Insurance Contract Law Issues Paper 2 Warranties - Law Commission

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Legality The implied warranty of cargoworthiness has been severely criticised on the ground that it might create freakish results for the assured in cargo insurance. A claim under the policy will fail if the carrying vessel was uncargoworthy at the start of the voyage, even though the assured has no means of ensuring whether the ship was cargoworthy or not. For this reason, in almost all cargo policies, the implied warranty of cargoworthiness has been waived provided that the assured or their servants are not privy to such unfitness. 9 A.18 The marine adventure itself must be lawful. Section 41 states There is an implied warranty 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. A.19 1n 1906 this reflected the general doctrine in the law of contract that illegal contracts may not be enforced. It is difficult to say how the section continues to reflect that doctrine. There is some uncertainty over whether the section should be interpreted in line with more recent case law on the doctrine of illegality, or whether it should be regarded as a stand alone rule, frozen in time. A.20 Clearly, if the parties agreed at the outset to insure an illegal adventure, the contract would be regarded as illegal and would not be enforceable in any event. Similarly if, unbeknown to the insurer, the insured intended to engage in an illegal activity it would be unenforceable by the insured. 10 A.21 The difficulties arise when at the time of making the contract the parties intended to act legally, but later performed the contract or carried out some aspect of the adventure in an unlawful manner. In St John Shipping Corporation v Joseph Rank Ltd, Devlin J held that illegality in the course of performance did not generally render a contract illegal. 11 Here the ship owners had overloaded the ship, causing its load line to be submerged, 12 but no harm or loss had been sustained. The ship owners sued for their freight, but the cargo owners defended the action on the grounds that the contract had been performed illegally. Devlin J commented that caution was required at a time when “so much of commercial life is governed by regulations of one sort or another, which may easily be broken without wicked intent”. 9 nd B Soyer, Warranties in Marine Insurance, 2 ed, 2006, p117. See further cl 5.2 of ICC 1982 (type A, B, C). 10 Archbolds (Freightage) Ltd v Spanglett [1961] 1 QB 374. 11 [1957] 1 QB 267. 12 This was an offence under the Merchant Shipping (Safety and Load Line Conventions) Act 1932, s 44, for which the master had been prosecuted. 104
To nullify a bargain in such circumstances frequently means that in a case - perhaps of such triviality that no authority would have felt it worth while to prosecute - a seller, because he cannot enforce his civil rights, may forfeit a sum vastly in excess of any penalty that a criminal court would impose; and the sum forfeited will not go into the public purse but into the pockets of someone who is lucky enough to pick up the windfall or astute enough to have contrived to get it. 13 A.22 The question is what effect section 41 would have if, for example, in the course of a voyage a ship is overloaded in a way that the ship owners could have prevented. Would this automatically discharge an insurer from liability for a loss that had no connection with the overloading? A.23 Baris Soyer argues that the principles in St John Shipping also apply to section 41. This means that a violation of shipping safety legislation does not render the performance of the adventure illegal. 14 On a policy level, the arguments Devlin J used in St John Shipping would appear to apply equally to an insurance contract. The breach may be trivial; it may bear no relationship to the loss; the insured may forfeit a sum vastly in excess of the criminal penalty; and the insurer may receive a windfall. The difficulty is exacerbated by the fact that the parties may not be able to contract out of the effect of section 41 if it does not suit their needs. 15 However, we have found no authority directly on the point. 13 St John Shipping Corp v Joseph Rank Ltd [1957] 1 QB 267, at p 288. 14 Warranties in Marine Insurance, 2 nd ed, 2006, p 126. 15 Gedge v Royal Exchange Assurance Corp [1900] 2 QB 214. 105
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Insurance Contract Law Issues Paper
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SPECIFIC UNDERTAKINGS AS TO PAST OR
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Reinsurance 15. Are there any reaso
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Basis of the contract clauses 39 Sp
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PART 1: INTRODUCTION BACKGROUND 1.1
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PART 2: BACKGROUND WHAT IS A WARRAN
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Held covered in case of any breach
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For example, in Farr v Motor Trader
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We recognise that a consequence of
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THE RECOMMENDATIONS 3.3 The 1980 re
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The test in the final report 3.12 F
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3.21 A more recent example is Seddo
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PART 4: ARE WARRANTIES STILL A PROB
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(4) The wording of the warranty doe
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4.12 The “innominate term” clas
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4.23 The 1977 Statement of Long-Ter
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4.34 The Long-Term Statement, howev
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4.42 In Director General of Fair Tr
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Does an exception have to be in pla
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4.60 It is not necessarily sufficie
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4.69 It might be argued that most w
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4.78 However, issues of causal conn
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4.86 Case 14 concerned a critical i
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5.5 In 1980 the Law Commission desc
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5.15 The effect of the Regulations
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Business insurance 5.25 The problem
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PART 6: WARRANTIES IN OTHER JURISDI
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6.10 In a 1982 case, the judge expl
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(b) In the view of the court or arb
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(4) Where the insured proves that s
Page 61 and 62: 6.33 An added twist to these diffic
Page 63 and 64: 6.44 The problems appear where the
Page 65 and 66: 6.53 Soyer argues that on the facts
Page 67 and 68: 6.64 An example will illustrate the
Page 69 and 70: PART 7: PROVISIONAL PROPOSALS 7.1 T
Page 71 and 72: All insurance 7.12 For both consume
Page 73 and 74: 7.20 In the seminar we were asked w
Page 75 and 76: 7.28 The last option is the most ra
Page 77 and 78: 7.37 It would be consistent with th
Page 79 and 80: 7.46 There are two reasons why an i
Page 81 and 82: Other types of clause dealing with
Page 83 and 84: 7.68 We tentatively conclude that t
Page 85 and 86: Our provisional view 7.75 In our vi
Page 87 and 88: 7.85 We think it would be unduly fo
Page 89 and 90: 7.97 Should the causal connection t
Page 91 and 92: 7.105 It has been put to us that a
Page 93 and 94: Legality 7.116 The warranty of lega
Page 95 and 96: 7.127 In 1980 the Law Commission re
Page 97 and 98: Continued liability for premiums FU
Page 99 and 100: 7.148 The question is whether this
Page 101 and 102: 7.157 Often both forms of waiver in
Page 103 and 104: PART 8: AN UNFAIR TERMS APPROACH TO
Page 105 and 106: 8.10 These provisions require the c
Page 107 and 108: (3) In examining whether a term was
Page 109 and 110: APPENDIX A: THE IMPLIED WARRANTIES
Page 111: A.11 There are some reasons to trea
Page 115 and 116: Table 1: Type of policy Travel 14 2
Page 117 and 118: B.16 Here a breach of the term does
Page 119 and 120: (4) In Case 20, the policy excluded
Page 121 and 122: significant definitions, terms and
Page 123 and 124: B.46 Although ombudsmen are unsympa
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Insurance Contract Law Issues Paper 2 Warranties - Law Commission

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