Moussi H Issa Nv v. Grand Union Insurance Co Ltd

CACV000106/1983

Marine insurance - Assured failing to institute proceedings against Carrier before expiry of time limited under Hague Rules "Red Line Clause" - in all the circumstances a prudent uninsured would not have instituted proceedings against Carrier - no breach of contract by Assured - Insurer liable - failure of Insurer to settle claim under policies within reasonable time would not have excused Assured from instituting proceedings against Carrier within time limit if a claim would have been prudent - "Bailee Clause" in Institute Cargo Clauses (All Risks) was intended to be an insurance warranty.

BETWEEN

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Coram: Sir Alan Huggins, V.-P., BARKER J. A. & Power, J.

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JUDGMENT

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Sir Alan Huggins, V.-P.:

1. The plaintiff Respondent ("the Assured") sued as holder of two policies of marine insurance taken out by the seller of goods with the defendant Appellant ("the Insurer") for an indemnity in respect of the loss of cargo Shipped from Hong Kong to Paramaribo in Surinam, South America, in the s. s. France Maru. Upon delivery a shortage, apparently due to pilferage, was discovered. The Assured made a claim against the shin owner through its agent, but this was summarily rejected and the Assured duly claimed under the policies. The Insurer declined to consider the claims "until the result of the claim against the Carrier is known" and required the Assured "to vigorously persue this matter further with the Carrier as self-insured" (sic). The Assured protested and it is conceded that the Insurer was not entitled to delay settlement of the claims under the policies until the Assured had pursued a claim against the Carrier. The Insurer then asked its agent to obtain from the Assured "a Landing account and weight note" and said that "further attention will be taken upon receipt your reply". This request was passed on to the Assured and he eventually replied that it was not usual in Surinam to issue landing accounts and weight notes. He complained of the delay in settling his claims under the policies. Not later than 15th November 1981 the time limit fixed by the Hague Rules for a claim against the Carrier expired and shortly afterwards the insurer rejected the claims under the policies on the ground that the Assured had failed to comply with a provision in the policies requiring him to ensure that all rights against the Carrier were "properly preserved and exercised".

2. That provision was contained in what is known as the "Red Line Clause" and in the Bailee Clause of the Institute Cargo Clauses (All Risks), which were incorporated in the policies. The material part of the Red Lane Clause reads as follows:

LIABILITY OF CARRIERS, BAILEES OR OTHER THIRD PARTIES

It is the duty of the Insured and their Agents, in all cases, to take such measures as may be reasonable for the purpose of averting or minimising a less and to ensure that all rights against Carriers, Bailees, or other third parties are properly preserved and exercised. In particular, the Insured or their Agents are required:-

The Bailee Clause is in identical terms to the first sentence of the Red Line Clause. It is also necessary to set out the Reasonable Despatch Clause from the Institute Cargo Clauses:

"14.  It is a condition of the insurance that the Assured shall act with reasonable despatch in all circumstances within their control.

3. The judge held that the Assured "had done what was reasonable in the circumstances and had taken all necessary steps with appropriate despatch in relation to their claims". He appears to have based this view on a passage which he cited from Goodacre on Marine Insurance Claims (2nd edition) to the effect that, if an assured receives a sharp refusal from the carriers, "the Underwriters do not expect the case to become a matter of protracted correspondence between the assured and the bailees": they would rather pay the claim and rely or their right of subrogation. He found support for his view from the Insurer's delay in taking any further action after requesting production of a landing account and weight notes. This delay he described as "laches".  I do not follow this line of reasoning. The judge correctly set out the meaning of laches as "delay in asserting a right, claiming for privilege or applying for redress" but did not indicate how the Insurer's failure to take action on the claim brought against them by the Assured could constitute delay in asserting a right or claiming redress against the Carrier. On the contrary, he went on to deduce from the Insurer's delay that it was guilty of bad faith. With respect to him I find no evidence whatsoever of bad faith and counsel for the Insurer has disclaimed any suggestion of bad faith.

4. The question which the judge had to consider was not what course an insurer might in many cases prefer to adopt in relation to a claim against a carrier, but whether the Assured was, under the terms of this contract, under an obligation to pursue the claim against the Carrier to the extent of instituting proceedings before the expiry of the time limit. No one has doubted that if the Insurer had paid the Assured's claim the Insurer could itself have sued the Carrier.

5. It is suggested on behalf of the Assured that the Bailee Clause is ambiguous in that the words "to take such measures as may be reasonable" can be read either as governing only "for the purpose of averting and minimising a loss" or as governing also "to insure that all rights against Carriers, Beilees or other third parties are properly preserved and exercised". Mr. Sussex submits that, applying the contra proferentem rule, the court should adopt the latter construction. He argues that the ambiguity is Highlighted by the fact that in the 1982 edition of the Institute Cargo Clauses the Bailee Clause appears as follows:

I am unable to accept that the previous version was ambiguous, although the new one undoubtedly avoids any possible argument that ambiguity exists. Grammatically the conjunction and connects like with like in this case on, infinitive clause with another infintive clause, "to take....... and to ensure ......".  Not only grammatically but all historically this is the only acceptable construction, for the first half of the Bailee Clause has been lifted verbatim from section of the Marine Insurance Act, 1906.

6. It follows that I cannot accept the further argument that the duty to ensure that all rights against carriers are properly preserved and exercised is not absolute and is directly subject to the question of reasonableness.

7. That is not to say that the judge was necessarily wrong in having regard to the reasonableness of the Assured' s conduct, because, like the judge, I accept the following statement by Goodacre at p.161 of the book cited as to the true meaning of the second half of the Bailee Clause:

"The provision that A rights against third parties should be properly preserved and exercised, however, impresses on the assured the need to late all actions which a prudent uninsured person would put into effect to protect his own rights with regard to recovery from bailees as well as preventing or reducing damage to the goods themselves.

Mr. Sussex attached great importance to the particulars contained in the Red Line Clause and went so far as to argue that the Bailee Clause should be construed similarly, so as to be limited to the taking of immediate steps to safeguard a claim as soon as the lost is discovered: as I understood him he was suggesting that there was never a duty on an assured, in the absence of express words, to institute proceedings. The text books suggest that that has not been the construction planed upon the Bailee Clause, and it would be strange if it was the correct construction: it is even more important to an insurer that a writ shall be taken out before the expiration of the time limit under the Hague Rules than that the assured shall give notice in writing to the carrier within three days of delivery if the loss or damage is not apparent at the time of taking delivery.

8. Returning, then, to the test suggested by Goodacre, I think that Is a general rule a prudent uninsured would preserve any rights he might have against a carrier by taking out a writ before the expiration of the one year time limit, but he would do so only if that right was worth preserving, and it is contended on behalf of the Assured that that a prudent uninsured would never have instituted proceedings in the circumstances of this case. In the first place, the chances of establishing that the loss occurred when the goods were in the custody of the Carrier were extremely poor in view of the fact that the loss was not discovered until after the cargo had been discharged and had been lying in the customs warehouse for 10 days. In addition there were considerations arising from the size of the claim and the cost of bringing proceedings even should they be successful.   The total amount of the loss was in the region of US$2,500, but, by reason of the package limitation which would affect the claim under one of the policies, the most which could be recovered was approximately US$1,300.  The Assured was resident in Surinam and the terms of the Bill of Lading required that any action be brought in the Tokyo District Court. It is to be noted that whey. the Insurer demanded that a claim be pursued against the Carrier it did not offer to indemnify the Assured against the costs of the action. The Assured could have sought an indemnity, but I do not say that if the Insurer had refused to give one the Assured would necessarily have been excused from taking out a writ. That would certainly have been a material consideration when deciding whether no prudent uninsured would have instituted proceedings.

9. It must be emphasised that the right conferred upon the Insurer by the Bailee Clause is its own right and that it is for the Insurer to decide whether it will exercise any right of subrogation which it has. The question What would I a prudent uninsured have done? is not to be confused with What would the Assured have done? Only if no reasonable uninsured would have taker the step of instituting proceedings against the Carrier can the Assured escape liability for failing to take out a write.

10. The judge does not appear to have arrived at his conclusion that the Assured had done what was reasonable in the circumstances by applying that test, but no oral evidence was called before him and we are in as good a position as he was to apply the correct test. In my view this was a case where it can confidently be asserted that no prudent uninsured would have incurred the expense of instituting proceedings against the Carrier and accordingly that there was no breach of the Bailee Clause.

11. In view of that conclusion. it is not strictly necessary to decide the other issues which were argued before us. However, for completeness I will refer to them briefly. It was urged upon us by Mr. Sussex that, even if the Assured was under a duty to institute proceedings, the loss of the Insurer's right to sue the Carrier was caused not by the Assured' s default but by the failure of the Insurer to settle the claims under the policies promptly: there was no good reason why the claims should not have been paid in February 1981- by which time all the relevant documents had been submitted - and had they been so paid the Insurer would have had ample time to sue the Carrier by virtue of his right of subrogation, if it wished to do so. That is true, but, so long as a contract remains in force, breach by one party does not excuse the other from fulfilling its obligations under the contract. It seems tome to be nihil ad ram that a strict enforcement of the Bailee Clause could enable an unscrupulous insurer to delay settlement of a claim with the deliberate intention of relying upon the clause if his (possibly ill-informed) assured failed to sue the carrier. If the circumstances here had justified the Assured in taking out a writ, he was not prevented from doing so by the Insurer's failure to pay the claims under the policies and I would have held that the default of the insurer was no excuse for his failure to preserve his right against the Carrier.

12. I have said that that was the position "so long as the contract remained in force" There was some discussion about a possible repudiation of the contract by the Insurer, but it was common ground that there was no evidence that, if its  refusal to consider the claims until the Assured had sued the Carrier could constitute a repudiation, the Assured had accepted the repudiation.

13. Again, it is unnecessary to decide what would have been the effect if the Assured had been in breach of the Bailee Clause. That would raise the question whether the Bailee Clause was a warranty within the meaning of section 33 of the Marine Insurance Ordinance, i.e. "a condition which must be exactly complied with, whether it be material to the risk or not". If it was, then a breach by the Assured would be a complete defence to the claims by him under the policies. If it was not, a breach by the Assured would merely give the Insurer a cross-claim for damages. Arnould on the Law of Marine Insurance and Average (16th Edition) says at. p. 1098 (para. 1320):

"It is submitted that the effect of this  important clause is to give the underwriter; a cross-claim for damages, which in appropriate circumstances. may amount to a full defence to a claim under the policy, in any case where the  assured has failed to preserve a time-limit against the third party, or has committed some other breach of the obligations imposed. by the clause. It is, however, arguable that the effect of the Reasonable Dispatch Clause, which is also included in the cargo clauses, is to elevate the effect of a breach of the Bailee Clause into a breach of condition, so that any failure to preserve rights against third parties operates automatically as a defence. In the opinion of the editors, the Reasonable Dispatch Clause does not have such a far reaching effect, since it is not possible to equate the need to issue a protective  writ within a fixed period with the need to "act with reasonable dispatch," but as the clause has yet to be judicially construed, the point remains uncertain."

I respectfully agree that the Reasonable Dispatch Clause can have no such effect as that suggested. However, Lam not sure that a cross-claim could in any circumstances "amount to a full defence to a claim under the policy". Macgillivray and Parkington on Insurance Law (7th Edition) indicate at p 490 (para. 1169) that it is not clear whether the Bailee Clause is a warranty or not, and merely submit that, if an assured allowed a time bar to elapse, the insurer could recover damages for breach of stipulation "in the amount which would have been recoverable from the third party."

14. Mr. Sussex submits that damages would be a sufficient remedy for breach of the Bailee Clause. That may normally be so, but it is not conclusive evidence that the parties did not intend to create a warranty. Secondly, he points out that, if section 78(4) of the Marine Insurance Ordinance had been intended to create a warranty, the draftsman would have inserted the provision in the fasciculus of sections under the heading "Warranties, Etc.". On the other hand, Mr. Ma forcefully contends that the status of the Bailee Clause had to be decided at the time the policy was executed and not in the light of the particular events which happened subsequently. He suggests that the parties here clearly indicated the importance which they attached to the protection of the Insurer's rights against the Carrier and other third parties by the inclusion of the Bailee Clause in addition to the Red Line Clause. I conclude that the parties did attach such importance to this that they intended to create a warranty. However, if that be wrong, the Insurer's cross-claim would entitle the Insurer only to compensation for such loss as it has suffered. For my part I am not persuaded that any loss has been established, for there has been no attempt to prove what (if anything) the Assured could have recovered against the Carrier and Mr. Ma who argued his case with great Skill and frankness, acknowledged that, if the Insurers had no more than a cross-claim, his clients were in difficulty.

15. Although, I believe, for different reasons I have come to the conclusion that the decision of the trial judge was right and I would dismiss the appeal.

16. I am authorised to say that the other members of the Court agree with this judgment.