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|Judgments - Manifest Shipping Company Limited v. Uni-Polaris Shipping Company Limited and Others
HOUSE OF LORDS
Lord Steyn Lord Hoffmann Lord Clyde Lord Hobhouse of Wood- borough Lord Scott of Foscote
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT
IN THE CAUSE
MANIFEST SHIPPING COMPANY LIMITED
UNI-POLARIS SHIPPING COMPANY LIMITED AND OTHERS
ON 18 JANUARY 2001
 UKHL 1
1. I have had the advantage of reading the speeches of Lord Clyde, Lord Hobhouse of Woodborough and Lord Scott of Foscote. For the reasons they give I would also dismiss the appeal.
2. I have had the advantage of reading in draft the speeches prepared by my noble and learned friends Lord Hobhouse of Woodborough and Lord Scott of Foscote and for the reasons which they give I would dismiss the appeal.
3. Section 39(5) of the Marine Insurance Act 1906 concerns the case where "with the privity of the assured, the ship is sent to sea in an unseaworthy state." The underwriters argue that the assured had "blind-eye knowledge" of the two particular respects in which the ship was unseaworthy. Blind-eye knowledge in my judgment requires a conscious reason for blinding the eye. There must be at least a suspicion of a truth about which you do not want to know and which you refuse to investigate. The argument on that approach then fails on the facts. I am not able to spell out of the judgment of Tuckey J any finding that the insured, or particularly any of those whose states of mind may be attributed to that of the insured, suspected any incompetence on the part of the master of the Star Sea, let alone any suspicion of his incompetence in the particular respect which mattered. That is sufficient to dispose of this part of the case; but in any event there is no finding of a suspicion on the part of the insured of the defective state of the dampers which contributed to the loss.
4. As regards the other chapter in the case I consider that it also fails on the facts. Even if the appellants were correct in requiring fair dealing and disclosure at the stage of the litigation I am not persuaded that the evidence supports the proposition that there was in fact any "culpable non-disclosure," as it was termed, on the part of the insured. As regards the obligations in law of an insured at the stage of a disputed claim I take the view that there is no duty upon the insured to make a full disclosure of his own case to the other side in a litigation. I see no practical justification for such an obligation at that stage. Unlike the initial stage when the insurer may rely very substantially upon the openness of the insured in order to decide whether or not to agree to provide insurance cover, and if so at what level of premium, the insurer has open to him means of discovery of any facts which he requires to know for his defence to the claim. Moreover I have found no precedent to support the appellants' proposition; if anything the authority at least of MacGillivray on Insurance Law, 9th ed. (1997), para 19-59 points in the opposite direction. The idea of a requirement for full disclosure superseding the procedural controls for discovery in litigation is curious and unattractive, and one which would require to be soundly based in authority or principle.
5. What has caused me greater difficulty is the broad provision in section 17 which appears to be unlimited in its scope. The expression "utmost good faith" appears to derive from the idea of uberrimae fidei, words which indeed appear in the sidenote, but whose origin I have not been able to trace. The concept of uberrima fides does not appear to have derived from civil law and it has been regarded as unnecessary in civilian systems (Prof T B Smith, "A Short Commentary on the Law of Scotland" (1962), p 836, quoting MA Millner "Fraudulent Non-Disclosure" (1957) 76 SALJ 177, pp 188-9). Indeed more recently the suggestion has been advanced in the Court of Appeal in South Africa that the concept should be jettisoned (Mutual and Federal Insurance Co Ltd v Oudtshoorn Municipality 1985 (1) SA 419, 433). Blackstone's Commentaries, 4th ed (1876) vol II, chapter 30 pp 412-413states that the very essence of contracts of marine insurance "consists in observing the purest good faith and integrity," but in Carter v Boehm (1766), 3 Burr 1905, at p 1910, Lord Mansfield refers simply to "good faith".
6. On the face of it the comprehensive degree of disclosure which the phrase implies and the absence of any limitation upon the period over which the obligation is to extend gives some support to the appellants' contention. But if the view which I have preferred is correct and the highest degree of openness is not required at the stage of a disputed claim, then the superficial meaning of section 17 cannot be correct. One solution is to impose a limit upon the period of the relationship between the parties to which the statutory provision is meant to apply so that it would only apply to pre-contract negotiations. That can be supported by the fact that the section is placed in a group of provisions dealing with disclosure and representation. The special provisions which immediately follow section 17 may embellish the general rule which applies at the period of formation, but not be exhaustive of it. But that solution now appears to be past praying for. In these circumstances the alternative remains available of adopting a flexible construction of the concept of utmost good faith. The latter course was the one which the respondent has adopted and which I would accept.
7. Since even after the contract is entered into the relationship between the parties should in any event be coloured by considerations of good faith, the point is in some respects academic. But once it is recognised that in a contract of insurance, and indeed in certain other contracts, an element of good faith is to be observed, and that that element may impose certain duties particularly of disclosure between one party and the other, duties which may vary in their content and substance according to the circumstances, then a question may arise as to the utility of the concept of an utmost good faith or an uberrima fides. In my view the idea of good faith in the context of insurance contracts reflects the degrees of openness required of the parties in the various stages of their relationship. It is not an absolute. The substance of the obligation which is entailed can vary according to the context in which the matter comes to be judged. It is reasonable to expect a very high degree of openness at the stage of the formation of the contract, but there is no justification for requiring that degree necessarily to continue once the contract has been made.
8. I agree that the appeal should be dismissed.
LORD HOBHOUSE OF WOODBOROUGH
9. On 8 November 1989, brokers acting for the Kollakis group of companies renewed with underwriters the marine hull and machinery cover on the 40 or so vessels in their fleet for a further year. One of the vessels was the Cypriot motor vessel Star Sea, built in 1974 and having a gross tonnage 6925 tons. She was a dry cargo vessel having her engine-room and accommodation amidships and 4 refrigerated holds suitable for carrying bananas and this was the trade in which she was primarily employed. The trade is seasonal and it was usual for the Kollakis group to lay up their refer vessels during the late summer and autumn. The Star Sea was laid up in the Piraeus during which time annual maintenance and repairs were done by local contractors. She sailed on her first voyage following lay-up on 28 November 1989 manned by a Maldivian crew with Greek officers. Before she sailed she was inspected by a class surveyor and her cargo ship safety certificate, covering among other things fire safety, was renewed. The renewed insurance cover had attached on 25 November. Her insured value was US$ 3.2 million. The insurance was governed by English law and no specific clauses in the policies have been relied on by either side on this appeal. The provisions of the Marine Insurance Act 1906 ("the Act") apply. Loss by fire is a peril insured against.
10. Between November 1989 and May 1990, no incident occurred relevant to this appeal. There was a minor engine-room fire in March but this was simply dealt with using fire extinguishers. In January there was also a question of the efficiency of the emergency fire pump drawing water from the forepeak. A temporary fire pump was provided which satisfied the local surveyor but the suction in the forepeak was left in a condition where it would not draw unless the tank was filled; it was normally empty when the vessel was laden. However nothing now turns on these matters; they did not contribute to what was subsequently to occur.
11. 27 May 1990 the Star Sea sailed from Corinto, Nicaragua bound for Zeebrugge laden with a cargo of bananas, mangoes and coffee. Two days out, on the morning of the 29th, a fire was accidentally started in the engine-room workshop where the third engineer was using an oxyacetylene torch and it flashed back to the oxygen gas bottles. Attempts to use extinguishers on the fire were defeated by smoke. After about two and a half hours the master decided to use the CO2 system. The actions then taken were not effective to put out the fire and it continued to burn although for a while the crew thought it had been extinguished.
12 The vessel had sent out distress calls and these were responded to. The first vessel to arrive departed during the afternoon because the crew thought that the fire was out and that they did not need further assistance. During the early evening it became only to obvious that this was not so. The fire spread to the accommodation. A tug arrived during the early hours of the following day and the fire was unsuccessfully fought for the next day using the tug's monitors. The vessel was towed into Balboa arriving on 1 June with the fire still burning. At Balboa the fire was eventually extinguished but the damage was so extensive that the vessel had become a constructive total loss.
13. Notice of abandonment was given to underwriters on 12 June. It was not accepted. On 10 July the underwriters agreed to put the assured in the same position as if a writ had been issued. The writ in the action endorsed with points of claim was issued on 3 August and served a month later. The writ named two representative underwriters as defendants.
14. At the trial of the action before Tuckey J, various issues of fact and law were raised by the defendants in response to the claim. Only two are now of relevance.
15. The first is the defence that arises under s.39(5) of the Act. For voyage policies there is an implied warranty (s.39(1)) that at the commencement of the voyage the ship shall be seaworthy, ie, reasonably fit in all respects to encounter the ordinary perils of the seas of the adventure insured (s.39(4)). Such a warranty must be exactly complied with, whether it be material to the risk or not, and if not complied with the insurer is discharged from liability as from the date of the breach of warranty (s.33(3)). The policy in question here is a time policy, not a voyage policy. Section 39(5) provides:
16. There are therefore three elements in this defence. First, there must have been unseaworthiness at the time the vessel was sent to sea. Secondly, the unseaworthiness must have been causative of the relevant loss. (Thomas v Tyne and Wear SS Freight Ins Ass  1 KB 938) Thirdly, the assured must have been privy to sending the ship to sea in that condition. At the trial it was accepted that this defence could only defeat the claim for the CTL. The vessel had become a CTL under the policy because the fire had not been put out until it had caused such extensive damage to the vessel that the cost of repairing the damage would have exceeded her insured value. But some damage would have been caused by the fire in any event. It was accepted that the occurrence of the original fire was not attributable to any unseaworthiness; accordingly this defence would not bar a recovery for the lesser (but nevertheless substantial) partial loss.
17. Tuckey J found that the vessel had been unseaworthy in two respects which had concurrently caused the vessel to be so severely damaged that she became a constructive total loss. He also found that the assured had been privy to the vessel putting to sea unseaworthy in those respects. Therefore he held that the defence was made out in so far as the CTL claim was concerned.
18. The second defence was said to arise under s.17 of the Act:
The case of the defendants was that the assured was under a continuing duty of the utmost good faith to disclose to them any information material to the claim and which might affect their decision to pay or defend the claim. The defendants argued that this duty continued notwithstanding that litigation had started and had been broken by the assured's (and their lawyer's) failure to disclose certain facts material to the defence under s.39(5). Accordingly, the defendants said, they were entitled to avoid the whole contract ab initio - with retrospective effect - and therefore had a complete defence to the whole of the claim, both the CTL and the partial loss.
19. Tuckey J held that this defence failed both in law and on the facts. He therefore gave judgment for the assured limited to the partial loss (giving, on his assessment, a recovery of some US$ 1.7 million).
20. Both sides appealed to the Court of Appeal. The Court of Appeal (Leggatt, Henry and Waller LJJ) in a judgment of the court delivered by Leggatt LJ dismissed the appeal of the defendants but allowed the appeal of the assured, reversing certain of the judge's findings of fact in relation to the first defence. The Court of Appeal therefore entered judgment for the assured in respect of their claim for a CTL. It is from this decision that the defendants have with the leave of your Lordships' House brought this appeal. The defendants submit that both defences should have succeeded. Since the utmost good faith defence (s.17) arises in connection with the privity defence (s.39(5)), I will take the privity defence first.
Section 39(5): The relevant unseaworthiness:
21. The judge found that the vessel was unseaworthy in a number of respects when she set sail from Corinto. These reflected the age of the vessel and a low standard of maintenance. But he found that the failure to put out the fire on the morning of the 29th was attributable to only two of them. The vessel was equipped with a CO2 fire extinguishing system. This system worked on the principle of discharging a large quantity of CO2 gas into the engine-room so as to suffocate and thereby extinguish the fire by depriving it of free oxygen. For the system to be effective a number of conditions have to be observed. It should be used as soon as possible, before the fire has spread to other spaces. The engine-room must first have been sealed closing all the vents and other apertures through which CO2 might escape or oxygen enter thus prejudicing the suffocation of the fire. The full amount of CO2 should be discharged at one time into the engine-room so as to flood it with the gas and maximise the suffocating effect. The attempt at around noon on 29 May to put out the fire using CO2 was not successful because the attempt had been left until some two hours after the fire had started, the engine-room could not be sealed as the funnel dampers were in a defective condition and could not be fully closed, and only half of the CO2 was used for the attempt. The CO2 was kept in a special store outside the engine-room holding 4 banks of bottles. The contents of the bottles could be discharged directly into the engine-room by pulling a lever. The wires leading from the lever to two of the banks were broken. The system for discharging the bottles had not been properly maintained. When the lever was pulled only two of the banks were discharged. Had the need to discharge all 4 banks at the same time been appreciated the other two banks could have been discharged by different means but this need was not appreciated and it was not done at that time.
22. The judge found that the failure to use the CO2 earlier and the failure to use all 4 banks of bottles at once was attributable to the incompetence of the master in that he was ignorant of what was required for the successful use of the CO2 system. He held that this disabling lack of knowledge on the part of the master amounted to unseaworthiness. (Standard Oil Co. of New York v Clan Line Steamers  AC 100) The judge found that the defective condition of the funnel dampers which made it impossible to shut them fully also amounted to unseaworthiness. On the hearing of the appeal these findings were not challenged. The defendants also conceded that, for the purposes of making good the defence under s.39(5), it was necessary for them to establish that the assured was privy to both of these aspects of unseaworthiness. Thus it was conceded that, if the defendants fail to show privity in respect of the master's incompetence, the defendants' defence under s.39(5) fails regardless of what may have been the position about the condition of the dampers: see the Court of Appeal judgment,  1 Lloyd's Rep 360, 378. The concession was repeated before your Lordships. Whether or not this concession was correctly made has therefore not been the subject of argument before your Lordships: for the purposes of this case, I proceed on the basis of the concession.
Privity: The Law:
23. It was accepted that the assured (however defined) did not have actual direct knowledge of the relevant unseaworthiness. But it was argued that the assured had a state of mind which was equivalent to knowledge - so-called 'blind eye knowledge'. This was the type of knowledge which the judge held had been proved. ( 1 Lloyd's Rep 651, 664)
24. The expression was used by Lord Denning MR in The Eurysthenes  QB 49 at 68 in relation to a defence of privity under s.39(5) which had been raised in answer to a claim under a policy of marine insurance:
Geoffrey Lane LJ in the same case (at p 81) stressed that privity meant knowledge and consent and was not equivalent to negligence. But he added the word "believed":
Roskill LJ discussed the point at p 76. He was prepared to accept the expression "conscious realisation". He agreed with what Lord Denning MR had said. He added -
25. All these formulations reject the suggestion that even gross negligence will suffice. The use of the word 'suspicion' and 'belief' are indicative of the strength of the suspicion that is required. But perhaps the most helpful guide is to be found in what was said by Roskill LJ and Geoffrey Lane LJ about the reason for refraining from inquiry - "in the hope that by his lack of inquiry he will not know for certain" - "in order to avoid obtaining certain knowledge of the truth". It is probable that Lord Denning MR was saying the same thing when he used the phrase "so that he should not know it for certain". The illuminating question therefore becomes "why did he not inquire?". If the judge is satisfied that it was because he did not want to know for certain, then a finding of privity should be made. If, on the other hand, he did not enquire because he was too lazy or he was grossly negligent or believed that there was nothing wrong, then privity has not been made out. An ambiguity has arisen from the use by Roskill LJ of the phrase "had he thought of it". This suggests that the test may be objective. If so, that is not correct. The test is subjective: Did the assured have direct knowledge of the unseaworthiness or an actual state of mind which the law treats as equivalent to such knowledge?
26. This conclusion is in line with what Branson J had said 40 years earlier in The Gloria (1935) 54 LlLR 35 at 58:
If the shipowner deliberately refrains from examining the ship in order not to gain direct knowledge of what he has reason to believe is her unseaworthy state, he is privy to the ship putting to sea in that unseaworthy state.
27. The section refers to the privity of the assured; the privity must be of an individual who is to be identified with the assured. The owners of the Star Sea were the Manifest Shipping Co Ltd (the plaintiffs in the action), a Cypriot company beneficially owned by the Kollakis family. The management of the vessel was in fact delegated to an English company based in London, Kappa Maritime Ltd. At the material times the directors of Kappa were Captain Stefanos Kollakis and his sons Pantelis and George, who were concerned with commercial and operational matters, and Mr Nicholaidis, the technical director. The registered managers were a Greek company, Charterwell Maritime SA, based in the Piraeus. Its directors were Captain Stefanos and a Mr Faraklas (who was also the sole director of Manifest). The role of Mr Faraklas was in fact subordinate to that of Mr Nicholaidis and the other directors of Kappa. The judge held that Captain Stefanos and his two sons and Mr Faraklas were to be treated as coming within 'the assured' for the purposes of s.37(5); the Court of Appeal considered that Mr Nicholaidis did as well. Nothing however turns on this in the present case and I will proceed on the basis that the state of mind of any of these individuals may have been relevant to the question of privity.
Privity: The Facts:
28. The defendants' case on privity was based upon what had happened the previous year to two of the other vessels in the Kollakis fleet. In February 1989 the Centaurus was alongside in Wilmington, Delaware, when there was a fire in the engine-room. The crew initially did nothing to fight the fire and simply summoned the local fire brigade who were not able to put out the fire until some 15 hours later. The vessel was fitted with a CO2 system but the Korean officers did not use it as they should because they apparently had the extraordinary belief that its use would in some way damage the engines. They left its use until it was too late for it to be effective to extinguish the fire. It also emerged that the engine-room could not be effectively sealed. The vessel was a constructive total loss.
29. The other vessel was the Kastora. She also had Korean officers and crew. In April 1989 she was at sea in the Carribean. There was an engine-room fire which again was not put out and allowed to spread so that the vessel became a constructive total loss. On this occasion the crew did use the CO2 within about half an hour of the start of the fire but it was not effective because the funnel dampers were not closed. The surveyor instructed by Kappa was a Dr Atherton who inspected the vessel twice. The first time was fairly soon after the fire. He then observed that one of the funnel dampers was sticking in a partially open position but thought that this might be due to its having been distorted in the fire: see his first report dated 22 May 1989. In mid-September he inspected the vessel again and reported that "an examination of the dampers themselves revealed that these were in poor condition and would not have provided an effective seal in the ventilator trunking": see his second report dated 22 September 1989.
30. There was no dispute that relevant individuals for the purpose of s.39(5) were aware of these facts. To lose two ships within the space of two months through engine-room fires which should have been capable of being extinguished was remarkable and disturbing. The judge found that the assured's response was "completely inadequate". So far as the crews were concerned, Captain Stefanos and the others concerned in the management of the fleet decided that the Korean crews and officers were not good enough. They were influenced in this not only by their experiences with the Centaurus and the Kastora but also with the need to have competent and reliable crews for vessels engaged in the carriage of refrigerated cargoes. They changed over to having entirely Greek officered vessels. This was the reason why the Star Sea when she came out of lay-up was given Greek officers. The master appointed to the Star Sea had been with the fleet for over 11 years with a good record of service, had been at sea for many years before that and had obtained his master's certificate in 1978. There was no evidence that the managers or any of the relevant persons believed that the captain they had appointed to the Star Sea was anything other than competent and experienced. But it was also the case that they took no steps to check his knowledge of the right way to use the CO2 system.