to that effect.”

JOINT INSURANCE IN THE COURT OF APPEAL: TYCO FIRE v ROLLS-ROYCE

A different result was reached in the decision of the Court of Appeal in Tyco Fire & Integrated Solutions (UK) Ltd v Rolls-Royce Motor Cars Ltd [2008] EWCA Civ 286; [2008] Lloyd’s Rep IR 716.  In that case the contract contained an express and unqualified indemnity by the contractor to the employer in respect of any damage or loss suffered by the employer as a result of any negligence, breach of contract or breach of statutory duty on the contractor’s part.

There were also provisions as to joint insurance.  The employer was to insure the existing structures “in the joint names of the Employer, the Construction Manager and others including, but not limited to, contractors”.  The employer was also to insure the works in the joint names of “the Employer, the Construction Manager, the Contractor and his subcontractors”.   The contractor was to make good any damage to the works and be paid for doing so up the amount of the joint names insurance of the works.

Rix LJ, with whom the other members of the Court of Appeal agreed, held that contractor was not intended to be an insured under the insurance of existing structures.  It followed that the contractor was liable to the employer for damage to those structures caused by its breach of contract and negligence.

In reaching that conclusion Rix LJ considered the interaction between the unqualified indemnity and the requirement to take out joint names insurance of the works for the benefit of the contractor.  He distinguished between damage caused by an insured peril which was an Act of God and damage caused by an insured peril resulting from a breach of contract or negligence on the part of the contractor.  He was inclined to hold that the contractor remained liable for the latter and considered that in such circumstances the employer would be entitled to retain the proceeds of the insurance policy and the contractor would have to carry out remedial works at its own expense.  He expressed the view that there was no reason why there should be no right of subrogation for insurers under a composite policy of insurance to bring a claim in the name of an insured who was covered for a particular loss against another insured who was not covered.

The express, unqualified indemnity was central to this reasoning (Rix LJ did not refer to the unqualified indemnity given by the electrical sub-contractor in the Co-operative Retail case).

JOINT INSURANCE IN THE SUPREME COURT: GARD MARINE v CHINA NATIONAL CHARTERING

The demise charter in the Gard Marine case contained the Warranty.  It also contained the term as to joint insurance set out above.  The majority of the Supreme Court held, in effect, that the latter trumped the former.

The reasoning of the majority (Lords Mance, Hodge and Toulson) was based on the presumed intention of the parties.  Lord Toulson, who gave the leading judgment of the majority, explained at [139] and [142]:

“It has become a common practice in various industries for the parties to provide for specified loss or damage to be covered by insurance for their mutual benefit, whether caused by one party’s fault or not, thus avoiding potential litigation between them … The commercial purpose of maintaining joint insurance in such circumstances is not only to provide a fund to make good the loss but to avoid litigation between them, or the bringing of a subrogation claim in the name of one against the other.”

The Warranty was not deprived of meaning.  It limited the use of the Vessel and breach of it might cause loss.  But the insuring clause regulated the positon if the breach resulted in loss of the Vessel.

Lord Toulson considered that the case for an implied term was stronger on the facts before the Supreme Court than those in the Co-operative Retail case, where one of the key obligations, that of the sub-contractor in its warranty to the building owner, had been in a different contract from those which dealt with joint insurance and how damage to the insured works was to be made good.

In the minority were Lord Sumption and Lord Clarke, the latter of whom had been a party to the decision of the Court of Appeal in the Tyco Fire case.  In their view, the demise charterer was liable in damages to the owner for loss of the Vessel as a result of breach of the Warranty, but that liability was discharged by payment under the joint insurance.  On this basis the demise charterer had been liable to the Vessel’s owner and so could claim damages down the chain of charters.  Lord Sumption, with whom Lord Clarke agreed, accepted that this meant that “if the insurer, being solvent, delays in paying the claim, the head owner can require the demise charterer to pay the loss at once”.  He dismissed this on the ground that “an obligation to pay damages upon a breach of contract is a routine consequence of the chartered service”.  This was “no more unthinkable in the case of the demise charter than it is in the case of the time charter, where no question of co-insurance arises”.

COMMENTARY

The decision in the Gard Marine case, like those in the other cases, turned upon the construction of the contracts between the parties.  It will always be necessary to have proper regard to the relevant terms.

But what does emerge clearly from the judgments of the majority is that agreement between the parties that they shall be jointly insured against a head of loss and damage will readily be taken as showing an intention that neither should be liable to the other in damages for that head of loss and damage.  And that this will be the case even if an express term of the contract might suggest otherwise.  This is based upon the presumed intention of the parties to avoid litigation between themselves.

This does not alter the result in the Tyco Fire case: there the defendant contractor was not an intended beneficiary of the joint insurance of the existing structure.  But it is hard to reconcile the reasoning of the majority in the Gard Marine case with Rix LJ’s analysis of the position under the joint insurance of the works (where the contractor was an intended beneficiary).  The better view is now that, in opting for joint insurance, the parties were agreeing that in the event of damage to the works by an insured peril, rather than argue between themselves as to who, if anyone, was at fault, they were to get on with putting right the damage, using the joint names insurance to fund the remedial works.

There is much to be said for that approach, although it is vulnerable to the argument that express obligations, such as the Warranty, are given a strained, unnatural meaning.  But there are, at least, two answers to that.  First, a contract must be read as a whole and so the express promises or warranties must be read together with the terms as to joint insurance.  Second, the approach of the minority is even more open to criticism: it is, with respect, no answer to the theoretical possibility that the demise charterer would have had to pay damages if insurers had been slow in paying out under the policy, to say that an obligation to pay damages is a “routine consequence”.  As the joint insuring clause in the demise charter showed, it was the intention of both parties that the loss should be covered by the insurance.  The position under the time charter was different.  What was unthinkable under the former was entirely thinkable under the latter.

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