Judgments - Manifest Shipping Company Limited v. Uni-Polaris Shipping Company Limited and Others

(back to preceding text)

    31. So far as the maintenance of the equipment in engine-rooms was concerned, the managers of the fleet did not take any special steps. It appears that they continued to rely upon the same maintenance procedures as before. In respect of the Star Sea, the managers engaged contractors to carry out necessary repairs and maintenance in the engine-room before she returned to service in November 1989. They put her through the required surveys in order to obtain the renewal of her safety certificates. In January 1990 at Zeebrugge, further inspections were carried out. However, neither in relation to the Star Sea nor in relation to other vessels did the management specifically require or instruct their superintendents to check the state of the dampers and other engine-room sealing components.

    32. As is shown by the judge's findings as to the state of seaworthiness of Star Sea when she sailed from Corinto, the managers were at fault. The steps that they had taken to prevent any repetition of the disastrous engine-room fires were inadequate, as he put it, "completely inadequate". The judge declined to find that there was any actual knowledge on the part of the relevant persons. He continued, at p 664:

    "However, I do find that there was blind eye knowledge on the part of the assured. The inadequate response to the earlier fires and the state of the Star Sea on 27 May [1990], demonstrate in my judgment that the assured did not want to know about her unseaworthiness in the relevant respects. What it comes down to specifically is this. With the message staring them in the face, that the CO2 systems on Centaurus and Kastora had not been used so as to prevent those ships from becoming constructive total losses, the assured took no effective steps to ensure that this would not happen again. The incompetence of the master and the state of the safety equipment for sealing the engine-room, essential to the effectiveness of the CO2 system on Star Sea show only too clearly how ineffective those steps were and how inadequately equipped she was to fight a fire effectively. The assured did not want to know about the competence of the master to use the CO2 system effectively. It is not easy to find a reason for this, since it would not have involved much time or money to ensure that the master was competent. The assured did not want to know about the state of the safety equipment. One reason for this is not difficult to find: money. This was an elderly vessel for which, as I find, there was a tight budget for repairs. A good deal of time and money had been spent on repairing in lay-up and maintaining at sea the reefer machinery which was, of course, essential to its revenue earning ability."

    33. Thus he does use the phrases drawn from the previous cases - "the assured did not want to know" - "staring them in the face" - but it is all postulated upon the inadequacy of the response to the earlier fires not upon any belief that would relate to the Star Sea herself. Whatever might be said about a tendency to skimp on repairs, nothing at all (as the judge himself points out) was to be gained by failing to check the master's state of knowledge of using CO2 and taking the simple steps, with no adverse costs implications, necessary to put any deficiency right. This is the point which was taken up by the Court of Appeal. Leggatt LJ said "an allegation that they ought to have known [is] not an allegation that they suspected or realised but did not make further enquiries". (p 208) He reviewed the evidence and continued at p 378:

    "Accordingly, on the evidence, it was simply not open to the judge to make a finding that any of the individuals 'suspected' or 'believed' that the master was incompetent, lacking the basic knowledge on how to utilise CO2. The judge, it is right to say, himself recognised that it was not easy to find a reason why, in making a decision to change the crew, anyone should do so to persons it was 'suspected' or 'believed' would render the ship unseaworthy. Negligence there may have been in failing to ensure that the master was instructed, but 'suspicion' in the minds of any of the relevant individuals that an incompetent master might be being used was simply not established."

    34. The Court of Appeal therefore reversed the finding of the judge. This sufficed (on the concession which had been made) to defeat the defence under s.39(5). They accordingly did not need to deal in detail with the question of privity in relation to the dampers. They pointed out, correctly, that the judge had not made a finding that any of the relevant individuals had suspected or believed that the Star Sea might be unseaworthy because of defects in the dampers. A finding of negligence to a very high degree did not suffice for a finding of privity.

    35. There may have been two sources of the difference between the Court of Appeal and the judge on this part of the case. The one was the confusion which has arisen from one of the phrases used by Roskill LJ in The Eurysthenes upon which I have already commented so as to have led to the use of an objective and not a subjective test. The other is the related point that evidence may provide support for making an inference that a person had a certain state of mind but may also be consistent with different states of mind. Thus the inadequate response to the previous casualties was evidence consistent with a number of states of mind of those concerned with the management of the fleet and does not without more establish that there was privity in relation to any individual vessel.

    36. I agree that the Court of Appeal were right to reverse the judge's findings of fact and to allow the owners' appeal. The evidence did not on the correct view of the law sustain the finding of privity. The defence under s.39(5) therefore fails.

    The s.17 Defence: The Facts:

    37. The facts relied upon by the defendants arose from the facts concerning the dampers on the Kastora as reported by Dr Atherton to the owners. His first report in May 1989 had noted that they had not been closed but did not criticise their maintenance; his second in September 1989 did. The reports went to Mr Nicholaidis who told the judge that he did not pick up this addition in the second report. Tuckey J disbelieved him and found further that Mr Nicholaidis had told Mr Faraklas that the dampers on the Kastora needed to be overhauled and repaired. In the present litigation the owners did not disclose Dr Atherton's reports, treating them as privileged. Further they did not disclose that he had, on his second visit to that vessel, found the dampers in a defective condition. They served a factual witness statement from Dr Atherton which did not refer to that fact. The witness statements of the Kollakis brothers also did not refer to Dr Atherton's second report. The defendants also relied upon a brokers' letter written in conjunction with negotiations for the settlement of the action which they said was similarly misleading in relation to the Kastora casualty. The defendants thus alleged that there had been a failure to observe the utmost good faith in that there had been a failure to disclose material information and misleading statements had been made. Their allegations involved also the owners' solicitors who were conducting the litigation on the owners' behalf and included allegations that what was done was done deliberately and that the untruths were reckless.

    38. The judge rejected the substance of all these allegations. The various statements were not untrue and should not have misled. The brokers' letter was open to criticism but it was not dishonest, nor was it written recklessly. The judge however did disbelieve what Mr Nicholaidis had said in his witness statement and in his oral evidence. Mr Nicholaidis was not responsible for the conduct of the litigation or the prosecution of the claim. The solicitors had treated the first Atherton report as privileged as indeed it was. They had been unaware of the existence of the second Atherton report until the second day of the trial as it had been temporarily mislaid amongst the papers for litigation relating to the Kastora casualty with which the solicitors were not concerned. The judge did not make a finding of fraud against the owners.

    39. The Court of Appeal upheld the judge's findings. In relation to the question of fraud, the case advanced by the defendants was that the decision to claim privilege for the Atherton reports was deliberate in the appreciation that its disclosure would weaken the owners' case. But, as the Court of Appeal pointed out, it was accepted that the reports were protected by legal privilege and it was believed by the solicitors that the owners were not under an obligation to disclose privileged documents unless and until they should choose to put them in evidence or call a witness who would be going to refer to them. Thus actual fraud was not alleged and it was at no stage alleged that the claim was being put forward fraudulently without an honest belief that it was a claim that the owners were entitled to make. Therefore, if a finding of fraud was necessary for the defendants to succeed on their defence under s.17, they would fail. Neither the judge nor the Court of Appeal made such a finding against the owners.

    40. Before your Lordships the defendants contended that there was a positive duty of fair dealing and disclosure any breach of which would amount, in effect, to constructive fraud giving rise to the s.17 remedy of an entitlement to avoid the contract. But the defendants also had to contend that the duty extended up to and included the pursuit of any claim in litigation since this was the stage at which the matters upon which they relied had occurred. Thus, the defendants argued that it was a breach of that duty for the assured to claim privilege for a document which might assist the insurer to resist the claim.

Section 17: The Legal Problems:

    41. Section 17 raises many questions. But only two of them are critical to the decision of the present appeal - the fraudulent claim question and the litigation question. It is however necessary to discuss them in the context of a consideration of the problematic character of s.17 which is overlaid by the historical and pragmatic development of the relevant concept both before and since 1906.

    42. The history of the concept of good faith in relation to the law of insurance is reviewed in the speech of Lord Mustill in Pan Atlantic Ins Co v Pine Top Ins Co [1995] 1 AC 501 and in a valuable and well researched article (also containing a penetrating discussion of the conceptual difficulties) by Mr Howard Bennett in 1999 LMCLQ 165. The acknowledged origin is Lord Mansfield's judgment in Carter v Boehm (1766) 3 Burr 1905. As Lord Mustill points out, Lord Mansfield was at the time attempting to introduce into English commercial law a general principle of good faith, an attempt which was ultimately unsuccessful and only survived for limited classes of transactions, one of which was insurance. His judgment in Carter v Boehm was an application of his general principle to the making of a contract of insurance. It was based upon the inequality of information as between the proposer and the underwriter and the character of insurance as a contract upon a "speculation". He equated non-disclosure to fraud. He said at p 1909:

    "The keeping back [in] such circumstances is a fraud, and therefore the policy is void. Although the suppression should happen through mistake, without any fraudulent intention; yet still the underwriter is deceived, and the policy is void."

    It thus was not actual fraud as known to the common law but a form of mistake of which the other party was not allowed to take advantage. Twelve years later in Pawson v Watson (1778) 2 Cowp 786 at 788, he emphasised that the avoidance of the contract was as the result of a rule of law:

    "But as, by the law of merchants, all dealings must be fair and honest, fraud infects and vitiates every mercantile contract. Therefore, if there is fraud in a representation, it will avoid the policy, as a fraud, but not as a part of the agreement."

    43. Echoes of his more universal approach could still be found nearly a century later in a judgment of Lord Cockburn CJ in Bates v Hewitt (1867) LR 2 QB 595 at 606-607:

    "If we were to sanction such [non-disclosure], especially in these days, when parties frequently forget the old rules of mercantile faith and honour which used to distinguish this country from any other, we should be lending ourselves to innovations of a dangerous and monstrous character, which I think we ought not to do."

    44. It was probably the need to distinguish those transactions to which Lord Mansfield's principle still applied which led to the coining of the phrases "utmost" good faith and "uberrimae fidei", phrases not used by Lord Mansfield and which only seem to have become current in the 19th Century. Storey used the expression "greatest good faith", Wharton "the most abundant good faith"; a Scottish law dictionary (Traynor) used "the most full and copious" good faith; some English judges referred to "perfect" good faith (Willes J, Britton v Royal Ins Co, (1866) 4 F&F 905) and Lord Cockburn CJ to "full and perfect faith" (Bates v Hewitt, sup at p 607). But 'utmost' became the most commonly used epithet and its place was assured by its use in the 1906 Act. The connotation appears to be the most extensive, rather than the greatest, good faith. The Latin phrase was likewise a later introduction. It has been suggested that its use may have been inspired by the use of similar language in Book IV of the Codex of Justinian (4.37.3) in relation to the contract of partnership. The best view seems to be that it had been unknown to Roman law and had no equivalent in Roman law: Mutual and Federal Ins Co v Oudtshoorn Municipality 1985 (1) SA 419, per Joubert JA at p 432. The first recorded use of the phrase in the law reports was by Lord Commissioner Rolfe (later Lord Cranworth LC) in Dalglish v Jarvie (1850) 2 Mac & G 231 at 243 in connection with the duty of disclosure to the court which arises when an ex parte application is made for an injunction; the phrase was however already current by that date as the judgment shows.

    45. Lord Mansfield's universal proposition did not survive. The commercial and mercantile law of England developed in a different direction preferring the benefits of simplicity and certainty which flow from requiring those engaging in commerce to look after their own interests.

    "Ordinarily the failure to disclose a material fact which might influence the mind of a prudent contractor does not give the right to avoid the contract. The principle of caveat emptor applies outside contracts of sale. There are certain contracts expressed by the law to be contracts of the utmost good faith, where material facts must be disclosed; if not, the contract is voidable. Apart from special fiduciary relationships, contracts for partnership and contracts of insurance are the leading instances. In such cases the duty does not arise out of contract; the duty of a person proposing an insurance arises before a contract is made, so of an intending partner." (per Lord Atkin, Bell v Lever Bros [1932] AC 161 at 227.)

    46. In relation to insurance Lord Mansfield was specifically addressing "concealments which avoid a policy". This concept of avoidance most obviously applies to the making of the contract and derives, as he said in Pawson v Watson (sup) and as confirmed by Lord Atkin (sup), from the application of a rule of law not from the parties' agreement. Later developments have applied the requirement of disclosure to matters occurring after the making of the contract of insurance, namely, the affidavit of ship's papers and the making of fraudulent claims; I will have to discuss these further. But, apart from some dicta, this has still been as a matter of the application of a principle of law and not through an implied contractual term. Nor was there any case prior to the Act where the principle was used otherwise than as providing a basis for resisting liability; no case was cited where the principle gave a remedy in damages, as would the tort of deceit or the breach of a contractual term. Whether there was a remedy in damages for a failure to observe good faith was finally and authoritatively considered by the Court of Appeal in Banque Keyser Ullmann SA v Skandia (UK) Ins Co [1990] 1 QB 665, affirmed by your Lordships' House at [1991] 2 AC 249 at p 280. In order to answer the question, both Steyn J at first instance (p 699 et seq) and the Court of Appeal (p 773 et seq) examined the basis of the requirement that good faith be observed. Having concluded on the authorities that the correct view was that the requirement arose from a principle of law, having the character I have described, the Court of Appeal held that there was no right to damages.

    47. The arguments of counsel in the present case disclosed a certain amount of common ground between them. The principle of utmost good faith is not confined to marine insurance; it is applicable to all forms of insurance (London Assurance v Mansel (1879) 11 Ch D 363, Cantiere Meccanico Brindisino v Janson [1912] 3 KB 452 ) and is mutual as s.17 itself affirms by using the phrase "if the utmost good faith be not observed by either party" and as was expressly stated by Lord Mansfield in Carter v Boehm 3 Burr1905.

    48. Secondly, both counsel submitted that the utmost good faith is a principle of fair dealing which does not come to an end when the contract has been made. A different inference might have been drawn both from the language of s.17 and from its place in the Act - beneath the heading "Disclosure and Representations" and above sections 18 to 21 which expressly relate to matters arising before the making of the contract. But there is a weight of dicta that the principle has a continuing relevance to the parties' conduct after the contract has been made. Why indeed, it may be asked, should not the parties continue to deal with one another on the basis of good faith after as well as before the making of the contract? In his book upon the Act published in 1907, Sir MacKenzie Chalmers added this note to s.17:

    "Note: The general principle is stated in this section because the special sections which follow are not exhaustive."

    There are many judicial statements that the duty of good faith can continue after the contract has been entered into. The citations which I make during the course of this speech will demonstrate this. To take just one example for the moment, in Overseas Commodities v Style [1958] 1 Lloyd's Rep 546 at 559, McNair J referred to the obligation of good faith towards underwriters being an obligation which rests upon the assured "throughout the currency of the policy". However, as will also become apparent from the citation, the content of the obligation to observe good faith has a different application and content in different situations. The duty of disclosure as defined by sections 18 to 20 only applies until the contract is made.

    49. Thirdly, both counsel accept and assert that the conclusion of the Court of Appeal in the Banque Keyser case is good law and that there is no remedy in damages for any want of good faith. Counsel also drew this conclusion from the second half of s.17 - "may be avoided by the other party". The sole remedy, they submitted, was avoidance. It follows from this that the principle relied upon by the defendants is not an implied term but is a principle of law which is sufficient to support a right to avoid the contract of insurance retrospectively.

    50. Having a contractual obligation of good faith in the performance of the contract presents no conceptual difficulty in itself. Such an obligation can arise from an implied or inferred contractual term. It is commonly the subject of an express term in certain types of contract such as partnership contracts. Once parties are in a contractual relationship, the source of their obligations the one to the other is the contract (although the contract is not necessarily exclusive and the relationship which comes into existence may of itself give rise to other liabilities, for example liabilities in tort). The primary remedy for breach of contract is damages. But the consequences of breach of contract are not confined to this. The contractual significance of the breach may go further. It may also amount to a breach of a contractual condition which will excuse or suspend the other party's obligation to continue to perform the contract. It may be a repudiatory breach, or evidence a renunciation, which entitles the other party to terminate the contract and sue for damages. However any such release only applies prospectively and does not affect already accrued rights. (Bank of Boston Connecticut v European Grain and Shipping Ltd [1989] AC 1056) Ordinarily, the right to the indemnity accrues as soon as the loss has been suffered: Chandris v Argo Insurance Co Ltd [1963] 2 Lloyd's Rep 65.

    51. The right to avoid referred to in s.17 is different. It applies retrospectively. It enables the aggrieved party to rescind the contract ab initio. Thus he totally nullifies the contract. Everything done under the contract is liable to be undone. If any adjustment of the parties' financial positions is to take place, it is done under the law of restitution not under the law of contract. This is appropriate where the cause, the want of good faith, has preceded and been material to the making of the contract. But, where the want of good faith first occurs later, it becomes anomalous and disproportionate that it should be so categorised and entitle the aggrieved party to such an outcome. But this will be the effect of accepting the defendants' argument. The result is effectively penal. Where a fully enforceable contract has been entered into insuring the assured, say, for a period of a year, the premium has been paid, a claim for a loss covered by the insurance has arisen and been paid, but later, towards the end of the period, the assured fails in some respect fully to discharge his duty of complete good faith, the insurer is able not only to treat himself as discharged from further liability but can also undo all that has perfectly properly gone before. This cannot be reconciled with principle. No principle of this breadth is supported by any authority whether before or after the Act. It would be possible to draft a contractual term which would have such an effect but it would be an improbable term for the parties to agree to and difficult if not impossible to justify as an implied term. The failure may well be wholly immaterial to anything that has gone before or will happen subsequently.

    52. A coherent scheme can be achieved by distinguishing a lack of good faith which is material to the making of the contract itself (or some variation of it) and a lack of good faith during the performance of the contract which may prejudice the other party or cause him loss or destroy the continuing contractual relationship. The former derives from requirements of the law which preexist the contract and are not created by it although they only become material because a contract has been entered into. The remedy is the right to elect to avoid the contract. The latter can derive from express or implied terms of the contract; it would be a contractual obligation arising from the contract and the remedies are the contractual remedies provided by the law of contract. This is no doubt why judges have on a number of occasions been led to attribute the post-contract application of the principle of good faith to an implied term.

    53. The principle relied on by the defendants is a duty of good faith requiring the disclosure of information to the insurer. They submit that the obligation as stated in s.17 continues throughout the relationship with the same content and consequences. Thus, they argue that any non-disclosure at any stage should be treated as a breach of the duty of good faith: it has the same essential content and gives rise to the same remedy - the right to avoid.

    54. In the pre-contract situation it is possible to provide criteria for deciding what information should be disclosed and what need not be. The criterion is materiality to the acceptance of the risk proposed and the assessment of the premium. This is spelled out in the 1906 Act and was the subject of the Pine Top case. But when it comes to post-contract disclosure the criterion becomes more elusive: to what does the information have to be material? Some instructive responses have been given. Where the contract is being varied, facts must be disclosed which are material to the additional risk being accepted by the variation. It is not necessary to disclose facts occurring, or discovered, since the original risk was accepted material to the acceptance and rating of that risk. Logic would suggest that such new information might be valuable to the underwriter. It might affect how hard a bargain he would drive in exchange for agreeing to the variation; it might be relevant to his reinsurance decisions. But it need not be disclosed. In Lishman v Northern Maritime Insurance Co (1875) LR 10 CP 179, at 182 Blackburn J said:

    "concealment of material facts known to the assured before effecting the insurance will avoid the policy, the principle being that with regard to insurance the utmost good faith must be observed. Suppose the policy were actually executed, and the parties agreed to add a memorandum afterwards, altering the terms: if the alteration were such as to make the contract more burdensome to the underwriters, and a fact known at that time to the assured were concealed which was material to the alteration, I should say the policy would be vitiated. But if the fact were quite immaterial to the alteration, and only material to the underwriter as being a fact which showed that he had made a bad bargain originally, and such as might tempt him, if it were possible, to get out of it, I should say that there would be no obligation to disclose it."

    55. Blackburn J is adopting a similar approach to that which he adopted in the leading case Cory v Patton (1872) LR 7 QB 304 which concerned whether there was a duty to disclose adverse facts discovered between the time that the underwriter had accepted the risk by initialling the slip binding in honour only, and the issue of the legally binding policy. Blackburn J said at pp 308-9 that the underwriter cannot depart "from terms thus agreed on [in the slip] without a breach of faith"; and the assured need not disclose to the underwriter "information which ought to have no effect on him, but would expose him to a temptation to break his contract. ..... he is not bound to lead his neighbour into temptation." The duty of good faith is even-handed and is not to be used by the opposite party as an opportunity for himself acting in bad faith.

    56. The decision in Cory v Patton was endorsed by the 1906 Act. What Blackburn J said in Lishman was followed in many subsequent cases, for example, Niger Co v Guardian Ass Co (1922) 13 LlLR 75, particularly per Lord Buckmaster at p 76-7, Iron Trades Mutual Insurance Co Ltd v Compania De Seguros Imperio 31/7/90 Commercial Court (unreported); Bank of Nova Scotia v Hellenic War Risks Mutual Insurance Ass (Bermuda Ltd) [1988] 1 Lloyd's Rep 514. In the Niger case an additional argument was advanced. The policy in that case was one which covered the assured for a number of years but it included a cancellation clause which allowed the insurance company to cancel the policy. The risk turned out to be more onerous than had been expected because there was a tendency for considerable quantities of goods to accumulate in the up-river warehouse from which they were to be dispatched. The insurance company sought to avoid the policy or resist a claim because this post-contract development of which the assured was aware had not then been disclosed by the assured to the insurance company. Obviously the development was of interest to the insurance company and might have led it to exercise its right of cancellation. But the Court of Appeal ((1921) 6 LlLR 239, particularly per Bankes LJ at p 245) and the House of Lords held that such facts need not be disclosed. (See also New Hampshire Ins Co v MGN [1997] LRLR 24.) A similar decision has been reached in Australia, NSW Medical Defence Union v Transport Industries Ins Co (1985) 4 NSWLR 107.

continue previous