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| Paper presented at: International Marine Insurance Conference University of Antwerp, November 1999 Footnotes: A valuable SHORT examination of the subject The Omnipotent Warranty:
FEW would challenge the inequity of the draconian effect of such a contractual term. The very existence of a warranty is anathema to many continental lawyers who are blessed with far more forgiving regimes in relation to contractual stipulations and their breach. This paper will therefore seek to persuade that the Anglo-American marine insurance warranty is a prodigal aberration from the European ius communis of marine insurance, and that the prodigal, in whatever systems it has raised its unwelcome head, ought to be brought back into the fold in the interests of the very fairness, justice and equity to which English law so properly aspires. The paper will consider the following aspects of warranties:
The Warranty in History If we are to attempt to motivate pulling the English law maverick back line, we should perhaps first reflect upon the common jurisprudential roots which underpin all of our respective marine insurance systems.[2] From the very earliest times of maritime trading, it was appreciated by both traders and carriers alike that maritime risks constitute a greater hazard than those encountered on land. To try to minimise this risk, early merchants usually sailed with their goods as 'supercargo'. This enabled them not only to supervise stowage and carriage, but also to finalise the transaction for the sale of their goods, and obtain payment for them at the port of delivery.[3] But merchants could not always accompany their vessels, nor could their presence ensure shielding from the risk to which their goods were subjected. What was needed was a contract which would protect merchants against the caprices of fortune.[4] The earliest contracts, in which the burden of the happening of uncertain events was transferred to another at a price, were not what we know today as insurance contracts at a premium. They were an extended facility of the maritime loan developed by the Babylonians in the 3rd millennium BC.[5] The Babylonian system was not a 'stand-alone' contract of insurance. It involved rather a 'premium' percentage of interest chargeable on a loan for the purchase of the goods to be traded. The lender of the money, in return for the 'premium' interest, assumed the risk of the goods in transit. Although not an insurance contract in its own right, the maritime loan, disburdening the uncertainty of events onto the lender, is reported by Trennery [6] as having been embraced by the Venetians, the Greeks and the Romans.Somewhat surprisingly, the Romans did not recognise a contract of insurance which was not coupled to a maritime loan. [7] Yet the notion of the transfer of risk to another for a price was certainly well developed by the time of Justinian, whose Digest contained provisions regulating the rate of premium interest covering the assumption of risk as part of a maritime loan.[8]Emerigon’s comments, written as they were in 1783, are perhaps more perspicacious of Roman 'insurance' practice:
It was the 'spirit of commerce' which indeed took the Babylonian, Venetian and Roman wild plant of the maritime loan and developed it into a contract in its own right. The maritime loan, with its premium interest, had been used and developed throughout the Middle Ages until in 1227 AD Pope Gregory IX issued a Papal See prohibiting it upon grounds of usury. [9] The church at that time was greatly concerned with interest and usury but, although theologians distrusted the whole concept of insurance,[10] the Pope had at no stage prohibited the assumption of risk per se. Nor indeed was insurance in itself in conflict with canon law. It was thus a natural process to separate the loan contract (with its 'usurious' maritime interest) from the undertaking to assume risk. From this process, probably, the independent contract of insurance was born.[11]It was the Italian merchants, most immediately affected by the papal ban on the maritime loan, who then used their commercial ingenuity to develop an insurance contract by a relatively swift process of evolution. We know that the northern trading cities of Italy played a crucial role in the development of the lex mercatoria, and thereby, the ius commune (which forms a part of the current South African Roman-Dutch common law). It is thus likely that the traders of the northern Italian cities therefore were the first to develop the fictitious loan,[12] and then, to short-circuit the Papal See, the simulated contracts of sale of the goods to the lender of finance for the purchase and transport of the goods -- with a premium added to the sale price to allow for the assumption of risk by the buyer (who was essentially the financier). Upon safe delivery, the simulated sale was either cancelled, or the goods were sold back upon agreed rates. If the goods were lost the 'insured', as the seller, was paid out the sum for which he had contracted that the 'insurer' as buyer would pay him, but he had then to abandon all his rights in the property to the insurer. It is here that the principle of indemnity and subrogation has roots.[13] And it also follows that the insured could not 'sell' property to an insurer buyer unless he as the seller owned the property. It is here that the roots of the concept of insurable interest may be found.[14] And it was not long before these simulated sale contracts developed into particular contracts for the assumption of risk upon the payment of a price, which came to be known as a premium. The lex mercatoria was quick to accommodate principles of premium insurance, and, driven by the expertise of the Lombardy merchants of Italy, the insurance pollizza (meaning in Italian a promise or an undertaking) spread constantly westwards until it took root in the City of London under the support of a royal warrant of Henry IV.[15] In its new home in England therefore, European marine insurance took hold in English law,[16] from where it later spread to the American and colonial English satellite legal systems. What is important, however, is that more perhaps than many areas of shipping law, marine insurance continues today, in the main, to reflect its common roots. The modern marine policy still contains traces of the wording of the Italian pollizza of the late 14th century.[17] For the early English marine insurance underwriters (or perhaps should one more accurately refer to them as the Italian practitioners operating in England) were practising the marine insurance that had been distilled in Europe throughout the 17th Century. Thus for example Grotius, in 1631, wrote a substantial work on insurance which made significant reference to the provisions of the existing city ordinances on insurance in Holland.[18] Grotius was not alone in dealing with insurance. In France, Germany and finally in England, commentaries by learned authors dealing with insurance and marine insurance contributed greatly to the process of codification.[19] France, beginning with Louis XIV’s Ordinance of 1681 and ending with the Code Napoleon in 1807, then the Netherlands (1838), Germany (1900) and finally England (1906), defined their own laws of marine insurance, broadly in accord with the ius communis of marine insurance then practised in Europe. There was little divergence in principle, for all were relying on the same roots. Origins and Development of Warranties: Contractual Stipulations Distinguished Against the framework of the common origins of the marine insurance how did the present day English warranty hive off on such a different course? The warranty has its early origins in the desire of an insurer to circumscribe and control the risk. Marine insurance is, and always has been, a contract. Nothing more and nothing less. In the absence of moral, religious or legislative intervention, the parties to an insurance contract have always been at liberty to insert into that contract clauses which serve their own interests. Indeed one of the cornerstones of the English system of contract is the freedom to formulate its terms. My countryman and academic colleague, Prof. J P van Niekerk, in his immensely interesting and comprehensive thesis dealing with The Development of the Principles of Insurance Law in the Netherlands from 1500 to 1800[20] points out that in pre-18th century European systems, the state or city legislatures had attempted to restrict the freedom of contract of insurers and their assureds by prescribing statutory forms of insurance in terms of which the parties were obliged to underwrite risks. But by the time that Grotius wrote his commentary on Dutch marine insurance law in 1631, it was generally accepted that the parties enjoyed full freedom of contract, with little or no legislative hindrance. Professor Van Niekerk concludes however that, in the circumstances of marine insurance practice at the time, the Dutch marine insurers seldom made use of contractual terms to reduce the likelihood of a risk materialising. Where, however, and apparently largely as the exception rather than the rule, an insurer inserted into otherwise standard terms a specific injunction upon the assured to do something or refrain from doing something during the currency of the policy, the courts enforced the will of the parties. The breach of such a term was however treated in the same way as breach of any other contractual term in the then civilian systems: breach was required to go the root of the contract in order to enable the aggrieved party to repudiate. Furthermore, the breach of an essential term of an insurance contract was required to be causative of the loss for the insurer to avoid liability.[21] It should perhaps also be noted that the causative connection between the breach and the loss was not viewed in those times in today's somewhat more restrictive light of the proximate or dominant cause. It was sufficient that the breach be a link in the actual causative chain which gave rise to a result. Professor Van Niekerk sums up the 18th century Dutch practice thus:
By the 19th century it was common for insurers in Europe both to issue policies drawn by themselves (as opposed to the more common earlier practice of policies being prepared by the insured), and to include terms to delimit the happening of the risk. Some of the terms became commonplace: an insured would often undertake that its vessel would sail in convoy. He would undertake that the vessel was in all respects seaworthy for the voyage.[23] In England, although the English legal system embraced freedom of contract, and whilst therefore English marine insurers were themselves not shy to insert clauses for their own protection by delimiting the risk, English law dealt with a breach of such terms in a way different from its European brothers. The essential term treated as a material and causative contractual stipulation by the civilians acquired an identity and a life of its own in the hands of the English jurists.[24] Where a contractual term was regarded as a 'warranty', it was automatically treated as an essential term, entitling the insurer to repudiate the contract. And the causative requirement fell away. As early as 1778 in Pawson v Watson[25] Lord Mansfield recognised a warranty as:
Although it would appear that the European systems also required strict compliance,[26] the reasons therefor and the consequences of non-compliance were very different. A civilian term controlling the risk, even in the manner of a warranty, was required to be complied with because it was essential. If its breach went to the root of the contract, repudiation was possible, but, in the marine insurance context, only if it caused the loss (in the European sense of causation). A trivial breach of a warranty is unlikely to be causative of the loss. But if a breach is sufficiently serious as to cause the loss it must surely go to the root of the contract -- which is the Roman Dutch law yardstick for repudiation by the aggrieved party. The English law generally, and more specifically in relation to the warranty, accordingly developed different tenets of repudiation.[27] And lest there be any doubt of the ability of an insurer to walk away from a policy where there has been a non-causative breach of warranty in early English law, Lord Mansfield in Woolmer v Muilman[28] in 1763 upheld an insurer’s repudiation of a claim where cargo was insured on a policy which warranted both ship and cargo to be neutral (which neither were) but where the ship was in fact lost in a storm. The English warranty was in another respect also a more draconian measure than the breach of an essential term across the Channel. In English law, a temporary breach of warranty extinguished the policy upon repudiation by the insurer. Subsequent remedying of the breach would not again place the insurer at risk, even if the insurer had continued to accept premiums. In the civilian practice in the 18th and 19th centuries, a temporary breach of an essential term, provided that it was later remedied, would not affect an insurer's liability -- provided of course that the cause of the loss was not the breach of the term either in retrospect or at the time of the breach. Causation was and remains in the European systems the key to cancellation of the policy. Toward the end of the 19th century the spotlight swings to the codification efforts of Sir MacKenzie Charmers. It is generally accepted that his 1906 Marine Insurance Act is very largely a restatement of the ius communis of marine insurance law on both sides of the channel as it had developed during the closing decades of the 19th century.[29] Which is why, even today, the civilian jurisprudence of marine insurance remains relevant to many marine insurance issues not definitively codified in the English Act. There were however certain exceptions in which English law had sailed a different course. And one of them was in the treatment of the English insurance warranty.[30] The Warranty in Present Laws At the outset it should be recognised that many legal systems (and all those which remain closer to their civilan roots) do not know the notion of a 'warranty' at all. They have contractual terms, some material, some trivial, upon which distinction the right to repudiate largely depends. It is thus anathema to continental lawyers to be told that Anglo-American insurance law knows a number of different types of warranty, and in some legal systems the way in which a warranty is treated will depend upon the category into which it falls. All systems which have received the English insurance warranty accept the difference between affirmative and promissory (or continuing warranties). The affirmative warranty, to borrow from the English Act, affirms or negatives the existence of a particular state of facts.[31] The promissory warranty (again to borrow from the Act) undertakes that some particular thing shall or shall not be done, or that some conditions shall be fulfilled. This would include my warranty that I shall not use my boat more than 30 miles off the coast, or that I shall at all times have on board a certified skipper. English law, both historical and current, also distinguishes the implied from the express warranty. And it implies a warranty of seaworthiness into a voyage policy but not into a time policy. There is a warranty of legality, applicable to both time and voyage policies. One should perhaps also reflect upon the ways in which a warranty may be created. The policy may be explicit in requiring the assured to warrant certain terms. Without mentioning the word 'warranty', the policy may prescribe that certain provisions requires strict compliance, failing which the insurer shall have the right to repudiate. Terms may similarly be expressed as 'conditions precedent' in English practice. This would equate with the 'essential term' in continental practice, from which the law will infer a right of the aggrieved party to repudiate. In our law, any words which a court may construe as imposing an obligation of strict compliance and a concomitant remedy of repudiation may be accepted by that court as a warranty. There is then a distinction between warranties relating to past or to present fact (whether affirmatory or promissory) and those relating to opinion. Generally it is accepted that an assured can not be held accountable for a breach of warranty of opinion, unless the assured has dishonestly supplied an incorrect answer to an insurer's questions.[32] Finally, and undoubtedly the most insidious of all, is a term in a policy which elevates the contents of a proposal form, however trivial or immaterial in respect of either the acceptance of the risk or the assessment of the premium, to the status of a warranty.[33] Let us now briefly examine a selection of domestic regimes which recognise the warranty and others which provide only for contractual terms with no special attributes of omnipotence.
There is no comfort to the assured if the breach is remedied. By sec 34(2):
Sections 33 and 34 reinforce the status of the warranty in English law as the ultimate trump card[34] in the insurer’s hand. It has the effect of excusing an insurer on account of any breach of warranty by the insured, causative or non-causative, trivial or material. It is, potentially at least, the nuclear weapon of the English marine insurance policy. English law, in the face of long-standing and on-going criticism of the inequity of the law of insurance warranties, has brought about limited reform in two ways. First, the English interpretational rule of contra preferentem generally favours the insured in situations where there is real doubt concerning the meaning of the policy wording.[35] And second, an industry-driven initiative has since 1977 imposed a measure of self-regulation in successive Statements of Insurance Practice.[36] In the marine context, London cover is often extended specifically for breach of warranty upon payment of an additional premium. This, as with the Statements in relation to non-marine insurance, is an attempt by a hopefully somewhat embarrassed industry to take the edge off the otherwise draconian effects of the Marine Insurance Act. But self-regulation should not relieve the legislature of its responsibility to ensure that its laws are fair. As John Birds writes:
In the eyes of a foreigner to the US system (and I suspect to many an American practitioner) Wilburn Boat must in itself stand as one of the greatest motivational arguments for an international convention on marine insurance, or at the very least an Oslo-Antwerp Rules -- or perhaps more appropriately, The Lombardy Rules – as an international 'Restatement' on the subject.[43] Bringing the USA to the table to sign such an international arrangement would, of course, be an entirely different matter.[44]
My understanding of the working of the Plan is that a breach by an insured of terms inserted into the contract (whether they be warranties or not) would only entitle the assured to avoid liability in whole or in part (the pro rata regein rule) if or to the extent that the breach were both material and causative. This is by reason of the operation of law rather than by any particular item in the Plan itself.
The Belgian reply in relation to warranties and the effect of their breach, says it all:
This is not to say that an assured has carte blanche in Belgian law. Belgium sticks to its civilian roots in allowing a contract to be terminated only in the event of a causative, and accordingly material, breach of an essential term of the contract.
Shortfalls and Inequities in Current Practices I have alluded earlier in this paper to what I perceive to be the inequities of the effect of a breach of warranty in most systems which have been tainted by the English law of warranties. I use the expression 'taint'" because there seems little justification in retaining what is often a purely technical defence to an otherwise perfectly legitimate claim. There seems to be little market advantage in the English approach to the non-causative and immaterial warranty, nor does the approach in fact and effect make it any more attractive to be a marine insurer in London than say in Antwerp or in Oslo. I am told that underwriting risks on a Norwegian Marine Insurance Plan policy, for instance, is done at rates comparable to those risks being underwritten on Institute Clauses in terms of the Marine Insurance Act in London. I am told further, that were English law to be amended to the effect that a warranty, as with any other breach, would have to be causally connected and material in order to allow an insurer to walk away from the contract altogether, no appreciable increase in premiums would be expected. Indeed, the Institute Clauses themselves recognise that an insured will be held covered for a breach of specific named warranties subject to the payment of an additional premium.[60] In practice also, English marine insurers seldom appear to rely upon a breach of warranty of seaworthiness in a voyage policy, and they frequently pay out upon policies where there has been a non-causative immaterial breach as a matter of honour. Changes to the law would simply address what has been recognised academically and judicially as technical traps[61] for the benefit of the insurer written into the fine print of policies which are not worth the paper upon which they are written requiring a prudent person seeking insurance to have an attorney at his elbow to tell him what the true construction of the document is.[62] Perhaps Lord Renbury says it all in Glicksman v Lancaster and General Assurance Company Limited:[63]
What is extraordinary, in my view, is that although those comments were made in 1927, three quarters of a century ago, there has still been no change. They were repeated in the English Law Commission Report of 1980[64] in a stinging criticism of the English law of insurance warranties and of its immoral and inequitable effect. The Law Commission summarised the defects in the present law relating to warranties as follows:[65]
The Commission then devotes a special section to the inequities of the clauses which deem the contents of a proposal to be the basis of a contract of insurance. The report describes such clauses as 'a major mischief in the present law'. Yet 20 years later we remain in a situation where no reform has yet been legislated -- neither in England, as the mother of the mischief, nor in its satellite jurisdictions. Co-perpetrators in the perpetuation of this mischief must therefore be all jurisdictions, like South Africa, the United States, Canada, Australia and New Zealand, and even in China in which the mischief is given legitimacy. The Way Forward The CMI is currently driving an initiative to examine whether or not there is any merit in debating a marine insurance convention or, at the very least, voluntary rules governing marine insurance along the lines of the York Antwerp Rules. The very successful Scandinavian symposium in 1998 gave rise to a decision by the CMI that it would appoint a working group to examine the similarities and differences between the various systems with the view to finding common ground. In that such a move would promote international uniformity in an important area of maritime law which is already favoured with a common pedigree, it should be welcomed. And the fact that certain of the major players (no doubt including the United States if its current track record is anything to go by) would decline to sign such a convention or adopt model rules, should not necessarily deter those players who feel that the suggestion has merit. Surely there can be no doubt that the adoption of basic and uniform international rules of marine insurance will provide the impetus and indeed the framework for legislative reform. If any country country then continues to resist reform, parties to insurance contracts would be at liberty to invoke the Rules contractually. There is much common ground. This conference in Antwerp will no doubt be an important step in the direction of determining whether or not an international initiative is an attainable reality, or whether nationalistic self-interest has already pushed the players too far apart to bring them back to their common roots. Perhaps a reminder of those common roots such as that which was attempted at the beginning of this paper may play a small part in the process. Perhaps also those who undertake such a brave initiative should take heart from a study of the essential commonality of marine insurance to help them compromise their differences. The words of Emerigon come to mind:
Let natural reason again prevail. Let the same results again flow from breach of an essential term (whatever its name may be) in all countries alike. And let us consign the toxic English warranty to the obscurity of history where it belongs. As we in South Africa have now learnt to chorus:
© John Hare |
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