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LW620 WORKSHOP FOUR TERM II/2012
COLLISION: THE ¾ LIABILITY CLAUSE
INTRODUCTION
As a matter of substantive law, collisions at sea involve the application of the law of
negligence in just the same way as collisions on the road. Collisions are the car crashes of the
sea. The existence of the duty of care is rarely a problem and can easily be established under
the general “neighbour” principle set out in Donoghue v Stevenson [1932] AC 562. The
difficult issues of law arise in the context of establishing: whether that duty has been
breached; how liability is to be apportioned when both vessels are, to some extent, at fault;
and what losses may be recovered by way of damages.
However, the starting point of any inquiry is to establish which human agencies were
responsible for the collision and whether their fault can be attributed to the defendant shipowner. This will involve the application of the principles of vicarious liability (S Baughen,
Shipping Law, Routledge – Cavendish, 2004 p279)
3 Marine adventure and maritime perils defined.
(1) Subject to the provisions of this Act, every lawful marine adventure may be the subject of
a contract of marine insurance.
(2) In particular there is a marine adventure where—
(c) Any liability to a third party may be incurred by the owner of, or other person interested
in or responsible for, insurable property, by reason of maritime perils.
“Maritime perils” means the perils consequent on, or incidental to, the navigation of the sea,
that is to say, perils of the seas … and any other perils, either of the like kind or which may
be designated by the policy.
Thus s 3(2) (c) of MIA envisages third party liability as a marine insurable risk; and as a
result the insurance industry has, over the years adopted clauses that offer cover for third
party liability. However, these clauses, which usually cover a collision between two vessels,
only cover no more than three-quarters of the assured’s liability.
The origin of this can be traced from the Marine Conventions Act 1911, s 1 of which states:
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The Marine Conventions Act 1911
Rule as to division of loss
1. (1) Where, by the fault of two or more ships, damage or loss is caused to one or more of those
ships, to their cargoes or freight, or to any property on board, the liability to make good the damage or
loss shall be in proportion to the degree in which each ship was in fault, except that if, having regard
to all the circumstances of the case, it is not possible to establish different degrees of fault, the liability
shall be apportioned equally. [Now see s 187 of The Merchant Shipping Act 1995 below]
The Merchant Shipping Act 1995
….
Multiple fault; apportionment, liability and contribution
187 Damage or loss: apportionment of liability.
(1) Where, by the fault of two or more ships, damage or loss is caused to one or more of those
ships, to their cargoes or freight, or to any property on board, the liability to make good the
damage or loss shall be in proportion to the degree in which each ship was in fault.
(2) If, in any such case, having regard to all the circumstances, it is not possible to establish
different degrees of fault, the liability shall be apportioned equally.
(3) This section applies to persons other than the owners of a ship who are responsible for the
fault of the ships, as well as to the owners of a ship and where, by virtue of any charter or
demise, or for any other reason, the owners are not responsible for the navigation and
management of the ship, this section applies to the charterers or other persons for the time
being so responsible instead of the owners.
(4) Nothing in this section shall operate so as to render any ship liable for any loss or damage
to which the fault of the ship has not contributed.
(5) Nothing in this section shall affect the liability of any person under a contract of carriage
or any contract, or shall be construed as imposing any liability upon any person from which
he is exempted by any contract or by any provision of law, or as affecting the right of any
person to limit his liability in the manner provided by law.
(6) In this section “freight” includes passage money and hire.
(7) In this section references to damage or loss caused by the fault of a ship include
references to any salvage or other expenses, consequent upon that fault, recoverable at law by
way of damages.
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ITCH 1/11/95
8. 3/4THS COLLISION LIABILITY
8.1 The Underwriters agree to indemnify the Assured for three-fourths of any sum or sums
paid by the Assured to any other person or persons by reason of the Assured becoming
legally liable by way of damages for
8.1.1 loss of or damage to any other vessel or property on any other vessel
8.1.2 delay to or loss of use of any such other vessel or property thereon
8.1.3 general average of, salvage of, or salvage under contract of, any such other vessel or
property thereon, where such payment by the Assured is in consequence of the vessel hereby
insured coming into collision with any other vessel.
8.2 The indemnity provided by this Clause 8 shall be in addition to the indemnity provided by
the other terms and conditions of this insurance and shall be subject to the following
provisions:
8.2.1 Where the insured vessel is in collision with another vessel and both vessels are to
blame then, unless the liability of one or both vessels becomes limited by law, the indemnity
under this Clause 8 shall be calculated on the principle of cross-liabilities as if the respective
Owners had been compelled to pay to each other such proportion of each other's damages as
may have been properly allowed in ascertaining the balance or sum payable by or to the
Assured in consequence of the collision.
8.2.2 In no case shall the Underwriters' total liability under Clauses 8.1 and 8.2 exceed their
proportionate part of three-fourths of the insured value of the vessel hereby insured in respect
of any one collision.
8.3 The Underwriters will also pay three-fourths of the legal costs incurred by the Assured or
which the Assured may be compelled to pay in contesting liability or taking proceedings to
limit liability, with the prior written consent of the Underwriters.
[The ITCH 1/10/83 is in similar terms]
The London Market Joint Committee (Lloyd’s Underwriters Association and IUA) in
consultation with ship owning associations, insurers, average adjusters and brokers,
developed International Hull Clauses (IHC), a new set of hull clauses. The IHC, which
became effective on 1 November 2002, are not a major rewrite of the 1983 and 1995 institute
time clauses (ITC), rather the ITC have been updated to reflect market practice and to support
the International Safety Management (ISM) code, flag states and classification societies.
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International Hull Clauses (IHC) 2003
6 3/4THS COLLISION LIABILITY
6.1 The Underwriters agree to indemnify the Assured for three fourths of any sum or sums
paid by the Assured to any other person or persons by reason of the Assured becoming
legally liable by way of damages for
6.1.1 loss of or damage to any other vessel or property thereon
6.1.2 delay to or loss of use of any such other vessel or property thereon
6.1.3 general average of, salvage of, or salvage under contract of, any such other vessel or
property thereon, where such payment by the Assured is in consequence of the insured vessel
coming into collision with any other vessel.
6.2 The indemnity provided by this Clause 6 shall be in addition to the indemnity provided by
the other terms and conditions of this insurance and shall be subject to the following
provisions
6.2.1 where the insured vessel is in collision with another vessel and both vessels are to
blame then, unless the liability of one or both vessels becomes limited by law, the indemnity
under this Clause 6 shall be calculated on the principle of cross-liabilities as if the respective
Owners had been compelled to pay to each other such proportion of each other's damages as
may have been properly allowed in ascertaining the balance or sum payable by or to the
Assured in consequence of the collision6.2.2 in no case shall the total liability of the
Underwriters under Clauses 6.1 and 6.2 exceed their proportionate part of three fourths of the
insured value of the insured vessel in respect of any one collision.
6.3 The Underwriters shall also pay three fourths of the legal costs incurred by the Assured or
which the Assured may be compelled to pay in contesting liability or taking proceedings to
limit liability, provided always that their prior written consent to the incurring of such costs
shall have been obtained and that the total liability of the Underwriters under this Clause 6.3
shall not (unless the Underwriters' specific written agreement shall have been obtained)
exceed 25% of the insured value of the insured vessel.
The Clause is unchanged except that in Clause 6.3 a cap of 25% of the Insured Value has
been imposed on the recovery of legal costs (unless otherwise agreed). Previously, under
ITCH 83 Clause 8.3 legal costs could theoretically be recovered up to the full insured value.
It is important to note that the 25% limit relates only to what are normally termed "costs of
defense", which will generally include a proportion of general costs of testing liability. Costs
of recovery are governed by Clause 49 in Part 3, which imposes only the requirement that
costs are reasonably incurred.[RH Rindley]
These three Hull Clauses (the 1/10/83, the 1/11/95 and the 1/11/03) are in effective force and
are available for use if required. It is, of course, always open to the parties to incorporate the
terms of any of the Clauses or to modify them, as they see fit, though, it is always advisable
to proceed with caution before departing from the standard phraseology.
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The ¾ Liability Clause, sometimes known as the Running Down Clause provides a shipowner with some cover for third party liability in the event of a collision. The insurer
undertakes, in the event of a collision, to indemnify the assured to the extent of ¾ of the loss
suffered by the other vessel; the remaining ¼ is borne by assured, but is usually covered by
the assured’s Protection and Indemnity Club (P & I).
Some of the terms in these clauses have been the subject of determination by the courts, and
will now be examined. Of particular interest here: “Collision”, “in consequence of”, “vessel”,
“by way of damages”, “paid by”, and “payment by”
Collision
The question of whether “collision” was a marine insurable risk was extensively debated in
the SS Xantho, the details of which are set out below
Thomas Wilson, Sons & Co. v The Owners
of the Cargo per the “Xantho” (1887) L.R. 12
App. CAS. 503
Ship—Bill of Lading—Perils of the Sea—Collision—Negligence.
Foundering caused by collision with another vessel is within the exception “dangers and
accidents of the sea” in a bill of lading; and excuses the ship-owner for non-delivery of the
goods if it occurs without fault in the carrying ship:—
Held, So, reversing the decision of the Court of Appeal (11 P. D. 170).
The owners of cargo by the steamship Xantho, who were the plaintiffs in the action, by their
statement of claim alleged that they had suffered damage by breach of the contract contained
in the bills of lading of goods shipped at Cronstadt on board the defendants' vessel Xantho for
carriage to Hull, that the bills of lading were indorsed to the plaintiffs to whom the property
in the goods passed by such indorsement, and that the goods were not delivered. The
statement further alleged alternatively that the plaintiffs had suffered damage from the loss of
their goods whilst on board the defendants' vessel by a collision with the steamship Valuta,
caused by the negligent navigation of the defendants' servants.
The statement of defence denied the contract and the breach, and also that the bills of lading
were indorsed to the plaintiffs, and that the property in the goods thereby passed to them. In
answer to the alternative claim it admitted that the Xantho came into collision with the Valuta
, but denied that the collision was caused by the negligent navigation of the Xantho , alleging
that it was solely caused by the negligent navigation of the Valuta . The defence further
alleged that the loss was occasioned by perils which were excepted by the bills of lading.
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In opening his case the plaintiffs' counsel stated that the Xantho was lost by reason of a
collision which took place between that vessel and the Valuta in a fog, and submitted that
whether the collision arose from the negligence of those navigating the Xantho or of those
navigating the Valuta, or from the negligence of both combined, the loss of the goods did not
fall within the exception contained in the bill of lading, and that the plaintiffs were in either
case entitled to recover.
The learned counsel for the defendants admitted that if Woodley v. Michell 3 were good law,
he could not resist this view, that even if he proved that no negligence was to be imputed to
the Xantho , and that the disaster was solely due to the negligence of the Valuta , as he could
not prove that it arose from an inevitable accident, the result must be a decision for the
plaintiffs. He considered, therefore, that the only course open to the defendants was to test the
law laid down in Woodley v. Michell 4 by appeal to this House.
The learned President thereupon gave judgment for the plaintiffs.
Against these decisions the defendants appealed.
LORD HERSCHELL
The question, what comes within the term “perils of the sea” (and certainly the words
“dangers and accidents of the sea” cannot have a narrower interpretation), has been more
frequently the subject of decision in the case of marine policies than of bills of lading. I will
first notice the decisions pronounced with regard to the former instrument, and then inquire
how far a different interpretation is to be applied in the case of the latter [Not relevant here]
I think it clear that the term “perils of the sea” does not cover every accident or casualty
which may happen to the subject-matter of the insurance on the sea. It must be a peril “of”
the sea. Again, it is well settled that it is not every loss or damage of which the sea is the
immediate cause that is covered by these words. They do not protect, for example, against
that natural and inevitable action of the winds and waves, which results in what may be
described as wear and tear. There must be some casualty, something which could not be
foreseen as one of the necessary incidents of the adventure. The purpose of the policy is to
secure an indemnity against accidents which may happen, not against events which must
happen. It was contended that those losses only were losses by perils of the sea, which were
occasioned by extraordinary violence of the winds or waves. I think this is too narrow a
construction of the words, and it is certainly not supported by the authorities, or by common
understanding. It is beyond question, that if a vessel strikes upon a sunken rock in fair
weather and sinks, this is a loss by perils of the sea. And a loss by foundering, owing to a
vessel coming into collision with another vessel, even when the collision results from the
negligence of that other vessel, falls within the same category.
…
But it is said that the words “perils of the sea” occurring in a bill of lading, or other contract
of carriage, must receive a different interpretation from that which is given to them in a
policy of marine insurance; that in the latter case the causa proxima alone is regarded; whilst,
in the former, you may go behind the causa proxima, and look at what was the real or
efficient cause.
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…
But I do not think this difference arises from the words “perils of the sea” having a different
meaning in the two instruments, but from the context or general scope and purpose of the
contract of carriage excluding in certain cases the operation of the exception. It would, in my
opinion, be very objectionable, unless well settled authority compelled it, to give a different
meaning to the same words occurring in two maritime instruments. The true view appears to
me to be presented by Willes J. in his judgment in Grill v. General Iron Screw Collier
Company 27. The question there arose whether, when a vessel was lost by a collision caused
by the negligence of those navigating the carrying ship, the case fell within the exception of
“perils of the sea.” It was held that it did not. Reference having been made to cases on
policies of insurance, and the interpretation there put upon these words, Willes J. said,
“I may say that a policy of insurance is an absolute contract to indemnify for loss by perils of
the sea, and it is only necessary to see whether the loss comes within the terms of the
contract, and is caused by perils of the sea; the fact that the loss is partly caused by things not
distinctly perils of the sea, does not prevent its coming within the contract. In the case of a
bill of lading it is different, because there the contract is to carry with reasonable care, unless
prevented by the excepted perils. If the goods are not carried with reasonable care, and are
consequently lost by perils of the sea, it becomes necessary to reconcile the two parts of the
instrument, and this is done by holding that if the loss through perils of the sea is caused by
the previous default of the ship-owner, he is liable for this breach of his covenant.”
Similarly, the ¾ Collition Liability Clause covers loss or damage to a third party vessel even
when the loss or damage is caused by a tug towing the insured vessel. The maxim that “tug is
servant of the tow” applies, that is to say that the vessel being towed will always be
vicariously liable for the loss or damage caused by the tug; vide M’Cowan v Baine and
Johnson “The Niobe” [1891] AC 401
David M'Cowan v Baine and Johnston (The
“Niobe”) [1891] A.C. 401
The Issues
Insurance (Marine)—Collision Clause—Vessel under Tow—Collision with Tug—
Construction of Policy.
By a policy of marine insurance the underwriters insured the ship Niobe from the Clyde (in
tow) to Cardiff and/or Penarth while there and thence to Singapore, and while in port for
thirty days after arrival; and agreed “if the ship hereby insured shall come into collision with
any other ship or vessel and the insured shall in consequence thereof become liable to pay,
and shall pay, to the persons interested in such other ship or vessel, any sum or sums of
money,” &c., to pay the assured a certain proportion of the sum so paid.
While the Niobe was being towed to Cardiff her tug came into collision with and sank
another vessel, whose owners recovered damages both from the Niobe and the tug.
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In an action by the owners of the Niobe upon the policy against one of the underwriters for
payment of his proportion of the sum paid by such owners on account of the collision, the
underwriter pleaded that under the policy he was only liable for damage arising from
collision with the Niobe :—
The question is whether the collision with the tug was a collision with the Niobe, the vessel in
tow, within the meaning of the policy.
Held, affirming the decision of the Court of Session (17 Court Sess. Cas. 4th Series (Rettie)
1016) (Lord Bramwell dissenting), that the collision of the tug with the damaged vessel must
be taken to have been a collision of the Niobe with another vessel within the meaning of the
policy, and that the underwriters were liable.
EARL OF SELBORNE
My Lords, I cannot help thinking that in construing such a mercantile contract as this, there is
as much danger of error in extreme literalism as in too much latitude; and though I do not
adopt the argument that a contract of indemnity against the consequences of collision can be
extended to a case in which there has been no collision, but only damages caused by
measures properly taken to avoid a collision, I think a construction which makes it cover all
damages consequent upon an actual collision, for which the assured is liable, is more
reasonable and more in accordance with the probable intention of the parties (if the words
will bear it) than one which does not.
In the present case, the Valetta was sunk by an actual collision, for which the owners of the
Niobe have been held liable. But the impact which caused the loss of the Valetta was not of
the hull of the Niobe, but of the steam-tug Flying Serpent, which was towing the Niobe on a
part of her insured voyage, described in the policy of insurance as “in tow from the Clyde to
Cardiff or Penarth.”
The words of this contract are: “If the ship hereby insured shall come into collision with any
other ship or vessel, and the insured shall, in consequence thereof, become liable to pay to the
persons interested in such other ship or vessel, or in the freight thereof, or in the goods or
effects on board thereof, any sum or sums of money, not-exceeding the value of the ship
hereby assured.” If a ship cannot be said to “come into collision with any other ship” except
by direct contact, causing damage, between the two hulls (including under the term hull all
parts of a ship's structure) there was in this case no such contact, and the appellants ought to
succeed.
But I cannot adopt so narrow a construction of those words. I should hold them to extend to
cases in which the injury was caused by the impact, not only of the hull of the ship insured,
but of her boats or steam launch, even if those accessories were not (as in this case) insured
as being, in effect, parts of the ship. I should also hold them to cover an indirect collision,
through the impact of the ship insured upon another vessel or thing capable of doing damage,
which might by such impact be driven against the ship suffering damage. I should take the
same view, as against insurers in similar terms, of a tug towing one or more barges (in which
case the barge owners would not be liable for a collision) if damage to any vessel were
caused by the barge or barges being driven against it through the improper navigation of the
tug, although there might have been no impact of the tug itself upon the injured vessel. And,
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after full consideration, it seems to me to be no more than a reasonable extension of the same
principle to include within them such a case as the present.
Where a ship in tow has control over, and is answerable for, the navigation of the tug, the two
vessels—each physically attached to the other for a common operation, that of the voyage of
the ship in tow, for which the tug supplies the motive power—have been said, by high
authority, to be for many purposes properly regarded as one vessel.
Lord Kingsdown's words, in the case of The Independence 9, were, that the tug “may, for
many purposes, be considered as a part of the ship to which she is attached”; and he went on
to repeat the reason given in the earlier judgment reported in the same volume: The Cleadon
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, to which he was also a party, where it was said: “The Cleadon being in tow of the tug, it is
admitted she and the tug must be considered to be one ship; the motive power being in the tug
and the governing power in the ship that was being towed.” I think the Flying Serpent and the
Niobe may be so regarded for the purpose now in question. The principle on which the Niobe
has been held liable for the collision seems to me to go far towards that conclusion. That the
Niobe should be in tow from the Clyde to Cardiff or Penarth was, in the present case, part of
the contract. I think the construction ought to be the same, so far as relates to that voyage, as
if the words in the margin had been: “If the ship insured, while in tow between the clyde and
Cardiff or Penarth, shall come into collision with any other vessel,” &c. If the contract had
been so expressed, I should have thought it arbitrary and not reasonable to exclude a collision
by the impact of the tug during that voyage upon another vessel, for the consequences of
which the owners of the Niobe were liable.
I am, for these reasons, of opinion that the interlocutors appealed from are right, and ought to
be affirmed.
LORD WATSON
My Lords, the Niobe, a sailing ship belonging to the respondents, was covered by a policy of
insurance at and from “the Clyde (in tow) to Cardiff and/or Penarth, while there, and thence
to Singapore, and while in port for thirty days after arrival.” Provision was made for
indemnity against liabilities arising from collision by a marginal clause, upon the
construction of which the result of this appeal must depend.
Whilst the Niobe was on her way to Cardiff in tow of the Flying Serpent, her tug came into
collision with the Valetta, causing her serious damage. The Valetta, after colliding with the
tug, also came into contact with the Niobe, but without receiving any injury. In a suit before
the Admiralty Court of England, it was decided by Lord Hannen, that the collision was due to
the fault of the tug in not porting her helm, in terms of the regulations, and that the Niobe was
likewise to blame, in respect of her failure to keep a look-out, and to control the steerage of
her tug. The respondents have, in consequence, paid £12,909 odd to the owners of the
Valetta, and they now sue one of the underwriters of the policy, for his proportion of the sum
which they claim by way of indemnity.
The legal liability of the Niobe, and the facts upon which it rests, as these were found by the
President of the Admiralty Court, are matter of mutual admission in this case. Whether the
collision between the Flying Serpent and the Valetta was a collision within the meaning of
the marginal clause of the policy, is the only subject of controversy.
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The material part of the clause is in these terms: “And it is further agreed, that if the ship
hereby insured shall come into collision with any other ship or vessel, and the insured shall in
consequence thereof become liable to pay, and shall pay, to the persons interested in such
other ship or vessel, or in the freight thereof, or in the goods or effects on board thereof, any
sum not exceeding the value of the ship hereby assured, we will severally pay the assured
such proportion,” &c. Then follows a stipulation that, in the same events, in cases where the
liability of the ship has been contested with their consent in writing, the insurers will also pay
a proportion of the expenses incurred or paid by the insured. Lastly, there is a proviso to the
effect that the clause shall not extend to any sum which the assured may become liable to pay
or shall pay “in respect of loss of life or personal injury to individuals for any cause
whatsoever.”
The clause is certainly not conceived in the terms which one would have expected the parties
to employ, if, as the Attorney-General argued, it was their intention to include in the
indemnity all liabilities arising from collision which the Niobe could possibly incur. The
condition, which must be purified before any obligation can attach to the underwriters, is
“that the ship hereby insured shall come into collision with” another ship or vessel. These
words, in their literal sense, import that there must be contact between the Niobe and such
other ship or vessel, causing damage to the latter.
There are many ways in which a ship under sail may, without being herself in collision,
become liable to bear the whole damages resulting from a collision. Her unjustifiable
manoeuvre may occasion the colliding of two or more vessels, other than herself, without any
blame on their part; and, in that case, the offending ship, and she alone, is responsible for the
consequences of her fault. In such a case I should not be prepared to hold that the Niobe had,
in the sense of the policy, “come into collision with” the vessels whom she caused to collide,
because there would be no ground, in fact or law, for the suggestion that the Niobe ought to
be identified with any one of them.
So far as I can discover, none of the learned judges of the Court of Session indicated an
opinion that the clause was so expressed as to cover every kind of liability for collision. They
based their decision upon a special rule of law, which has admittedly no application except as
between a ship and her tug. They held that the identity which that rule establishes between
tow and tug is so complete, that the Niobe herself must be considered to have come into
collision with the Valetta within the meaning of the policy.
A sailing vessel, and the steam-tug which has her in tow, have frequently been described by
eminent judges as, for certain purposes, constituting “one ship,” an expression which has
been borrowed by text-writers, and is familiar to persons conversant with maritime law. The
expression is figurative, and must not be strained beyond the meaning which the learned
judges who have employed it intended that it should bear. As I understand their use of the
expression, it signifies that the ship and her tug must be regarded as identical, in so far as the
two vessels, with their connecting tackle, must be navigated as if they were one ship, and, the
motive power being with the tug, must, in order to comply with the regulations for preventing
collision at sea, be steered and manoeuvred as if they formed a single steamship; and also, in
so far as the ship towed, when she has (as in this case) the control of the tug, and the duty of
directing the course of the tug in accordance with these regulations, is responsible for the
natural consequences of the tug being wrongly steered, through the neglect of her officers or
crew to perform that duty.
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There was, therefore, a legal connection betwixt the Niobe and the Flying Serpent which
could not subsist between her and any other vessel which her fault might drive into collision
with a stranger ship. The Niobe was, in the contemplation of the law, one and the same ship
with the Flying Serpent for all purposes of their joint navigation with a view to avoid the risk
of collision; and the fault which led to a collision between that legal composite and the
Valetta was admittedly the fault, not only of the Flying Serpent, but of the Niobe.
I admit the force of the appellant's argument that contracts ought to be construed according to
the primary and natural meaning of the language in which the contracting parties have chosen
to express the terms of their mutual agreement. But there are exceptions to the rule. One of
these is to be found in the case where the context affords an interpretation different from the
ordinary meaning of the words; and another in the case where their conventional meaning is
not the same with their legal sense. In the latter case, the meaning to be attributed to the
words of the contract must depend upon the consideration whether, in making it, the parties
had or had not the law in their contemplation.
The point thus raised appears to me to be a very narrow one. But, in this case, the contracting
parties are ship-owners and underwriters; and the clause in question relates to possible legal
liabilities of the ship insured, which are entirely dependent upon the rules of maritime law. In
these circumstances I have, not without some hesitation, come to the conclusion that they
must be presumed to have known the law, and to have contracted on the faith of it.
LORD BRAMWELL
My Lords, in this case the facts are that the Niobe was insured by the respondents with the
appellants and others, by a policy in the ordinary form, from the Clyde (in tow) to Cardiff, or
Penarth, and thence to Singapore. In the margin of this policy is this, I believe, usual clause:
“And it is further agreed that, if the ship hereby insured shall come into collision with any
other ship or vessel, and the insured in consequence thereof become liable to pay, and shall
pay, any money not exceeding the value of the ship hereby assured, we will severally pay the
assured such proportion of three-fourths of the sum so paid as our respective subscriptions
hereto bear to the value of the ship hereby assured, or if the value hereby declared amounts to
a larger sum then to such declared value.”
What happened was this: The Niobe, in tow of a tug, proceeded on her voyage, and, by the
negligence of the tug, and of those navigating the Niobe, the tug came into collision with the
Valetta, and sank her. There was a collision between the Niobe and the Valetta, which may be
disregarded, as it did no damage. In very fact, therefore, the ship has not come into collision
with any other ship, and the insured paid something in consequence thereof. The insured, the
respondents, have paid to the owners of the Valetta a large sum of money in consequence of
the damage to her, owing to the conjoint bad seamanship of the tug and the Niobe, and this is
sought to be recovered in this suit.
I say then, in very fact, the Niobe did not come into collision with the Valetta, causing a
liability in the appellant, and, according to the ordinary primary meaning of the words used
the case is not within them. This is agreed. But it is said that for some reason the primary and
natural meaning of the words is to be extended; and that we should hold that there was a
collision where there was none. I am at a loss to see why. I think an Act of Parliament, an
agreement, or other authoritative document, ought never to be dealt with in this way, unless
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for a cause amounting to a necessity, or approaching to it. It is to be remembered that the
authors of the document could always have put in the necessary words if they had thought fit.
If they did not it was either because they thought of the matter and would not, or because they
did not think of the matter. In neither case ought the Court to do it. In the first case, it would
be to make a provision opposed to the intention of the framers of the document; in the other
case, to make a provision not in the contemplation of those framers. Take this very case. Can
anyone say that, if the assured had required the insurers to agree to be liable for a collision by
the tug (and be it remembered that it is mentioned the Niobe was to be towed to Cardiff), I
say if such a requirement had been made, can anyone say that the insurers would have agreed
to it without an increase of premium: a liability for any towing till the voyage to Singapore
was over? Suppose a suit to reform the document by making the insurers liable for collisions
by the tug, could it have succeeded?
Let me examine the reasons given for adding to or altering the meaning of the words used.
The Lord Ordinary says if the collision clause is read in the strictest manner he would be of
opinion that the defender was not liable, but he thinks it admits of being read in a broader and
more comprehensive sense. The superlative “strictest” is a difficult word to deal with. Is it to
be read in a way not strict; if so, how far short of it? His Lordship gives his reasons; he says:
“The risk they wished and had an interest to cover was liability arising from collision for
which as owners of that particular ship, they might be liable.” “That the defender knew they
wished to cover it, and it may fairly be presumed that the clause was intended to cover that
particular risk.”
I respectfully ask where is the evidence that they wished to cover any risk of collision beyond
what they have expressed, or that the defender knew the pursuers so wished? I firmly believe
that if the truth were known, neither party had it in mind; and I repeat, I am by no means sure
it would have been included for the same premium. The Lord Justice Clerk says: “In certain
circumstances the vessel is looked upon as being part of the tug, and the real question here is
whether that view applies to such a case as this. I think it would have been far better if the
policy had been more clearly expressed.” With submission, that should be not “more clearly”
but differently expressed. Nothing can be clearer than it is. It is said that to hold as I do is a
“narrow construction.” I respectfully deny it. I do not construe the words. I simply read them
as I should “twice two are four.” “Narrow”! Well, if too narrow is wrong so is too wide,
which, to my mind, the construction, (for it is a construction), I object to, is. His Lordship
came to the conclusion for the pursuer not without hesitation. Lord Young says the collision
was just the sort of collision the possibility of which was contemplated by both sides. I
should suppose, then, he does not agree with the Lord Justice Clerk, that it would have been
far better if more clearly expressed. Lord Rutherfurd Clark doubts if the pursuer is right. Lord
Lee agrees with the Lord Ordinary.
It is said that the Niobe was, in the contemplation of the law, one and the same ship with the
Flying Serpent for all purposes of their joint navigation with a view to avoid the risk of
collision. I respectfully deny it. I deny that it is an intendment of the law. The law does not
contemplate anything like it. A most distinguished lawyer, Lord Kingsdown, did once use the
unfortunate metaphor, (judges ought to be very careful about using such expressions), that
“the tug may for many purposes be considered as a part of the ship to which she is attached.”
He says “for many purposes,” not all. He does not say that it is to be so considered that the
plain words of a contract are to be misinterpreted. Had he foreseen what use would be made
13
of his words he would not have used them. These two shall be one. And it is said that the
parties to this suit knew all about this, and contracted on the footing of it.
Now, my Lords, this seems to me to be a case (too common) in which there is a tendency to
depart from the natural primary meaning of words, and add to or take from them—to hold
that constructively words mean something different from what they say. It introduces
uncertainty. No case is desperate when plain words may be disregarded. I deprecate this in all
cases. In this particular one I believe it will be attended with at least this injustice, that the
parties did not contemplate the case that has occurred, and perhaps would have raised the
premium if they had. That they did not contemplate it I infer from the words they used.
Ingenious cases were put in which there might be damage by collision with the Niobe without
her touching the vessel damaged, as where she pushed an intermediate vessel against that
damaged. I have no doubt that ingenuity might suggest many difficult cases. I content myself
with dealing with the present, where the ship did not in any sense come into collision with
any other ship and cause damage. I think the judgment should be reversed, but I suppose I
must be in the wrong, because four judges of the Court of Session have held differently, and
three of your Lordships, I know, will hold differently.
LORD MORRIS
My Lords, in my opinion the contract must be construed as an insurance against risk or
liability for payment by collision to be incurred by the Niobe while in tow. What the owners
were bargaining for was indemnity against loss or payment which the Niobe might incur
while being towed. I consider the tug part of the apparatus for moving the ship Niobe , and
that a collision by the tug while so towing the Niobe was a collision of the Niobe within the
meaning of the marginal clause of the policy; consequently that the judgment of the Court of
Session should be affirmed.
The majority of the judges, in this case, regarded the Niobe and the Flying Serpent as one and
the same and came to the conclusion that the fault which led to a collision between that legal
composite and the Valetta [the other ship] was admittedly the fault, not only of the Flying
Serpent, but of the Niobe. In other words, it was not necessary for there to be actual bodily
contact between the vessels that is between the Valetta and the Niobe.
Counsel for the claimant had argued that:
“The term “collision” in this policy ought not to be confined to actual collision with the ship
insured. To constitute a collision within the meaning of the instrument, there need not be any
actual contact between two vessels; for example, if through the fault of the Niobe another
ship was compelled to run ashore to avoid a collision… Secondly, the tug is employed by the
tow, and it has been held by Dr. Lushington and Sir James Hannen that tow and tug are to be
considered as one ship. And when there is the additional fact that the tug is under control of
the tow, as was the case here, collision with the tug is collision with the tow”.
This approached carried the day, but it did not find favour with Lord Bramwell (dissenting),
and his arguments deserve careful consideration.
Be that as it may, the broad interpretation, of the term collision, adopted in the Niobe, above,
was employed in the Union Marine case below, though, of course, the policy in question was,
admittedly broader than that in the Niobe Case.
14
Union Marine Insurance Co v Borwick
[1895] 2 Q.B. 279
Mathew J.
Insurance (Marine)—Policy—Reinsurance—Collision Clause—“Piers or similar Structures.”
A vessel, insured by the plaintiffs, was driven by the wind and sea against a sloping bank,
formed outside the breakwater of a harbour by laying down loose boulders in the sea to
protect the breakwater, and was totally lost. The plaintiffs, having paid for a total loss ought
to recover under a contract of reinsurance, by which the defendant insured “against risk or
loss or damage through collision with any other ship or vessel or ice or sunken or floating
wreck or any other floating substance, or harbours or wharves or piers or stages or similar
structures”:—
Held, that the loss was caused by collision, and not by stranding, and therefore came within
the words “loss or damage through collision with … piers or stages or similar structures,” and
the plaintiffs were entitled to recover.
The plaintiffs, an insurance company carrying on business at Liverpool, sued the defendant,
an underwriter at Lloyd's, on a contract of reinsurance, called a collision contract, dated July
20, 1894, and underwritten by the defendant.
By the collision clause, clause 3 of the contract of reinsurance, the defendant insured “against
risk or loss or damage through collision with any other ship or vessel or ice or sunken or
floating wreck or any other floating substance, or harbours or wharves or piers or stages or
similar structures, and including a running-down clause, as per original policies.”
The facts proved at the trial were shortly as follows. The plaintiffs had insured two vessels,
the Kirkmichael and the Osseo. On December 22, 1894, during a heavy gale, the
Kirkmichael, while endeavouring to clear the end of the breakwater of Holyhead harbour,
was driven by the force of the wind and sea against a sloping bank or mound called the toe of
the breakwater, which had been artificially formed by laying down in the sea loose boulders
taken from the mountains. The bank or mound was about 250 feet wide at the level of low
water, and about 450 feet wide at the base, which was in about 50 feet of water. The
inclination of the slope was 12 to 1 down to low water mark, 5 to 1 down to about 10 or 12
feet below low water mark, and from that point to the bottom about 2 to 1. The Kirkmichael
drifted on to the bank nearly broadside on, and became a total loss.
On the morning of December 30, 1894, also during a heavy gale, the Osseo was driven on to
the same bank, almost in the same manner as the Kirkmichael, at a spot about 50 feet distant
from where the Kirkmichael was wrecked, and also became a total loss.
The plaintiffs, having paid under their policies in respect of each of the two vessels as for a
total loss, now claimed to recover against the defendant under the clause in the contract of
reinsurance above set out.
15
Bigham, Q.C. (T. G. Carver with him), for the plaintiffs. The losses in respect of which the
plaintiffs have paid, and now seek to recover from the defendant under the contract of
reinsurance, come within the words of the collision clause in that contract, “loss or damage
through collision with … harbours or wharves or piers or stages or similar structures.” The
decision of Barnes J. in The Munroe 1, so far as it affects the present case, is in favour of the
plaintiffs.
Joseph Walton, Q.C. , and J. A. Hamilton , for the defendant. The case of The Munroe 2 is not
in point here, for each case must depend on its own facts. The evidence in the case of both
these vessels shews a stranding, not a collision. To constitute a collision the upper works of
the vessel should strike against some foreign body, such as another vessel, or an iceberg; but
in a case like this, where a vessel runs aground on a bank *281 of boulders, which practically
forms part of the coast, striking the bank with her keel, she does not come into collision,
within the meaning of the contract, but simply runs aground.
MATHEW J.
This case has now been thoroughly discussed, and the only question for my decision is,
whether the facts which occurred in the cases of these two vessels amounted to loss or
damage through collision, within the meaning of the words contained in clause 3 of the
contract of reinsurance. It is contended that the losses in the present case do not come within
a clause insuring against loss by collision, but the clause in question here is much more
extensive in its operation. It refers to collision with a floating substance on the one hand, and
to collision with a permanent structure on the other hand. It then proceeds to include collision
with harbours, wharves, piers, stages, or similar structures. The words of the clause which are
applicable to the present case are the words “piers or similar structures.” The evidence shows
that both these vessels struck and were wrecked on the toe of the breakwater outside the
harbour at Holyhead. The breakwater in question was made by the deposit of a number of
large boulders, forming the toe of the breakwater, behind which the wall of the breakwater
itself is built. I am of opinion that the words “pier,” “breakwater,” and “toe” all denote one
and the same structure, and therefore that the expression “collision with piers … or stages or
similar structures” covers the present case. I cannot distinguish collision with from striking
against. It has been contended on behalf of the defendant that in order to constitute a collision
the upper works of the ship must strike some one of the things referred to in the clause in the
contract, and that there were not collisions in the present case, because it appears that it was
the keels of these two vessels which struck against the toe of the breakwater. According to
the view which I have expressed as to the meaning of the words, that argument must be
unavailing; and I am therefore satisfied that this was a case of damage by collision with a pier
or similar structure, within the meaning of the 3rd clause in the contract of reinsurance.
Judgment for the plaintiff.
“Woodrop-Sims” (Jones) (1815) 2 Dods 83
16
The Issues
Rules for fixing or apportioning the loss occasioned by two vessels running foul of each
other.
The Facts
This was a cause of damage at the instance of Thomas Potts and George Taylor, the owners
of the brig “Industry,” against the above ship the “Woodrop-Sims,” her tackle, &c.
The two vessels collided off the South Foreland, and the Industy laden with a cargo of
coal on its way from Sunderland to some port in the West of England was sank and lost as a
result of the negligence or want of skill of the master and crew of the “Woodrop-Sims,”
and by the want of a good look-out on board that ship.
The Court was assisted by two of the elder brethren of the Trinity House; and in the course of
his judgment, the judge commented on the principle of the apportionment of blame along the
following lines.
Sir W. Scott
This is one of those unfortunate cases in which the entire loss of a ship and cargo has been
occasioned by two vessels running foul of each other.
There are four possibilities under which an accident of this sort may occur. In the first place,
it may happen without blame being imputable to either party; as where the loss is occasioned
by a storm, or any other vis major : in that case, the misfortune must be borne by the party on
whom it happens to light; the other not being responsible to him in any degree.
Secondly, a misfortune of this kind may arise where both parties are to blame; where there
has been a want of due diligence or of skill on both sides: in such a case, the rule of law is
that the loss must be apportioned between them, as having been occasioned by the fault of
both of them.
Thirdly, it may happen by the misconduct of the suffering party only; and then the rule is,
that the sufferer must bear his own burden.
Lastly, it may have been the fault of the ship which ran the other down; and in this case the
injured party would be entitled to an entire compensation from the other.
It frequently happens in cases of this kind, that there is great discordance of evidence as to the
facts upon which the Court has to form its decision. The testimony of the witnesses is apt to
be discoloured by their feelings, and the interest which they take in the success of the cause;
and the Court too frequently has to decide upon great diversities of statement as to the
courses the vessels were steering, or the quarter from which the wind was blowing at the time
when the accident occurred. In the present case, I.am in a great measure relieved from all
difficulties of this kind, and it is not at all necessary for me to pay any minute attention to the
conflicting testimony of the witnesses respecting the wind; for, I understand it to be the
17
opinion of the gentlemen (the Trinity Masters) by whom I have the good fortune to be
assisted on this occasion, that the state of the wind, as deposed to on one side and on the
other, does not differ so materially as to make any difference in the measures which ought to
have been pursued for the avoidance of this unfortunate accident. I am also relieved from any
very minute attention to the testimony of the witnesses respecting the look-out which was
kept either in one ship or the other; because, however different the representation in this
respect may be, there was, at all events, abundance of time after the discovery of each other
to have taken precautionary measures for avoiding the accident. The misfortune which
occurred must not be attributed therefore to what took place before the vessels perceived each
other; but was consequential upon what occurred afterwards.
This state of circumstances raises a question or two of professional skill, upon which you,
gentlemen (addressing himself to the Trinity Masters), will have to decide. It is incumbent on
you to determine whether proper measures of precaution were taken by the vessel which
unfortunately ran the other down. The law imposes upon the vessel having the wind free, the
obligation of taking proper measures to get out of the way of a vessel that is close-hauled, and
of showing that it has done so, if not, the owners of it are responsible for the loss which
ensues. This, therefore, is the first point upon which the Court request to be favoured with
your opinion. If you shall think that the proper precautions were taken by the persons on
board the “Woodrop-Sims,” then it will become necessary to enquire whether these measures
were counteracted and defeated by improper measures taken by those on board the other ship.
Upon these points, gentlemen, I shall rely on your judgment.
The Trinity Masters expressed their opinion, that the “Woodrop-Sims” was to blame; that she
had the wind free, and ought to have got out of the way.
The Court pronounced its sentence accordingly, and referred the settlement of the amount of
loss to the registrar and merchants.
See also
MIOM 1 Limited, The Isle of Man Steam
Packet Co Ltd v Sea Echo E.N.E.
[2010] EWHC 3180 (Admlty)
Justice Teare
1 On 3 February 2007 at about 1138 SEA EXPRESS 1, a high speed twin hull catamaran
passenger and vehicle ferry, collided with ALASKA RAINBOW, a conventional geared bulk
carrier, in the River Mersey off the Liverpool Landing Stage. SEA EXPRESS 1 was almost at
the end of its regular crossing from Douglas in the Isle of Man to Liverpool and was carrying
274 passengers, 58 vehicles and 20 crew. ALASKA RAINBOW was laden with a part cargo
of steel products and had been seeking to stem the tide whilst waiting to enter Albert Lock
assisted by two tugs. The collision occurred in dense fog. The bulbous bow of the ALASKA
RAINBOW struck the starboard quarter of the SEA EXPRESS 1 causing her damage below
the waterline. Her starboard machinery and propulsion spaces were flooded and she had to be
18
towed to the Liverpool Landing Stage. ALASKA RAINBOW suffered only superficial
damage and proceeded out of the Mersey to her anchorage.
2 The court is required to apportion liability for this collision.
Apportionment
84 Both vessels were at fault. Liability is to be apportioned in proportion to the degree in
which each was in fault; see section 187(1) of the Merchant Shipping Act 1995 . It is well
established that such apportionment requires the weighing of the culpability and causative
potency of the respective faults. Apportionment is not a matter of adding up the faults on
each side. Apportionment is a qualitative not a quantitative exercise.
Culpability
85 The failure of the master of ALASKA RAINBOW to return to anchorage at C-9 or C-8
was the result of a failure to appreciate the danger ALASKA RAINBOW presented to
inbound vessels and in particular to KEEWHIT and SEA EXPRESS 1. The danger was
caused by the circumstance that, contrary to her intentions and to what she had informed
Mersey Radio; she was not stemming the tide but was snaking across the river. The failure to
appreciate the danger she presented was particularly culpable having regard to the close
distance at which she and WD MEDWAY II passed. Having decided to move back across the
river to the west bank it was particularly incumbent upon the master and pilot to monitor the
track of SEA EXPRESS 1 and inform SEA EXPRESS 1 of the difficulty ALASKA
RAINBOW was in having failed to stem the tide. Neither step was taken. Finally, having
turned back from the west bank, ALASKA RAINBOW failed to keep clear of the fairway
after C-3. This was probably a result of the failure to monitor the track of SEA EXPRESS 1. I
regard the culpability of such faults as serious. They were probably caused by the master
having too relaxed an attitude to navigation and his duties (illustrated by the shrug of his
shoulders in the witness box when asked why he had not sounded fog signals), which attitude
was exacerbated by relying upon the pilot to such an extent that he did not exercise his own
judgment.
86 Mr. Brenton submitted that the reasons for Mr. Pirrie's failure on board SEA EXPRESS 1
to appreciate that the large radar echo was a vessel under tow rather than two tugs lay in the
circumstance that the master, in assessing Mr. Pirrie for his type rating as master of SEA
EXPRESS 1, had required him not only to have the “con” of the vessel but also to be
responsible for keeping a good lookout. It was therefore said that the master failed to have
sufficient regard to the advice from the owners of SEA EXPRESS 1 in their Route Operating
Manual…
89 I accept this advice which is in accordance with the Claimant's standing orders. The vessel
was in pilotage waters and therefore the master under examination ought to have had the con
at the steering position (the master's chair) and the chief officer ought to have been at the
navigation position (the chief officer's chair) providing navigational and anti-collision
information. Whilst the standing orders provide that the master may require otherwise I am
19
not persuaded that there was any reasonable basis for placing the master under examination in
the chief officer's chair from where he was not only to carry out the required constant radar
watch but was also to con the vessel.
90 I consider that the root cause of Mr. Pirrie's failures in lookout was not so much a lack of
care on his part as the fact that he was required not only to con the vessel but also to be
responsible for a good lookout. Since he was under examination and had failed to berth the
vessel safely the previous day one would expect that Mr. Pirrie was doing all he could to
navigate SEA EXPRESS 1 safely. It is very likely that his failure to keep a good lookout
stemmed from the fact that in addition to keeping a lookout he was required to con the vessel.
The master said that as master he normally conned the vessel in addition to keeping a good
lookout and therefore Mr. Pirrie was doing no more than he would have to do as master. It
may be the case that this was the master's practice but if so it was a practice contrary to that
which his Owners thought was good practice in pilotage waters and restricted visibility and
contrary to the advice I have received as to good bridge management practice. The master
also insisted that the duties on Mr. Pirrie were not too onerous because he had the assistance
of the master. It is true that the master was monitoring what Mr. Pirrie was doing but Mr.
Pirrie remained the person who was conning the vessel and keeping a good lookout. As
events proved the burden placed on him was not alleviated by the master monitoring what he
was doing. The master did not appreciate that ALASKA RAINBOW was ahead of SEA
EXPRESS I and also did not continue to observe the echo of ALASKA RAINBOW after
1134. I therefore consider that the failure to appreciate the presence of ALASKA RAINBOW
was seriously culpable because it was the result of poor bridge management.
91 Nevertheless, despite these strictures as to the bridge management of SEA EXPRESS it is
not possible, in my judgment, to separate or differentiate the respective faults of ALASKA
RAINBOW and SEA EXPRESS 1 in terms of culpability. They were both culpable to a high
order.
Causative potency
92 The dangerous situation which lay ahead of SEA EXPRESS 1 was created by ALASKA
RAINBOW. Her inability to stem the tide, the initial cause of which was probably the
counter current off the west bank, caused her to snake across the river. She could have
brought that dangerous situation to an end by aborting the attempt to stem the tide and
returning to her anchorage. Her failure to monitor the progress of SEA EXPRESS 1 and warn
her of the danger ahead worsened that danger. In addition ALASKA RAINBOW failed to
sound fog signals for a vessel under tow. Such a signal (four blasts in succession, that is, one
prolonged followed by three short blasts) was likely to have woken up those on board SEA
EXPRESS 1 to her presence. These faults were therefore of great causative potency. The
failure to monitor the progress of SEA EXPRESS 1 also led to the failure of ALASKA
RAINBOW to keep clear of the fairway at the last.
93 However, the bridge management of SEA EXPRESS 1 was ill-equipped to observe and
react to that dangerous situation. As a result the presence of ALASKA RAINBOW was not
appreciated until it was too late to take effective avoiding action. The faults of SEA
EXPRESS 1 were therefore also of great causative potency.
94 As with culpability I am not able to separate the respective faults of ALASKA
RAINBOW and SEA EXPRESS 1 in terms of causative potency.
20
95 It will often be the case that the vessel which creates the dangerous situation will bear a
greater share of responsibility than the vessel which has to react to that situation. However, I
am not persuaded that in the present case it is possible to establish different degrees of fault
on that basis. That is because the fault in reaction on board SEA EXPRESS 1 was of great
causative potency and was the result of poor lookout stemming from poor bridge
management.
96 It follows that I have not found it possible to establish different degrees of fault and
therefore liability for the damage must be apportioned equally; see section 187(2) of the
Merchant Shipping Act 1995 .
Conclusion
97 I have concluded that responsibility for the collision must be divided equally between the
two vessels.
Miom 1 Limited, The Isle of Man
Steampacket Co Ltd v Sea Echo E.N.E.
(No.2) [2011] EWHC 2715 (Admlty)
Mr. Justice Teare:
1 On 8 December 2010 I gave judgment on liability in this collision action and determined
that liability for the collision must be borne equally by the Claimant and the Defendant; see
[2010] EWHC 3180 (Admlty). The parties have been unable to agree the question of costs
and so have returned to Court. The costs dispute has given rise to one or two issues of
interest, at least to Admiralty lawyers. The parties' respective positions may be summarised
as follows.
2 The Defendant claims to have made an offer pursuant to CPR 61 on 5 February 2010 to
settle liability for the collision on the basis that each ship was equally to blame. Accordingly
the Defendant contends that as from 21 days after the date of that offer the Claimant should
pay the Defendant's costs of the action and that prior to that date costs should be apportioned
in accordance with the collision liability, or alternatively, that there should be no order as to
costs.
3 The Claimant says that the Defendant should pay the Claimant's costs of the action incurred
before 26 February 2010 because it obtained judgment on its claim, albeit for 50% of its
damages, and the Defendant had not issued a claim form within the period of two years from
the date of the collision so that there was no effective counterclaim. So far as costs incurred
after 26 February 2010 were concerned it was said that the Defendant's offer dated 5
February 2010 failed to comply with CPR Part 61 and so the Defendant ought not to be
awarded its costs from 26 February 2010. If the offer is to be accorded some weight then the
appropriate order is “no order as to costs” for the period after 26 February 2010.
4 In response to the Claimant's case that there is no effective counterclaim the Defendant said
that it is now too late to raise the time-bar point, that the Claimant is stopped from relying
21
upon it, that time should be extended for making the counterclaim pursuant to section 190(5)
of the Merchant Shipping Act 1995 and that in any event, having regard to the single liability
principle established by the decision of the House of Lords in The Khedive (1882) LR 7
App.Cas. 795 , alternatively the principle of equitable set-off, the Claimant is only entitled to
judgment for the sum by which 50% of its claim exceeds 50% of the Defendant's claim.
Costs incurred after 26 February 2010
5 Mr. Jacobs QC, on behalf of the Defendant, submitted that the question of costs after 26
February 2010 could be resolved solely by reference to the offer dated 5 February 2010. Mr.
Kimbell, on behalf of the Claimant, accepted that that was so. Since it is common ground that
more costs were incurred after rather before 26 February 2010 it seems sensible to begin with
those costs and a consideration of the terms of the offer dated 5 February 2010.
6 Prior to that offer there had been two other offers. On 23 November 2009 the Claimant
offered to settle liability for the collision on the basis of 60/40 in favour of the Claimant. That
offer complied with the provisions of CPR Part 61.4(12) . On 7 December 2009 the
Defendant offered to settle liability for the collision on the basis of 60/40 in favour of the
Defendant. That offer was said to have been made pursuant to CPR Part 61 and on the same
basis as the Claimant's offer of 23 November 2009.
7 On 5 February 2010 the Defendant wrote to the Claimant as follows:
“We refer to previous correspondence in this matter and to the consent order dated 18
January 2010. While we consider our clients to have a strong legal position with respect to
this claim, they are conscious that the parties are now entering into the stage of the
proceedings where legal costs and expenses accumulate quickly. With this in mind, we are
instructed by clients to offer to settle the issue of liability on the basis of each vessel being
equally to blame for the collision.
Such offer is made pursuant to Parts 61 and 36 of the CPR and shall remain open for 21
days.”
8 CPR Part 61.4(10)-(12) deal specifically with collision actions. Sub-para.(12) provides as
follows:
“An offer under paragraph (10) must be in writing and must contain
(a) an offer to settle liability at stated percentages;
(b) an offer to pay costs in accordance with the same percentages;
(c) a term that the offer remain open for 21 days after the date it is made; and
(d) a term that, unless the court orders otherwise, on expiry of that period the offer remains
open on the same terms except that the offeree should pay all the costs from that date until
acceptance.”
9 Mr. Kimbell submitted that the offer dated 5 February 2010 did not comply with subpara.(12) because the offer did not comply with sub-paragraphs (b) and (d) of CPR 61.4(12) .
22
10 In construing the offer dated 5 February 2010 it is necessary to follow the guidance of the
Court of Appeal in C v D [2011] EWCA Civ 646 . The question is how a reasonable solicitor
would have understood the offer in its context, including the known context of the dispute as
it stood at the time; see Rix LJ at para. 45. Rimer LJ, at para.75, said:
“It was expressly stated to be an ‘Offer to Settle under CPR Part 36 ’ that was ‘intended to
have the consequences set out in Part 36 …’. Of course, that does not mean that it did in fact
comply with Part 36 and therefore must, come what may, somehow be shoehorned into the
confines of its four corners: a stated bid to attain a particular goal does not also mean that the
goal has been attained. The answer to the critical question still turns on how the reasonable
man would read the offer. The relevance, however, of the claimant's expressed intention to
make its offer a Part 36 offer is that, if there are any ambiguities in it raising a question as to
whether the offer does or does not comply with the requirements of Part 36 , the reasonable
man will interpret it in a way that is so compliant. That is because, objectively assessed, that
is what the offeror can be taken to have intended.”
11 I consider that a reasonable solicitor would have understood the offer dated 5 February
2010 as complying with CPR Part 61.4(12) . It is true that, although the offer was expressed
to made pursuant to Part 61 , no specific reference was made either to costs or to the terms
which applied on expiry of the offer ( sub-paragraphs (b) and (d) of Part 61.4(12) ). But the
offer was the third of three offers, the first of which expressly set out the matters required by
Part 61.4(12) and the second of which was said to be on the same basis as the first. The third
offer began by referring to the previous correspondence. In that context I consider that the
reasonable solicitor would understand the third offer to have been made on the same basis as
the earlier two offers which expressly or by incorporation complied with CPR Part 61.4(12) .
It is true that the offer made reference to the 21 day duration of the offer, and so complied
with sub-paragraph Part 61.4(12)(c) , which might be said to introduce an uncertainty as to
whether sub-paragraphs (b) and (d) were intended to be complied with but the reasonable
solicitor would, in my judgment, interpret the offer in context as complying with the
provisions of Part 61.4(12) because it was expressed to be made pursuant to Part 61 .
12 In circumstances where the Defendant obtained at trial an apportionment equal to its offer
the Defendant is entitled to all its costs from 21 days after the offer was made unless such
order was unjust; see CPR Part 61.4 (10)-(11) . Such an order would not be unjust and so the
Defendant is entitled to payment of its costs incurred from 26 February 2010, that is 21 days
after the date of the offer.
13 If I am wrong in concluding that the offer complies with CPR Part 61 it was, nevertheless,
an offer to settle which, pursuant to CPR 44.3(4)(c) , I am entitled to take into account when
determining the incidence of costs. There was no dispute that in doing so it was appropriate
to apply the causation test to which I made reference in The Samco Europe [2011] EWHC
1656 (Admlty) at paragraph 26. That test requires the court to consider whether the costs
incurred after 26 February 2010 would have been incurred by the parties had the offer been
accepted. It is plain that they would not. It was not suggested that the Claimant had good
reason not to accept the offer and so, even if the offer dated 5 February 2010 did not comply
with CPR Part 61 , I would have decided, in the exercise of my discretion, that the Claimant
should pay the Defendant's costs incurred after 26 February 2010
14 It is unnecessary to consider CPR 36 because Part 61 is the rule which deals with offers in
Admiralty collision actions.
23
15 After the oral hearing Mr. Jacobs, who had said at the hearing that costs on the indemnity
basis were not sought, changed his mind and in a written note sought costs on the indemnity
basis on the basis that Part 36.14 provided for that where a Part 36 offer was successful and
the same approach should apply where a Part 61 offer was successful. Mr. Kimbell said that
Mr. Jacobs should not be permitted to withdraw his concession but since it was withdrawn
before I had delivered judgment and Mr. Kimbell had an opportunity to respond to it I
consider that Mr. Jacobs should be permitted to withdraw his concession.
16 Part 61 does not provide for costs on the indemnity basis where a Part 61 offer is
successful whereas Part 36 does provide for such costs when a Part 36 offer is successful.
That is a clear indication that the authors of Part 61 did not intend that indemnity costs should
be awarded merely because a Part 61 offer had been successful. In those circumstances I do
not consider that it is appropriate in a collision action governed by Part 61 to order costs on
an indemnity basis merely because an offer has been successful. There is no other reason to
award costs on an indemnity basis.
Costs incurred before 26 February 2010
17 Determining who should pay these costs requires the court to consider whether the
Defendant had an effective counterclaim because if there is not then the Claimant, having
recovered judgment on its claim, albeit for only 50% thereof, claims that it is entitled to all of
its costs incurred before 26 February 2010. If there is an effective counterclaim it was not
disputed that each party should pay 50% of the other's costs.
18 It is necessary to set out the course of events from collision until the time when it was first
contended that there was no effective counterclaim by reason of the Defendant not having
brought proceedings within the period of two years following the collision.
19 Following the collision on 3 February 2007 security was provided in respect of each
vessel's claim. It was immediately apparent that the Claimant had by far the greater claim.
The Claimant required security in the sum of £5.6m. and the Defendant required security in
the sum of £53,000. Towards the end of 2008 and in early 2009 the parties, through their
respective solicitors, discussed the mutual exchange of without prejudice submissions on
liability. On 15 January 2009 the Claimant suggested a mutual extension of time for 6 months
from 3 February 2009. A draft agreement was provided on 16 January 2009. On 22 January
2009 the Claimant suggested that it might be simpler for each party to issue a claim form and
then agree a mutual stay of proceedings. On 23 January 2009 the Defendant said that a
mutual extension of time would be simpler. On 27 January 2009 the parties agreed that
without prejudice submissions on liability would be exchanged on 30 January 2009.
20 On 30 January 2009 the Claimant issued its claim form. The two year limitation period for
issuing a claim form expired on 3 February 2009. The Defendant did not issue a claim form
by that date. Mr. Leonard of Wikborg Rein & Co., who acted for the Defendant, has stated
that at that time, in view of the size of its claim, it was the intention of the Defendant to
pursue its claim only if the Claimant pursued its claim. It was the belief of Wikborg Rein &
Co. that “any Counterclaim could be raised by way of defence or set-off to the claim without
the need for [the Defendant] to issue [its] own independent proceedings.”
24
21 On 5 February 2009 the Claimant informed the Defendant that a claim form had been
issued within the 2 year limitation period but that it wished to proceed with the without
prejudice exchange of liability submissions. The email continued:
“We do not know if your clients also issued proceedings for their claim (?), but in any event
would propose the following course of handling…..”
22 The e-mail then proposed that after service of “the respective proceedings” there should be
a two month stay to permit exchange of without prejudice statements and a settlement
meeting.
23 On 16 February 2009 without prejudice “position papers” were exchanged and the
Claimant served its claim form on the Defendant. On 21 April 2009 the Defendant
acknowledged service of the claim form.
24 On 6 and 16 July 2009 respectively the Defendant and Claimant filed their Statements of
Case. The Statements of Case were exchanged on 4 August 2009. Part 2 of the Defendant's
Statement of Case claimed “Judgment against the Defendants for the loss and damage
sustained” and a reference to the Registrar to assess the amount of such damage. It was
common ground that the reference to “the Defendants” was a typographical error and should
have been a reference to the Claimant. The error was corrected by a later amendment. The
Defendant's Statement of Case was in the form specified in the Practice Direction to CPR
Part 61 . The prayer was headed “And the Defendants Claim”. The word “counterclaim” was
not used. CPR 61 PD para.4.2(2)(c) requires the Statement of Case to state the remedy which
the party filing the collision statement of case “claims”. That is what the Defendant did.
Where “claim” appears in a Defendant's Statement of Case that would be reasonably
understood as “counterclaim” (or, to use the language of CPR 61.4(9) a “cross-claim”).
25 It was accepted at the hearing before me that the Claimant was aware by August 2009 that
the Defendant had not issued a claim form within time and that a time bar argument existed.
Whether or not such an argument should be advanced at that stage was considered by the
Claimant's solicitor and counsel. Mr. Donaghy of Weightmans, solicitors for the Claimant,
has stated that it was decided that “there was no strong reason to formally introduce an
argument at this stage that the counterclaim was time barred. This was because in accordance
with usual procedure in the Admiralty Court, the apportionment of liability would be tried
first and no further statement of case was going to be served by either party in response to the
respective collision statements of case.”
26 On 2 September 2009 there was a without prejudice meeting.
27 On 23 November and 7 December 2009 respectively the Claimant and the Defendant
made the offers to which I have already referred.
28 On 11 January 2010 the parties agreed the Case Memorandum and List of Issues. The
Case Memorandum stated that the Defendant had not issued its own proceedings and that its
Statement of Case contained a counterclaim expressed to be for “Judgment against the
Defendants” in respect of which there would be an application to amend “Defendants” to
“Claimants”. The List of Issues identified 16 principal issues of which the last two were:
“15. The correct apportionment of liability between the [Claimant] and the [Defendant].”
25
16. Quantum”
29 On 18 January 2010, by consent, directions were given for trial, including the amendment
of the Defendant's Statement of Case.
30 On 5 February 2010 the Defendant made the offer which I have already quoted.
31 The trial took place in October 2010 and judgment was given on 8 December 2010. On 23
December 2010 the Defendant informed the Claimant that, as a result of its successful offer,
it was entitled to its costs as from 27 February 2010 and that each party should bear its own
costs incurred before that date.
32 On 28 January 2011 the Claimant said that it did not accept that the Defendant was
entitled to its costs from 27 February 2010 because the Defendant's offer did not comply with
the rules. The Claimant also said that the Defendant had not protected the time for suit by
commencing proceedings and that there was no “formal counterclaim.” It was said that “the
ordinary rules as to costs should apply” and that the Claimant was entitled to its costs “in
full”. On 1 March 2011 the Defendant said that it had advanced a claim for damages in its
Statement of Case and maintained its position on costs. On 19 April 2011 the Claimant
maintained its position.
33 Thus on 10 May 2011 the Defendant issued an application for a declaration that its
counterclaim was not time-barred or, in the alternative, for an extension of time in which to
bring a counterclaim pursuant to section 190(5) of the Merchant Shipping Act 1995 . On 14
June 2011 the Claimant issued an application for a declaration that any claim for damages by
the Defendant was time barred.
Is it too late for the Claimant to take the time bar point?
34 Mr. Jacobs submitted that in circumstances where (i) the Defendant, by its Statement of
Case served on the Claimant in August 2009, claimed judgment against the Claimant for the
damages sustained in the collision, (ii) the Claimant chose not to take any time bar point at
that time and (iii) the matter went to trial in October 2010 and judgment was given in
December 2010 it was too late for the Claimant to take the time bar point in January 2011.
Mr. Jacobs said that once it was clear to the Claimant that the Defendant was seeking
judgment for the damage sustained by the Defendant it was incumbent upon the Claimant, if
it wished to say that any such claim was time barred, to say so promptly thereafter. Otherwise
the Defendant would proceed to trial believing that there was no objection to his seeking
judgment for the damage it had sustained.
35 Mr. Kimbell submitted that the time bar point could be taken at any time before the matter
was referred to the Registrar to assess damages. He submitted that section 190 of the
Merchant Shipping Act 1995 barred the remedy of damages and that damages were
determined by the Registrar after judgment on liability so that the latest time for taking a time
bar point was before the court ordered a reference to assess damages. He accepted that there
might be circumstances in which it would be appropriate to give notice before that time but
the present case was not such a case. Having regard to the large amount of damage sustained
by the Claimant and the small amount of damage sustained by the Defendant the collision
action would continue even if the Defendant's claim was time barred.
26
36 Section 8 of the Maritime Conventions Act 1911 provided that “no action shall be
maintainable” unless proceedings are commenced within two years and section 190 of the
Merchant Shipping Act 1995 , its successor, provides that “no proceedings ……shall be
brought” after two years has expired. Thus what is barred is the proceedings. Whether the
time bar is engaged will be apparent when the proceedings are commenced. That is when the
claim form is issued or when a defendant to an action for damages caused by a collision
counterclaims for judgment in respect of his own damage. The reference, which is the
conventional procedure in the Admiralty Court for determining the quantum of damages, is
part of the proceedings which are barred. The bar is not restricted to the reference but extends
to the proceedings as a whole.
37 As a matter of practice a time bar point must be pleaded. CPR Part 16 Practice Direction
13.1 provides that the details of any relevant limitation period relied on must be given. The
notes in the White Book to section 190 of the Merchant Shipping Act 1995 draw attention to
that provision; see Vol.2 para.2D-257.
38 The modern preferred practice of “putting your cards on the table” in order to avoid
surprise requires that a time bar point be taken at early stage. Admiralty practice is to the
same effect. Since at least 1932 Admiralty practitioners have been advised to raise any
defence based upon section 8 of the Maritime Conventions Act 1911 (the predecessor of
section 190 of the Merchant Shipping Act 1995 ) as a preliminary objection by way of
summons or motion seeking an order that the action is not maintainable; see The Merchant
Shipping Acts by Temperley 4th ed. (published in 1932) at p.551, which advice is now to be
found in the 7th ed. of that work (published in 1976) at p.346. The same advice is given in
The White Book at Vol.2 para.2D-257. In practice time bar points pursuant to section 190 of
the Merchant Shipping Act 1995 (as with its predecessor section 8 of the Maritime
Conventions Act 1911 ) are taken initially by letter; see for example The Pearl of Jebel Ali
[2009] 2 Ll.Rep. 484 at para.14.
39 Thus as soon as it is apparent that a shipowner is seeking judgment for the damage
sustained in a collision notwithstanding that he has not brought proceedings within the period
of two years from the collision it is incumbent upon the defendant to that claim to raise the
time bar point if he wishes to rely upon it to prevent such proceedings being brought. In the
present case it became apparent to the Claimant in August 2009, when Statements of Case
were exchanged, that the Defendant was seeking judgment for the damage sustained in the
collision between Sea Express 1 and Alaska Rainbow notwithstanding that no claim form had
been issued by the Defendant within two years of the date of collision. At that stage the time
bar point could have been taken by a letter to that effect and/or by the issue of an application
seeking a declaration that the claim could not be brought. The point could also have pleaded
by way of a defence to counterclaim although that would have been unusual.
40 It is true that the taking of the time bar point in August 2009 would not have made the trial
of liability for the collision unnecessary. But, on the Claimant's case, the time bar was
capable of having an important effect on the costs of the proceedings. For if there was no
counterclaim then, on the Claimant's case, it was arguable that the Claimant should obtain its
costs of the proceedings even if the court were to hold that liability for the collision should be
borne equally by both vessels; see The Victory [1996] 2 Lloyd's Rep. 482 at p.501 and The
Krysia and Europa (no.2) [2008] 2 Lloyd's Rep.707 at para.29. It was therefore only fair that
the Defendant should know that the Claimant was intending to take that point.
27
41 The point was not taken at that stage. Nor was the point taken at the CMC in January
2010. The parties set out the “principal issues”. They included apportionment and quantum
but no reference was made to a time bar point.
42 The trial took place in October 2010 and it was not until after judgment was given that the
Claimant decided to take the point, in January 2011.
43 In my judgment, where the Defendant had stated in its Statement of Case in August 2009
that it was seeking judgment for the damage it had sustained in the collision, the Claimant, if
it wished to contend that the Defendant was not entitled to bring proceedings for such
damage pursuant to section 190 of the Merchant Shipping Act 1995 , was obliged to take that
point in response to the Defendant's Statement of Case, either by preliminary objection by
way of application, letter or a further pleading. The Defendant was entitled to be told that the
Claimant was saying that such a claim could not be brought long before trial rather than after
trial when the parties were seeking to agree the ancillary orders consequential to my
judgment. Such notification would have been consistent with the long established Admiralty
practice to which I have referred and with the modern practice of “cards on the table”.
44 I do not accept Mr. Kimbell's submission that the Claimant was entitled to take the time
bar point at any time before the court ordered a reference to assess damages. The Defendant's
pleading seeking judgment for the damage sustained and an order for a reference had been
served in August 2009. That was when the time bar point ought to have been taken for, if
successful, it would prevent the Defendant from obtaining judgment and a reference. To
delay taking the point until after judgment has been given on the issues pleaded in the
respective statements of cases was, in my judgment, contrary to principle and good practice.
It is significant that Mr. Kimbell was unable to point to any case in which a time point based
on section 8 of the Maritime Conventions Act 1911 or section 190 of the Merchant Shipping
Act 1995 had been taken after the trial on liability.
45 I therefore accept Mr. Jacobs' submission that it is now too late for the Claimant to take
the time bar point. There may be circumstances where a point can be taken after judgment but
they would have to be exceptional (see The White Book Vol.1 para.17.3.8) and it was not
suggested that the circumstances of the present case were exceptional.
46 It follows that there was an effective counterclaim and that there is no reason why the
costs incurred before 26 February 2010 should not be borne in accordance with liability for
the collision. Since the Claimant's costs were somewhat greater than the Defendant's costs the
appropriate order is that each should pay 50% of the other's costs rather than making no order
as to costs.
47 It is unnecessary to decide the other arguments addressed to me by Mr. Jacobs but in
deference to those arguments and to Mr. Kimbell's arguments in response I shall give my
views on them as shortly as I can.
Estoppel
48 Mr. Jacobs submitted that the Claimant was estopped from now relying upon the time bar
point.
28
49 In order to found a claim that a person is estopped from asserting a legal right, in this case
the right to say that the Defendant's counterclaim may not be brought because the two year
time limit had expired, it is necessary to show that the person has made a clear and
unequivocal representation that the right will not be asserted; see Ace Insurance v
Surendranath Seechurn [2002] EWCA Civ 67 per Ward LJ at paragraphs 17-125. If the
representation is said to have been made by conduct it is necessary to show that the person
was aware of his right and that the course of conduct on which he engaged was inconsistent
with reliance upon that right; see The Superhulls Cover Case [1990] 2 Lloyds Rep.431 per
Phillips J. at p.450.
50 For the reasons I have already given it was incumbent upon the Claimant, if it wished to
rely upon the time bar point, to take that point promptly after the Defendant had stated in its
Statement of Case that it sought judgment in respect of the damage it had sustained and a
reference to assess that damage. On 11 January 2010 prior to the CMC the parties agreed the
Case Memorandum and List of Issues. The Claimant was aware that the Defendant had not
commenced proceedings within the two year time limit and yet, although quantum was stated
to be one of the issues in the action, the Claimant did not raise reliance on the time bar as
being one of the issues in the proceedings. The Claimant's conduct in failing to inform the
Defendant at the time of the CMC that it was intending to rely on the time bar was, in my
judgment, a clear and unequivocal representation that the Claimant was not relying upon the
time bar. If the Claimant had been intending to rely upon the time bar the Claimant ought to
have informed the Defendant (and the Court) of that by the time of the CMC at the latest. Its
failure to take the point by that time was, in one sense, silent conduct, but it was silent
conduct at a time when the Claimant had a duty to take the point if it wished to rely upon it.
Silence in that context is a clear statement that the time bar point is not to be relied upon. It is
inconsistent with an intention to rely upon the point.
51 The evidence of Mr. Leonard of Wikborg Rein was that if the limitation issue had been
raised the Defendant would have made an application for an extension of time. There is no
reason to doubt that. For the reasons explained below such application would have succeeded
and so it would be unfair or unconscionable to permit the Claimant to rely upon the time bar.
52 Mr. Leonard also said that if such an application had failed it was likely, though he could
not be certain, that the First Defendant would have made an offer on a 50/50 basis earlier than
the Defendant in fact did. This however was on the basis that there was a representation in
February 2009 that the time bar point would not be taken and that an application to extend
time in May 2009 had failed. Since I have identified the agreement of the list of issues in
January 2010 as the time when a clear and unequivocal representation was made it is
unnecessary to consider this alternative “reliance” since a 50/50 offer to settle was made on 5
February 2010.
Extension of time pursuant to section 190(5) of the Merchant Shipping Act
1995.
53 Mr. Jacobs applied on behalf of the Defendant for an extension of the time for bringing
proceedings until 7 July 2009, the day after the Defendant filed its Statement of Case. Section
190(5) of the Merchant Shipping Act 1995 gives the court power to extend the period
allowed for bringing proceedings “to such extent and on such conditions as it thinks fit.”
29
54 It was common ground that this court was bound by the decision of the Court of Appeal in
The Al Tabith [1995] 2 Lloyd's Rep. 336 to adopt a two stage process in dealing with this
application, stage one being whether there was good reason for an extension and stage two
being whether it was fair and just to grant the extension.
55 What is a good reason for an extension cannot be defined; see The Pearl of Jebel Ali
[2009] EWHC 1365 (Admlty) at para.37. In that case I noted that what must be shown has
previously been described as “special circumstances which create a real reason why the
statutory limitation should not take effect” (see The William Gray and The Llandovery Castle
(1920) 2 Ll.Rep. 273 ) or “some good and substantial reasons for the exercise of the Court's
discretion in favour of allowing the action to proceed” (see The Hesselmoor and The
Sergeant [1951] 1 Lloyd's Rep.146 ).
56 Mr. Leonard of Wikborg Rein has stated that:
“….it was our intention only to bring the claim as a counterclaim in circumstances where the
Claimants brought a claim. In the light of the size of any prospective counterclaim to be
advanced on behalf of the First Defendants, it was not intended to pursue this claim
independently in circumstances where Claimants elected not to pursue their own. When we
were informed of the Claimants' intention to issue their own proceedings (in January 2009) it
was thought that any counterclaim could be raised by way of defence or set-off to the claim
without the need for the First Defendants to issue their own independent proceedings.”
57 Given the very small size of the Defendant's claim (security had been sought in the sum of
£53,000) it was (putting to one side section 190 of the Merchant Shipping Act 1995 ) a
sensible and proportionate decision not to pursue that claim unless the Claimant pursued its
claim. With regard to the belief that “any counterclaim could be raised by way of defence or
set-off to the claim without the need for the First Defendants to issue their own independent
proceedings” the argument before me proceeded on the basis that the Defendant's solicitor
thought that section 190 of the Merchant Shipping Act 1995 did not apply to counterclaims. 1
Such a belief was mistaken, as reference to The Fairplay XIV [1939] P. 57 would have
shown. That case is referred to in The White Book Vol.2 p.574, The Merchant Shipping Acts
by Temperley 7th ed. p.347 and Marsden on Collisions at Sea 13th ed. p.455. (My decision to
the same effect in The Pearl of Jebel Ali was not delivered until 18 June 2009.)
58 This is a case where an extension of time is sought to bring a relatively small counterclaim
which it is sought to set off against the Claimant's very much larger claim. That very
circumstance is capable of providing good reason for extending time, namely, that in
circumstances where the Claimant's claim will in any event be before the court, the
Defendant's counterclaim can be tried on the same evidence and without any increase in
expense; see The Fairplay XIV [1939] P. 57 at pp.62–63 per Sir Boyd Merriman P. and the
passages from The Igman (an unreported decision of the Court of Appeal dated 27 May 1993)
and The Kafur Mamedov (an unreported decision of the Court of Appeal in Hong Kong dated
12 July 1996) quoted in The Pearl of Jebel Ali [2009] EWHC 1365 (Admlty) at paragraphs
47 and 48.
59 Mr. Kimbell objected that the fact that an extension is required to bring a counterclaim is
“classically” a stage two consideration and that to treat it as good reason for an extension of
time “collapses” the test into a single stage test. I accept that in The Pearl of Jebel Ali (where
there was considerable debate as to why the applicant had not issued proceedings within
30
time) I considered the counterclaim at the second stage but I am unable to accept that it
cannot be considered at the first stage. That would be inconsistent with the approach of Sir
Boyd Merriman P. in the Fairplay XIV. Nor do I accept that it collapses the two stage test
into a single stage test because it will still be necessary to consider whether it is fair and just
to extend time.
60 The Defendant's solicitor was mistaken in thinking that section 190 of the Merchant
Shipping Act 1995 did not apply to counterclaims. However, the mere fact that the solicitor is
mistaken in not ensuring that the Defendant had issued proceedings within the two year time
limit is not a bar to extending time. If it were then time would not have been extended in The
Fairplay XIV where the applicant failed to issue proceedings within the two year time limit;
see p.61.
61 In considering where the interests of justice lie it is necessary to balance all the
circumstances of the case. In the present case the Defendant, whose counterclaim is relatively
small, sensibly had no desire to commence proceedings but, if the Claimant commenced
proceedings, wished to set off its small counterclaim against the claim. Such a set-off would
neither lengthen nor increase the costs of the trial. In such circumstances the interests of
justice, in my judgment, favour an extension of time to permit the counterclaim to go ahead
notwithstanding the Defendant's mistake in thinking that he did not have to commence
proceedings within the two year time limit. Had an application been made for an extension of
time shortly after the CMC I consider that it would have been granted.
62 The trial has now taken place. It was heard before the Claimant had indicated that it
wished to rely upon the time bar. If anything the interests of justice demand even more
strongly that the Defendant's counterclaim be permitted to be brought. For the Claimant
permitted the Defendant to pursue its claim for judgment and a reference through to trial
without informing the Defendant that it intended to say that the Defendant was entitled to
neither judgment nor reference by reason of the Defendant's failure to bring proceedings
within two years.
63 Therefore, had it been necessary, I would have extended the Defendant's time for
commencing proceedings until 7 July 2009 so as to validate the Defendant's claim for
judgment and a reference to assess damages made the day before.
The single liability principle; the Khedive (1882) 7 App. Cas. 795
64 Mr. Jacobs submitted that by reason of the single liability principle established by the
Khedive the Claimant was in any event unable to recover judgment on its claim without
having 50% of the Defendant's damage set-off against it in order to reduce it. Mr. Kimbell
submitted that this could not be so because it would mean that section 190 (or its predecessor)
did not apply to a counterclaim which did not exceed the claim. That had never before been
suggested. Mr. Jacobs pointed out that the point had been raised but not decided in The Kafur
Mamedov (see paragraphs 63, 68 and 74) and that he had reserved the right to argue it in The
Pearl of Jebel Ali .
65 The issue in the Khedive concerned a question which had arisen in the context of the
tonnage limitation of a shipowner's liability. In that case the Voorwaarts had collided with the
Khedive . The owners of the Voorwaarts brought an action in rem in the Admiralty Court
against the Khedive . The owners of the Khedive defended the action and counterclaimed in
31
respect of their own damage. Both vessels were held to have been at fault. (At common law
neither would therefore have had a claim but in Admiralty the rule was that “the loss must be
apportioned between them as having been occasioned by the fault of both of them”; see the
Woodrop-Sims (1815) 2 Dodson 83 at p.85 per Lord Stowell and Cayzer, Irvine v Carron
Company (1884) 9 LR App.Cas. 873 at pp.880–881 per Lord Blackburn.) The owners of the
Khedive brought a limitation action against the owners of the Voorwaarts and all other
persons claiming damages against the owners of the Khedive to limit their liability pursuant
to the Merchant Shipping Amendment Act 1862 and paid the amount of their liability into
court. The limitation fund was not sufficient to satisfy in full the claims for which they were
answerable to damages.
66 The owners of the Khedive submitted that the fund should be apportioned rateably
between the owners of the Voorwaarts and the other claimants against the fund in proportion
to the respective amounts of their claims. For this purpose the claim of the Voorwaarts was a
moiety of their claim and that was the sum for which the owners of the Khedive were liable.
They said the claim against the Khedive should be stayed apart from their counterclaim
which they sought to enforce against the owners of the Voorwaarts .
67 The owners of the Voorwaarts submitted that the owners of the Khedive were actually
liable for damages in a sum equal to a moiety of the damage sustained by the owners of the
Voorwaarts less a moiety of the damage sustained by the owners of the Khedive and that
such sum was the sum to be proved against the limitation fund rateably with the other
claimants on the fund. The owners of the Khedive would thus have no claim to pursue against
the owners of the Voorwaarts .
68 In practical terms the owners of the Khedive , having paid their limitation fund into court,
wished to be able to claim a moiety of their loss from the owners of the Voorwaarts . For
their part the owners of the Voorwaarts were prepared to prove a lesser sum against the fund
in return for being able to prevent the owners of the Khedive from pursuing them for a
moiety of their claim. Also, other claimants on the fund would obtain a greater payment from
the fund if the arguments of the Voorwaarts prevailed.
69 The House of Lords held in favour of the Voorwaarts . The basis of the decision was that
the rule in Admiralty was that where both ships were at fault there were not two cross
liabilities in damages but a single liability for the difference between a moiety of the larger
claim and a moiety of the smaller claim; see the judgment of Lord Selborne at pp.801–807
(especially at pp. 801 where the question – two cross-liabilities or one liability — was
identified and p.807 where Lord Selborne agreed with the Master of the Rolls and Brett LJ in
an earlier case (see p.803) that there was no liability in damages except for the balance) and
the judgment of Lord Blackburn at pp.816–822. Lord Watson agreed with both of those
judgments. (Lord Bramwell would have dissented but decided not to trouble their Lordships
with his judgment and yielded to the other judgments. The reporter was nevertheless
permitted to publish the judgment which Lord Bramwell had prepared but not delivered as a
footnote; see pp.824–827.)
70 Thus the decision in the Khedive did not decide the issue raised by Mr. Jacobs. Indeed, the
two year time bar was not enacted until the Maritime Conventions Act 1911 . However, the
issue in that case was resolved by reference to a principle of Admiralty law, namely, that
there were not two cross liabilities in damages but only one liability.
32
71 Mr. Kimbell said that it was not clear that the House of Lords said that there was a single
liability and he noted that in the Despina R [1978] QB 396 at p.414 Brandon J. summarised
the decision in terms of there being one judgment for the difference between two liabilities.
However, as I have pointed out, Lord Selborne expressed his view in terms of there being
only one liability. The basis of that view was that there would be only one monition issued to
pay the balance. As Sheen J. held in the Transoceanica Francesca [1987] 2 Lloyd's Rep.155
at p.161 (after quoting from the judgment of Brett LJ which had been approved by Lord
Selborne) “where there is a claim and a counterclaim neither party is liable to pay until a
balance has been struck”. Similarly in the Lu Shan [1993] 2 Lloyd's Rep. 259 at pp.263–4
Clarke J., having analysed the decision in the Khedive , said that its effect was that there is
“only one liability for half the excess of the aggregate loss.” I prefer the analysis of the
decision by Sheen J. and Clarke J. to the short summary by Brandon J. (See also Marsden on
Collisions at Sea 13th ed. para.14-27 which analyses the decision in terms of there being
“only one liability”.)
72 Mr. Jacobs submitted that it was a logical consequence of the single liability principle
established by the Khedive that where ships A and B collided as a result of the equal fault of
each but only A had commenced suit within the two year limitation period B was only liable
for the amount by which a moiety of A's claim exceeded a moiety of the claim of B. Mr.
Kimbell submitted that the Khedive concerned only the question decided as to the application
of the tonnage limit and that it had never been suggested in any case or textbook that an out
of time counterclaim might still be relied upon as a set-off to reduce the claim of the other
shipowner who had commenced his action within time.
73 It cannot be doubted that the decision in the Khedive remains good law. Later Admiralty
judges have noted what it decided without suggesting that it no longer remains good law; see
the Tojo Maru [1969] 1 1 Lloyd's Rep.133 at p. 148 per Willmer LJ, the Despina R [1978]
QB 396 at p.414 per Brandon J., the Transoceanica Francesca [1987] 2 Lloyd's Rep. 155 at
pp.159–161 per Sheen J and the Lu Shan [1993] 2 Lloyds Rep.259 at pp.263–264 per Clarke
J.
74 The logical consequence of the single liability principle appears to be that for which Mr.
Jacobs contends. If the only liability which the Claimant can enforce where both ships are
equally to blame is a liability for the difference between a moiety of both claims then the
Claimant cannot claim that the Defendant is liable in a sum which does not take account of
the damage suffered by the Defendant's ship.
75 Mr. Jacobs' submission is supported by the decision of Dr. Lushington in the
Seringapatam (1848) 3 Wm.Rob 38 as explained by Lords Selborne and Blackburn in the
Khedive at pp.806 and 821. In the Seringapatam there was a collision between two ships. An
action and cross-action were commenced but the cross-action was discontinued. Both vessels
were found to have been at fault. The shipowner who had discontinued his cross-action
sought an order that a moiety of his damage should be deducted from the moiety of the
damage claimed by the other shipowner. Dr. Lushington refused to grant such an order
because, the cross-suit having been discontinued, the shipowner seeking the order could not
have “the benefit of a decree which, in point of fact, has never been pronounced in their
favour”. However, he resolved not to permit the other shipowner to recover the moiety he
claimed unless he submitted to the deduction of a moiety of the damage sustained by the
shipowner who had discontinued his cross-suit. “By this decision I conceive that the owners
of the Seringapatam will have no reason to complain that injustice has been done towards
33
them.” Lord Selborne said that this decision could be reconciled with “sound principle” and
Lord Blackburn said the decision was justified on the basis that “the substance was that the
balance only should be paid.” Thus, despite the absence of an effective counterclaim, the
principle later established by the Khedive applied .
76 The important question, it seems to me, is whether section 8 of the Maritime Conventions
Act 1911 and its successor section 190 of the Merchant Shipping Act 1995 have modified the
single liability principle so as to enable a shipowner to assert and claim a liability which does
not take into account the damage suffered by the other vessel whose owner has not complied
with the time limit provided by those Acts.
77 In the Pearl of Jebel Ali I held that section 190 of the Merchant Shipping Act 1995 , like
its predecessor, applied to counterclaims. “Any proceedings” includes a counterclaim. The
novel question to which Mr. Jacobs' submission has given rise is whether that phrase includes
the raising of an argument based upon the principle in the Khedive , namely, that if the
defendant is liable the claimant can recover no more than the difference between their claims
in accordance with the Admiralty rule.
78 Section 190 bars the remedy of bringing proceedings as did its predecessor, section 8 of
the Maritime Conventions Act 1911 ; see Aries Tanker v Total Transport [1977] 1 WLR 185
at p. 188 per Lord Wilberforce. A shipowner who expects to be the net payee needs to
enforce the remedy available to him by bringing proceedings against the other shipowner. If
he has failed to comply with section 190 that remedy is barred. However, where he expects to
be the net payor, he may not wish to commence proceedings but only, if sued by the other
shipowner, to rely upon the principle established by the Khedive to ensure that any judgment
obtained against him takes account of the damage suffered by him. In that event he is merely
defending himself by relying upon the limitation imposed by the rule in Admiralty on the
sum in respect of which the defendant is liable to the claimant. He is not bringing
proceedings.
79 I have therefore concluded that section 190 does not affect the application of the principle
established by the Khedive . It follows that, whether or not the court may properly grant the
Defendant an extension of time, the Defendant remains entitled to rely upon that principle.
80 I recognise that it is now the centenary of the Maritime Conventions Act 1911 and this
defence has not been the subject of any decision or mentioned in any textbook since that Act
was passed. But for the reasons I have endeavoured to express I have concluded that it is
available. However, a shipowner will often be unable to be confident that he will ultimately
be the net payor and so the safe course will continue to be the commencement of proceedings
within the two year limitation period rather than reliance upon the principle in the Khedive .
As I said in the Pearl of Jebel Ali at para.28 that has been the practice for many years.
Equitable set-off
81 The principle in the Khedive is a form of set-off long recognised in Admiralty law. In
those circumstances it is unnecessary to discuss whether the principle of equitable set-off
would in any event come to the aid of the Defendant; cf Fearns v Anglo-Dutch Paint and
Chemical Co.Ltd [2011] 1 WLR 366 at paragraphs 40-43 per George Leggatt QC.
34
82 There being several reasons why there is an effective counterclaim it is also unnecessary
to consider what order for costs would have been appropriate had there been no effective
counterclaim. I shall therefore not enter into any further consideration of the issues
considered in the Victory [1996] 2 Lloyd's Rep. 482 and the Krysia and Europa [2008] 2
Lloyd's Rep. 707 .
Conclusion
83 As a result of its successful offer the Defendant is entitled to the costs of the action
incurred after 26 February 2010.
84 With regard to the costs of the action incurred before 26 February 2010 each party should
pay 50% of the other's costs. The Claimant is unable to contend that there was no effective
counterclaim because




i) it is too late to take the time bar point;
ii) the Claimant is estopped from doing so;
iii) the Defendant is entitled to an extension of time to bring its counterclaim; and
iv) the Defendant is entitled to rely by way of defence on the single liability principle in the
Khedive .
“The Consequence of”
The insurer’s liability by virtue of the ¾ Collision Liability Clause arises only where the
assured indemnifies the owners of the suffering vessel “in consequence of” the assured vessel
colliding with another vessel. The import of the phrase “in consequence of” was highlighted
in France, Fenwick & Co v Merchant Marine Insurance Co Ltd, outlined below.
William France Fenwick & Co., Ltd v
Merchants' Marine Insurance Co Ltd
[1915] 3 K.B. 290
The Issues
Insurance (Marine)—Running down Clause—Damage in Consequence of Collision—
Construction of Clause.
The Facts
By a policy of marine insurance upon the hull and machinery of a steamship it was agreed
that if the ship thereby insured should come into collision with any other ship or vessel, and
the assured should in consequence thereof become liable to pay, and should pay by way of
35
damages to any other person or persons any sum or sums … the underwriters would pay the
assured a certain proportion of such sums.
The insured ship, the Cornwood, by reason of her negligent navigation came into collision
Rowen, which she was overtaking. The impact was very slight and
had practically no effect. After the collision the other ship, the Rowen by reason and as a
with another ship, the
direct consequence of the incidents of the collision, including the manoeuvres properly
adopted by her to minimize the effects of the collision, came into collision with a third ship,
the Galatee, to which a large amount of damage was done. The owners of the insured ship
having been held alone to blame for both collisions became liable to pay, and paid, sums in
respect of damages arising out of both collisions. The owners of the insured ship claimed
under the policy the sums paid, but the insurer rejected the claim, arguing that there had been
no direct physical contact between the Cornwood and the Galatee.
Held, that the right inference to be drawn from the facts as proved was that the collision with
the third ship was a consequence of the collision between the insured ship and the other ship
within the meaning of the clause, and that therefore the insurers were liable to pay to the
owners of the insured ship the proportion they had underwritten of the damages arising out of
both collisions.
SWINFEN EADY L.J.
The question raised by this appeal turns upon the construction and true effect of part of the
running down clause in the Institute Time Clause which is attached to a policy of insurance.
By the terms of that clause it was agreed that if the ship insured should come into collision
with any other ship or vessel “and the insured shall in consequence thereof become liable to
pay, and shall pay by way of damages to any other person or persons any sum or sums not
exceeding in respect of any one such collision the value of the ship hereby insured,” then the
company will pay. The material words that have to be construed and dealt with in this clause
are the words “in consequence thereof.”
The collision between the Cornwood and the Rouen, and afterwards between the Rouen and
the Galatée, has already been the subject-matter of proceedings in the Admiralty Court. The
question there, of course, was different from the question which we have to decide; but the
facts as found and determined by the Court of Admiralty and ultimately by the House of
Lords are the basis from which we start in this case. The question to be determined there was
whether the Cornwood or the Rouen was the ship to blame for the collision which took place
between the Rouen and the Galatée. The collision between the Rouen and the Galatée was
the result of the action of one or both of the Cornwood and the Rouen —one or both of those
vessels being to blame. It was ultimately determined that the Cornwood was to blame for the
collision: so that we start with that fact.
The collision between the Cornwood and the Rouen was itself very slight and caused very
slight damage; but the damage occasioned to the Galatée by the collision with the Rouen was
very serious damage, involving, we are told, something like £15,000. In the litigation in the
Admiralty Court it was held that the Cornwood was to blame. The present case raises the
question whether that collision for which the Cornwood was to blame was in consequence of
the collision between the Cornwood and the Rouen. The judge below has held that it was; but
36
the appellants contend that he has misdirected himself in point of law and that upon the facts
as he found them he ought to have decided the other way. That contention is based upon this
finding. Bailhache J., after pointing out that actual contact between the two vessels, that is to
say, collision between the ship insured and some other ship or vessel is essential in order to
bring this clause into operation, proceeded as follows: “In one sense it is quite true to say that
the collision between the Rouen and the Galatée was not due to the collision between the
Rouen and the Cornwood, that is to say, it was not due to the actual impact between the two
vessels. I do not think it was. The impact, so far as it had any effect at all, was to drive the
Rouen away from the Galatée.” It is said that that finding of fact goes the whole way; and
that as the judge found that the collision between the Rouen and the Galatée was not due to
the actual impact between the two vessels, the Rouen and the Cornwood, he ought to have
said that the plaintiffs were not entitled to succeed.
In my opinion, according to the true construction of a clause such as the present, an assured
may become liable to pay damages in consequence of a collision between his ship and
another ship, although the damage is not immediately and directly caused by the actual
impact between the two colliding vessels. The learned judge afterwards goes on to say this:
“It does not seem to me to be necessary at all, granted that there is a collision, to find that the
actual impact of the two vessels drove the Rouen into the Galatée . I think it is sufficient to
find that the forces put into operation by the negligent navigation of the Cornwood did in fact
not only cause a collision between herself and the Rouen , but, having done that, afterwards
sent the Rouen into the Galatée .” That is a part of his judgment which has been much
commented upon. It is possible that the negligent navigation of the Cornwood might have
caused a collision between that vessel and the Rouen, and the negligent navigation of the
Cornwood might also, and subsequently, have caused the Rouen to collide with the Galatée,
and yet the collision between the Cornwood and the Rouen would not necessarily have
caused the collision between the Rouen and the Galatée.
It is therefore necessary to consider how the facts of this case stand. In the navigation of these
vessels proceeding up the river, owing to the improper way in which the Cornwood was
navigated, she approached too close to the Rouen. There was an attraction between these
vessels, with actual collision. The effect of the attraction was to cause the bows of the Rouen
to be turned to or inclined to port, which action was for the moment arrested during the time
the vessels were in contact; but, after the Cornwood had proceeded to pass the stem of the
Rouen, the port direction of the Rouen proceeded, and was accelerated by the wash of the
Cornwood on the starboard bow of the Rouen. Moreover, in order to avert a collision those on
board the Rouen, seeing the collision was imminent, had put their helm hard a-port, and had
reversed the engines. The consequence was that the Rouen was setting across the stream, and
had lost her steering way, and proceeded directly into the Galatée, striking the Galatée
almost at right angles. Mr. Littledale, who is a master mariner, was cross-examined with
regard to the actual or direct effect of the impact itself between the Cornwood and the Rouen;
and he said that might be disregarded, that it was a blow and not a push, and that as a blow it
might be disregarded. Then, dealing with the Rouen's being out of control, he said “a ship is
always out of control in a collision,” and then he explained that as meaning “from the mere
fact that once in a collision various actions have to be taken, such as putting her engines
astern to minimize the effect of the blow.” “It is a recognized thing at sea in collisions that
your vessel is altogether out of control for the time being. Her speed is reduced. The moment
you put your engines astern you have lost control of your ship,” meaning that the ship has
diminished control and steering way. The too close proximity of the Cornwood and the
Rouen occasioned the collision between them, and a direct consequence of the incidents of
37
the collision, including the manoeuvres necessitated by the collision, was the cause of the
Rouen striking the Galatée. Under these circumstances, I am of opinion that the damage
occasioned to the Galatée arose in consequence of the collision between the Cornwood and
the Rouen, although not the direct and immediate consequence of the impact—although one
ship was not, by the force of the impact, driven directly against the other. The collision, with
what has to be taken as part of the collision,—the attendant incidents of the collision—
produced the subsequent result. For these reasons I am of opinion that the judgment below
was right, and that the appeal should be dismissed.
BRAY J.
The question which we have to decide is this:—whether the assured was, in consequence of
the collision, liable to pay a large sum to the Galatée for the injury done to her by the
collision between the Rouen and the Galatée. In order that the plaintiffs may succeed it is
necessary first of all to show that there was a collision. There is no question about that.
In my opinion the collision, and the manoeuvres which were necessarily taken in order to
avoid or minimize the collision, were the cause of the Rouen being unable to avoid the
Galatée.
Appeal dismissed.
“The Vessel”
The critical issue here is what constitutes a vessel, for the purposes of the ¾ Collision
Liability Clause? The clause can only be relied on to recover moneys paid by the assured for
the “loss or damage to any vessel or property on any other vessel”. Thus, the insurer is only
liable for the loss or damage resulting from the assured’s vessel’s collision with another
vessel. The test of what “structure” constitutes a vessel was first laid down in Chandler v
Blogg (1898) 1 QB; it is to be observed, however, that this test is by no means universally
accepted.
Chandler v Blogg [1898] 1 Q.B. 32
Bigham J.
1897 Nov. 24.
Insurance (Marine)—Policy—Reinsurance—Collision Clause—Collision with sunken Barge.
The plaintiff underwrote a time policy on a vessel, the “Newburn”, containing a clause
that if the steamer should come into collision with any other vessel, and the insured should
have to pay damages, the insurers would pay.
38
The defendant underwrote a policy of reinsurance, on the same vessel, for the same period,
subject to the same clauses and conditions as the original policy, and to pay as might be paid
thereon, but only to pay all claims for loss or damage done or received through collision.
During the period covered the
Newburn, while swinging off Regent's Canal in the River
Lizzie,
Newburn
Thames, struck with her port side abreast the engine-room of the sailing barge
which had just been sunk by collision with the steamship
Lodore.
The
Lizzie for several hours, and while she so remained fast she was run
into by the SS Senior, and also by barges laden with coal, which drove across her stern,
striking her heavily aft under the counter. The Lizzie was raised on December 3, and
remained fast on the
having sustained comparatively small damage, at once sailed to Faversham, her home port,
and was there repaired by her owners.
The plaintiff sued on behalf of underwriters at Lloyd's, who in the course of their business
had underwritten policies of insurance on the SS Newburn, by which she was insured to the
total amount of £300 for twelve calendar months, commencing at noon on February 20, 1894.
The defendant admitted liability to his proportion of the loss (if any) sustained by reason of
the collisions between the Newburn and the SS Senior , and the coal-laden barges,
respectively, but contended that the contact between the
Newburn and the sunken barge
Lizzie was not “collision with any other ship or vessel,” within the meaning of the policies.
Held, that, although, at the moment when the steamer struck her, the barge could not have
been navigated, yet, as she became navigable as soon as she was raised, there was a collision
between two navigable vessels, in respect of which the plaintiff was entitled to recover on the
policy of reinsurance.
BIGHAM J.
I am of opinion that my judgment ought to be in favour of the plaintiff. The question to be
determined is whether, on two policies of reinsurance, the defendant is liable, under the
circumstances stated in the special case, as for damage caused by collision. I am disposed to
agree with Mr. Walton's contention, that “collision,” when used alone, without other words,
means two navigable things coming into contact. In the present case the Lizzie was a barge,
which happened to have been sunk, and therefore could not have been navigated at the
moment when that which the plaintiff contends was a collision took place. If one takes the
case of a vessel at anchor, which has taken the ground at low water, it is clear that she cannot
be navigated until the tide rises and floats her. Or take the case of a vessel the rudder of
which has been unshipped, she cannot be navigated until her rudder has been shipped again.
Yet in neither of the cases which I have suggested could it properly be said that there was not
a vessel, or that the vessel was not navigable. I am of opinion that, although the Lizzie could
not have been navigated during a period of a few hours, that is, until she was raised and
floated, nevertheless she was a vessel, and was navigable, within the meaning of the
definition which has been suggested, and therefore what took place comes within Mr.
Walton's own definition of a collision. The result is that there will be judgment for the
39
plaintiff for his claim in respect of the damage caused to the Newburn by the collision with
the Lizzie.
Judgment for the plaintiff.
Case Study One
Pelton SS Co v North of England Protection and
Indemnity Association (1925) 22 LlL Rep 510
The SS Zelo struck the wreck of the Finnish SS Merkur, which had sunk some
months earlier and was in the process of being salvaged. The plaintiffs, having failed to
recover from the insurers, brought an action against the P & I Club for the loss. The P & I
argued that they were, under the ¾ Collision Clause, liable for only a ¼ of the loss.
The question for the court was whether the sunken Merkur was a vessel under the Clause in
question.
Held that the Merkur was a vessel and that the P & I Club was only liable, under the
Clause for ¼ of the loss
Greer J
A ship, like any other thing, remains entitled to its description until facts are established
which show it has become disentitled to its ordinary name or description. Just as a man may
be moribund without ceasing to be a man if the doctors are hopeful that they will be able to
secure his recovery by treatment, so I think a ship may remain a ship or vessel even though
she be damaged and incapable of being navigated, if she is in such a position as would induce
a reasonable minded owner to continue operations of salvage; and if she would, in the
ordinary use of the English language, be still described as a ship or vessel, though described
as one which was in serious danger of ceasing to be a ship or vessel. In my judgment, the
salvors at the time of the loss had a reasonable expectation that they would be able to salve
the vessel.
…
It seems to me, with great respect, that navigability cannot be the test as to whether the thing
is or is not a ship or a vessel… It does not seem to me you can test whether a vessel at the
bottom is or is not a ship or vessel by saying she will be navigable immediately she comes to
the surface. You must apply some other test; and I cannot find any better test than the
question whether or not any reasonably minded owner would continue salvage operations in
the hope of completely recovering the vessel by those operations and subsequent repair.
Case Study Two
40
Bennett Steamship Company v Hull Mutual
Steamship Protecting Society [1914] 3 K.B.
57
The Issues
Insurance (Marine)—Collision Clause of Lloyd's Policy—“Collision with ship or vessel”—
Collision with Nets of Fishing Vessel.
The Facts
A steamship ran into the nets attached to and extending from a fishing vessel which was
about a mile distant from the steamship; there was no contact between the hulls of the two
vessels. The plaintiffs, as members of the defendant association, brought this action to
recover £509. 14s. alleged to be due to them under the rules of the association, as an
indemnity in respect of a claim against the plaintiffs for damage done by their vessel the SS
Burma.
The terms of the rules of the defendant association, provided protection in respect of (a) the
sums which the member might become liable to pay and should pay in respect of: collision,
&c.; (c) claims for losses, damages, or expenses arising from or consequent upon collision,
and for losses, damages, or expenses arising from or consequent upon damage caused by the
entered steamship to other ships or property without actual contact or collision so far as such
claims are not recoverable under the usual form of Lloyd's or Mutual Insurance Association's
policy with collision clause attached; and (e) loss or damage caused by such steamship to any
harbour, dock or pier, or the quays or works connected therewith, or to any jetty erection or
other fixed or movable things whatsoever, other than ships or vessels, whether caused by
negligence or otherwise.
The collision clause attached to the usual form of Lloyd's policy is as follows:
“And it is further agreed that if the ship hereby insured shall come into collision with any
other ship or vessel and the assured shall in consequence thereof become liable to pay and
shall pay by way of damages to any other person or persons any sum or sums not exceeding
in respect of any one such collision the value of the ship herein insured this company will pay
the assured such proportion of three-fourths of such sum or sums so paid as its subscription
hereto bears to the value of the ship hereby insured.”
The defendants contended that the proportion of three-fourths of the damages in question was
recoverable by the plaintiffs under the collision clause attached to the usual form of Lloyd's
41
policy, and that their liability extended only to the one quarter, or the sum of £127. 8s. 6d not
recoverable under such Lloyd's policy with collision clause attached.
The defendants paid to the plaintiffs the sum of £127. 8s. 6d prior to the commencement of
these proceedings.
The question for the opinion of the Court was whether in the circumstances set forth in
paragraph 1 there was a collision within the collision clause of a Lloyd's policy. If the Court
should be of opinion in the negative, judgment was to be entered for the plaintiffs for the sum
of £382. 5s. 6d and costs of the action. If the Court should be of opinion in the affirmative,
judgment was to be entered for the defendants with the cost of defence.
Pickford J. held that there had not been a collision between the plaintiffs' vessel and another
ship or vessel, and gave judgment for the plaintiffs.
The defendants appealed.
Held, that the SS Burma had not “come into collision with any other ship or vessel”
within the meaning of the collision clause attached to the usual form of Lloyd's policy.
LORD READING C.J.
This is an appeal by the defendants from the judgment of Pickford J. upon a special case. The
question raised is whether upon the facts stated the insured ship came into collision with
another ship or vessel. That question, upon the facts of this case, is whether the Burma came
into collision with the fishing vessel.
On these facts it is contended that the Burma came into collision with the fishing vessel.
Apart from authority, I agree with Pickford J. that no one could say, giving a reasonable
meaning to the words used, that this ship came into collision with the fishing vessel. Upon the
words “come into collision with any other ship or vessel” alone I would have no doubt that
there was not a collision. It is said, however, that there is a number of authorities which in
principle have decided that there may be a collision between one ship and another although
there has been no contact between the ships themselves.
We were first referred to The Niobe. In that case the decision of the House of Lords rested
upon the tug and tow together being, for this purpose, one vessel—in other words, that the
tug was part of the apparatus of the tow. It was accordingly held that the tow was to blame
although there had not been in fact any contact between her and the other vessel. It is
sufficient to say that that case goes as far as any case has yet gone in that direction, and,
speaking for myself, I cannot see my way to extend that principle so as to apply it to this
particular case. Indeed I have no inclination to extend the principle beyond that decision.
Then In re Margetts and Ocean Accident and Guarantee Corporation [1901] 2 KB 792 was
cited, in which the words of a policy of insurance were “owing to actual collision between
any such tug and any vessel, bridge, &c.,” and one of the insured tugs was damaged by
striking upon the anchor to which a vessel was then riding, and it was held that the tug had
come into collision with a vessel within the meaning of the policy. No doubt that decision
42
was based upon the view that when a vessel is riding at anchor the anchor and chain are part
of the vessel, and that coming into collision with either is a collision with the ship. In the
words of Phillimore J. in that case, “it may fairly be said that a vessel comes into collision
with another vessel if it comes in to collision with any portion of that other vessel.” Another
authority cited was The Warwick 15 P. D. 189. Upon looking at the report of that case in
Aspinall's Maritime Cases (1890) 6 Asp. M. Law C. 545 it appears that the collision there
was between the warps of the trawls attached to two fishing smacks. The question there was
as to the jurisdiction of a county court, and that case is no authority in the present case.
I think that the decision of Pickford J. was correct and that I cannot improve upon the reasons
which he gave for his decision. I do not feel impelled by any of the cases which have been
cited to decide in favour of the appellants.
PHILLIMORE L.J.
I am of the same opinion. Whenever any part of the tackle of a vessel is being used in
connection with the vessel, although it may be outside the ambit of the hull, as the anchor or a
boat towing astern or working ahead to warp the vessel, it may just as well be said to be a
part of the vessel when there is a collision with it as if it were still on board the vessel itself.
Upon that ground the case of In re Margetts and Ocean Accident and Guarantee Corporation
was properly decided. Nets, however, are not a part of the ship in that sense, nor are they
things which it is necessary for her to have and without which she could not prudently put to
sea.
I think that it would be straining language to say that the collision in this case with the nets
was a collision with the ship.
LUSH J.
I am of the same opinion. It does not seem to me to be possible to say, without distorting
language, that running into the nets of a fishing vessel which is a mile away is the same thing
as running into the vessel itself merely because the nets are attached to it; and I do not think
that the authorities would justify us in holding that it is.
Appeal dismissed.
“BY WAY OF DAMAGES”
The primary object of the ¾ Collision Liability Clause is to cover the assured’s liabilities resulting from
a collision between the insured vessel and other vessels. It covers the liability arising “by way of
damages that is to a claim payable to a third party by the assured, that sounds in tort in
contradistinction to a claim arising from a breach of contract or statute, which are not covered by
the clause. These issues were addressed in the following two case studies.
43
Case Study One
Furness Withy and Co Ltd v Duder [1936] 2
K.B. 461
Where, pursuant to the terms of a towage contract between the owners of a steamship and the
owner of the only tugs available at a port, the former pay to the latter a sum in respect of
damage to a tug resulting from a collision during towage between the steamship and the tug
caused solely by the negligent navigation of the tug, the owners of the steamship cannot
recover the amount of that sum from the underwriters of a policy of marine insurance on the
steamship containing a running-down clause in the usual form, inasmuch as that clause
applies only to liabilities arising from tort and not to liabilities arising from contract.
The Issues
Insurance (Marine)—Policy on ship—Running down clause—Indemnification of ship-owner
against damages paid in consequence of collision—Contract between ship-owner and
Admiralty for use of Admiralty tug—Ship-owner to make good all damage to tug—Collision
between insured ship and tug caused by negligence of tug—Payment by shipowner to
Admiralty for damage to tug—Liability of underwriter to indemnify shipowner—Payment
arising from contract and not from tort.
The Facts
"The plaintiffs are and were at all material times the owners of the
ss Monarch of
Bermuda”.
By a policy of marine insurance dated November 9, 1932, which was
subscribed to by the defendant for 15/100ths of £9090 part of £1,000,000 the defendant
insured the plaintiffs in respect of the s.s. Monarch of Bermuda upon the terms and
conditions therein set out including the running down clause.
"On October 30, 1933, the said s.s. Monarch of Bermuda was in collision with the Admiralty
tug St.
Blazey in Two Rock Passage, Bermuda. The collision was solely caused by the
negligent navigation of the said tug, and resulted in the tug sustaining damage amounting to
$579.62, or £119. 12s. 8d.
"The plaintiffs, believing that in consequence of the collision they had become liable to the
Admiralty under the said towage contract have paid to the Admiralty the said sum of £119.
44
12s. 8d. For the purposes of this action the defendant admits that the plaintiffs did in fact
become liable to pay the said sum to the Admiralty under the towage contract, but denies that
he is liable under the policy to contribute towards the sum so paid by the plaintiffs.
"If the Court be of opinion that the plaintiffs are entitled under the policy to contribution from
the subscribers to the said policy towards the sum so paid by them, the amount of the
defendant's contribution is 4s. 8d."
The policy of insurance had attached to it a slip containing the running down clause, which
was in these terms:
"And it is further agreed, that if the ship hereby insured shall come into collision with any
other ship or vessel, and the assured and/or charterers shall in consequence thereof become
liable to pay, and shall pay by way of damages to any other person or persons any sum or
sums not exceeding in respect of any one such collision the value of the ship hereby insured,
we will pay the assured and/or charterers such proportion of such sum or sums so paid as our
subscription hereto bears to the policy value of the ship hereby insured"; and the slip also
contained a clause which provided: "should any clause or clauses in the policy not accord
with those in this slip the latter are hereby accepted as binding on both parties."
The towage contract between the plaintiffs and the Admiralty, which was in the terms of
Form D. No. 461, provided (inter alia) that the plaintiffs agreed "to make good to the
Admiralty all damage suffered by the Admiralty through injury to Admiralty property or any
other cause by reason of or arising out of or in any way connected with the service and to
indemnify the Admiralty against all liabilities and claims whether in respect of injuries to
persons or property or otherwise which may be incurred by or made against the Admiralty by
reason of or arising out of or in any way connected with the service and if any claim shall be
made by any person whatsoever against any officer or representative or servant of the
Admiralty in respect of or arising out of or in any way connected with the service and
whether in respect of any breach of duty alleged breach of duty or otherwise and if any such
claim shall be satisfied or disposed of by any payment as an act of grace by the Admiralty to
indemnify the Admiralty against and to make good to the Admiralty the amount of every
payment so made."
A. T. Miller K.C. and Stephen Furness for the plaintiffs. The plaintiffs are entitled to recover
from the defendant as an underwriter of the policy of insurance on their steamship his
proportion of the sum paid by them to the Admiralty under the towage contract. It was only
by entering into that contract that the plaintiffs could obtain the necessary towage assistance
at Bermuda. By the terms of that contract the plaintiffs were liable to pay to the Admiralty a
sum sufficient to make good to the Admiralty the damage to the tug caused by the collision
between the steamship and the tug during the towage service, even though the collision was
solely caused by the negligent navigation of the tug: see The President Van Buren (1924) 132
L. T. 253; and the plaintiffs duly paid that sum to the Admiralty. The sum so paid by the
plaintiffs is a sum which the underwriters of the policy are bound to pay to the plaintiffs, and
of which the defendant is accordingly bound to pay his proportion, inasmuch as it is, within
the meaning of the running down clause in the policy, a sum which the plaintiffs became
liable to pay and paid in consequence of the steamship having come into collision with
another ship or vessel, namely, the tug, and which they became liable to pay by way of
damages.
45
H. U. Willink K.C. and W. L. McNair for the defendant. The defendant is not liable to the
plaintiffs under the policy of insurance for the sum claimed.
The sum which the plaintiffs paid to the Admiralty was paid in discharge of a purely personal
liability, and not by way of damages for negligence or any other tort, or even for breach of
contract. That sum was paid in pursuance of the towage contract by which alone the plaintiffs
were bound to indemnify the Admiralty against cost, damage, and claims arising out of the
towage service. The plaintiffs in their points of claim have to allege that the sum paid by
them to the Admiralty is a sum which they became liable to pay to the Admiralty under the
towage contract which provided that they "agreed" to make good all damage suffered by the
Admiralty. If it had been necessary for the Admiralty to sue the plaintiffs for that sum, the
action must have been founded on contract and not on tort. Apart from their contractual
liability the plaintiffs did not incur any liability in respect of the collision. The collision did
not result from any negligence or other tort of the plaintiffs, but was solely caused by the
negligent navigation of the tug. The collision may no doubt have been a causa sine qua non of
the particular payment made by the plaintiffs to the Admiralty, but the causa causans of the
payment was the contractual liability of the plaintiffs under the towage agreement: see per
Lord Sumner in Admiralty Commissioners v. S.S. Amerika. [1917] A. C. 38, 60, 61.
The liability contemplated by the running down clause is of a different nature from that
created by the towage contract. That clause insures the shipowner against any sum which he
may become liable to pay by way of damages in consequence of the ship having come into
collision with any other ship or vessel. Its object is to insure the shipowner against liability
for damages in respect of a collision caused by his own negligence. The insertion in the
running down clause of the words "by way of damages" appears to be of comparatively
recent origin. They would seem to have been introduced as words of limitation for the
purpose of restricting the liability of the insurer to damages caused by a collision resulting
from the negligence or other tortious act of the insured. They exclude any case of liability
which is not by way of damages, and the most obvious case of that kind is a case of
contractual liability. The towage contract creates a liability to provide an indemnity for
damage however caused: the running down clause creates a liability to insure against damage
caused by the negligence of the insured. There is a distinction between an indemnity and
damages. An indemnity is a contract securing against loss; damages on the contrary are a
recompense for breach of a contract or for tort: Birmingham and District Land Co. v. L. &
N.W. Ry. Co. (1886) 34 Ch. D. 261, 274, 276.
That being so, a sum paid by the plaintiffs pursuant to their contractual liability under the
towage agreement to indemnify the Admiralty against loss by collision, cannot be recovered
by the plaintiffs as collision damages under the running down clause in the policy.
A. T. Miller K.C. in reply. The running down clause rightly construed is sufficiently wide to
include the payment made by the plaintiffs under the towage contract. The expression "by
way of damages" would appear to have been included in the running down clause from the
first and not to have been recently introduced into it: see per MacKinnon J. in Young v.
Merchants' Marine Insurance Co. (1932) 42 Ll. L. 134, 136, affirmed [1932] 2 K. B. 705; 43
Ll. L. 277 The presence of that expression in the clause does not limit the clause to a sum
paid in consequence of a collision by way of damages, but admits of the clause including a
sum paid in respect of a collision by way of contract. The policy is a commercial document,
and as the running down clause is inserted in it for the business purpose of protecting the
shipowner that clause should be construed as applying to any liability incurred by the
46
shipowner for damages in connection with a collision whether arising from contract or tort.
The construction of that clause which is proposed by the defendant purports to introduce into
it words which it does not contain - namely, the words "by reason of negligence." There is, no
doubt, a distinction between a liability to indemnify against a claim and a liability to pay
damages; but that distinction is here immaterial, because the towage contract imposes upon
the plaintiffs not only a liability to indemnify the Admiralty against all claims arising out of
the towage service, but also a liability to make good to the Admiralty all damage arising out
of the service. The running down clause insures the plaintiffs against liability for damages in
consequence of collision, and under the towage contract the plaintiffs have incurred and paid
a liability in respect of damages in consequence of collision.
BRANSON J.
This case raises a short point upon an agreed statement of facts. [His Lordship read that
statement and continued as follows:] The amount involved is negligible, and the action is
brought merely to get the point in issue cleared up. That point, I think, turns entirely upon the
wording of the first two lines of the running down clause in the policy of insurance:
"And it is further agreed that if the ship hereby insured shall come into collision with any
other ship or vessel, and the assured and/or charterers shall in consequence thereof become
liable to pay and shall pay by way of damages to any other person or persons any sum" the
underwriters will pay their respective proportions of that sum to the assured. The question
here is whether the £119 odd which the plaintiffs have paid to the Admiralty is a sum which,
within the meaning of that clause, in consequence of the ship having "come into collision
with any other ship or vessel," they become liable to pay "by way of damages."
The argument for the plaintiffs is that, in view of the incident of their having in the
circumstances to contract with tug owners for the assistance of tugs under terms which made
them as owners of the ship responsible to the tug owners for any damage which the tug might
sustain while engaged in towing the ship, or which the tug might do to third persons whilst so
employed, these words in the policy are sufficiently wide to cover the damages which they
have had to pay to the Admiralty under the contract between themselves and the Admiralty.
Mr Miller urges on behalf of the plaintiffs that the real cause of the payment was the
collision, none the less because without the fact that the plaintiffs had entered into the
contract the collision would in this instance have given rise to no liability. He says that the
collision was an operating cause and the proximate cause of the arising of the liability of the
plaintiffs to pay, and therefore that it can correctly be described as the cause in consequence
of which the plaintiffs became liable to pay under the running down clause.
In my view that clause must be read as it is written. I do not think it is permissible to divide it
into two limbs, and ask oneself first, whether the payment arose in consequence of the
collision, and then, whether, if it did so arise, it was or was not a payment by way of
damages. To my mind it leads to a clearer apprehension of the meaning of the clause to read
it as it is written, in one sentence, and to ask oneself what the parties meant when they said
that if the ship should come into collision and the assured should in consequence thereof
become liable to pay something by way of damages, the underwriters would indemnify them.
What are the circumstances which the parties contemplated? I do not think that any of the
cases cited help in any way towards answering this question, unless some support is to be
found for the view which I am going to suggest in the observations made by Lord Sumner
47
near the end of his judgment in Admiralty Commissioners v. S.S. Amerika. [1917] A. C. 38,
60, 61. His Lordship, however, was there dealing with considerations which are not present in
the case before me, and this case must be dealt with as a case of first impression, in which
one has to construe the clause and say what one thinks it means without the assistance of any
previous decision. Approaching the case from that point of view, I think the clause means
that where in consequence of a collision there arises a legal liability upon the shipowners to
pay a sum which can properly be described as damages for a tort, then the underwriters will
indemnify them. The expression “becomes liable to pay .... by way of damages" indicates, to
my mind, a liability which arises as a matter of tort, and not as a matter of contract.
I do not think I need pursue the matter further, except perhaps to add that if one were to hold
that this language in the running down clause was sufficient to cover any sort of liability
which a shipowner might undertake by way of contract if and when his ship got into
collision, the obligation of the underwriters would, I suppose, only be limited by the pity
which the shipowner might be willing to extend to them.
The question, however, as I have said, is what is the real meaning of the clause. I think it
means what the defendant says it means, and that this action should be dismissed.
Judgment for defendant.
Case Study Two
Hall Bros Steamship Co Ltd v Young.
[1939] 1 K.B. 748
The Issues
Insurance (Marine)—Running down clause—Collision between insured ship and pilot boat—
Insured ship not to blame—Recovery by pilot administration of cost of repairs to pilot boat—
Recovery under French law—Shipowners claim to be recouped under policy—Meaning of
"by way of damages."
By a marine insurance policy dated March 18, 1929, the hull and machinery of a ship were
insured for £47,500. The policy was subject to the Institute Time Clauses, including the
common form running down clause by which it was provided: "If the ship hereby insured
shall come into collision with any other ship or vessel and the assured shall in consequence
thereof become liable to pay and shall pay by way of damages to any other person or persons
any sum or sums in respect of such collision" the underwriters would pay to the assured
three-fourths of such sum or sums.
The ship while on a voyage arrived off Dunkirk and stopped to take up a pilot. The pilot boat
was coming alongside when the steering-gear broke down and she collided with the ship. The
ship was in no way to blame. Art. 7 of the French law of March 28, 1928 (as translated),
48
provides "except in case of gross negligence of the pilot damage (avaries) sustained by the
pilot boat in the course of pilotage operations, and in the course of embarking or
disembarking the pilot, is chargeable to the ship." The pilot administration recovered from the
owners the sum of £432 under this law, and the owners claimed to recover three-quarters of
this sum from the underwriters:Held (affirming Goddard J.), (1.) that the words "by way of damages" in the running down
clause limited the right of recovery under the clause to cases where the liability of the
shipowners was due to some breach of duty by the ship;
(2.) that the meaning of these words could not be extended by reason of a proviso which
excluded from the operation of the clause liabilities to which on the limited view of the
operation of the main part of the clause stated above it could in no case apply;
(3.) that the owners' claim therefore failed.
Furness Withy & Co., Ld. v. Duder [1936] 2 K. B. 461 applied.
The plaintiffs were at all material times the owners of the steamship Trident . By a policy of
marine insurance dated March 18, 1929, the defendant insured the plaintiffs for a tenth part of
950l., which was itself part of the total sum of 47,500l. insured on the hull and machinery of
the vessel *749 for one year from February 20, 1929. The policy was subject to the Institute
Time Clauses attached to the policy, the first of which was:
"And it is further agreed that if the ship hereby insured shall come into collision with any
other ship or vessel and the assured shall in consequence thereof become liable to pay and
shall pay by way of damages to any other person or persons any sum or sums in respect of
such collision the undersigned will pay the assured such proportion of three-fourths of such
sum or sums so paid as their respective subscriptions hereto bear to the value of the ship
hereby insured, provided always that .... in cases in which the liability of the ship has been
contested, or proceedings have been taken to limit liability, with the consent in writing of the
undersigned, they will also pay a like proportion of three-fourths of the costs which the
assured shall thereby incur, or be compelled to pay; but where both vessels are to blame, then
unless the liability of the owners of one or both of such vessels becomes limited by law,
claims under this clause shall be settled on the principle of cross-liabilities. ...."
This was followed by a proviso in these terms:
"Provided always that this clause shall in no case extend to any sum which the assured may
become liable to pay or shall pay for removal of obstruction under statutory powers, for
injury to harbours, wharves, piers, stages, and similar structures, consequent on such
collision; or in respect of the cargo or engagements of the insured vessel or for loss of life or
personal injury."
While proceeding with a cargo of cereals from the River Plate to Dunkirk the Trident arrived
off Dunkirk on August 24, 1929, and stopped to take up a pilot. The pilot boat Vétéran which
belonged to the Pilotage Administration of Dunkirk, was drawing alongside the vessel when
her steering-gear broke down and she came into collision with the vessel. The vessel and the
pilot boat were both damaged. It was admitted that the vessel was in no way to blame.
49
Art. 7 of the French law of March 28, 1928, dealing with matters of pilotage, provides:
"Saut le cas de faute lourde *750 du pilote, les avaries survenues au bateau pilote au cours
des opérations de pilotage, au cours des manoeuvres d'embarquement ou de débarquement du
pilote, sont à la charge du navire."
The following is the agreed translation:
"Except in case of gross negligence of the pilot damage (avaries) sustained by the pilot boat
in the course of pilotage operations, and in the course of embarking or disembarking the pilot
is chargeable to the ship."
Proceedings were brought in the French Courts by the Pilotage Administration against the
present plaintiffs to recover the cost of repairing the damage sustained by the Vétéran under
the above law. By a judgment given on February 9, 1931, the Tribunal de Commerce
pronounced in favour of the claimants, but reserved the question of the amount payable to
them. The Court of Appeal at Douai reversed this decision by a judgment dated December 3,
1931; but by a decision given on January 6, 1937, the Civil Chamber of the Cour de
Cassation annulled the judgment of the Court of Appeal and remitted the case to the Court of
Appeal at Amiens. Subsequently the plaintiffs without further pursuing the litigation
compromised the claim of the Pilotage Administration and paid to the Administration the
sum of 47,468.45 francs or (at the exchange of 109.78½ francs to the £) the sum of 432l. 7s.
6d. in discharge of all liability. It was not disputed that the plaintiffs were in fact liable to the
Pilotage Administration under the terms of the French law of March 28, 1928.
The underwriters were kept informed of the claim made by the Pilotage Administration and
of the progress of the litigation in the French Courts and of the negotiations for the
settlement, but from the outset they took up the attitude that they were under no liability to
reimburse the plaintiffs any sums which they (the plaintiffs) might become liable to pay to
the Pilotage Administration, and were not concerned in the French proceedings or in the
settlement; but, in so far as they might be concerned, they assented to the settlement.
*751
In these circumstances the plaintiffs brought these proceedings against the defendant to
recover 13s. 1d., being his proportion of three-quarters of the sum of 432l. 7s. 6d.
Evidence was given at the hearing as to the nature of the liability that arose under the French
law by two French lawyers who differed considerably in their views. The effect of their
evidence is sufficiently stated in the judgment.
Goddard J. said that the plaintiffs contended that the sum paid in respect of the repairs of the
pilot boat was a sum recoverable under the running down clause, as the ships did come into
collision; against this it was contended that the insurance here was an insurance only against
a liability in tort, and that the intention of the policy was that the underwriter was to
indemnify the shipowner only when the shipowner was held to blame or partly to blame, as
the words "by way of damages" must be strictly construed.
Both parties had called lawyers from France to explain the French law, which seemed to be
reasonably clear in itself. There was some difference of opinion between them as to whether
50
there was in the action brought by the pilotage authority any element or conception of what in
English law would be called a tort and in French law a quasi delict. So far as it was a matter
of coming to a decision upon the evidence of French lawyers there seemed to be no
conception of tort in those proceedings.
If it was a mere question of having to decide whether the action lay in contract or tort, he
would incline to the view that it lay in contract. It was in effect a statutory cause of action. At
any rate it was not a liability in tort or in quasi delict or delict.
Then he had to consider the words "by way of damages" in the policy. The plaintiffs
contended that in a business document between business men those words ought to include
such a sum as that in question. His duty in construing a document, whether a commercial
document or any other sort of document was to give a meaning to all the words of the
document, and he had to give a meaning to the words "by way of damages."
*752
He (his Lordship) thought he ought to construe the expression "by way of damages" as
meaning by way of damages that had to be paid in consequence of a tortious act committed
by the ship, and in that view he had the support of Branson J. in Furness Withy & Co., Ld. v.
Duder. 1 He thought that the liabilities which might be imposed on a ship by foreign law,
although the ship was in no way to blame, were not to be held covered by the common form
of collision clause as this clause was. He thought it was intended to point only to cases where
the ship was held liable for damages caused by her fault. Nor did he think the proviso
inconsistent with the construction he had placed on the clause. The effect of the clause with
the proviso was that, although the ship was negligently navigated so that the owners became
liable for damages on account of a collision, the underwriters had to indemnify them against
the damages they had to pay to the owners of the other ship, but not in respect of any sum
which had to be paid in respect of the enumerated excepted risks.
The plaintiff appealed. The appeal was heard on February 27 and 28, and March 1, 1939.
Sir Robert Aske K.C. and W. L. McNair for the appellants. The sum for which the shipowners
became liable to the Pilotage Administration under the French law is recoverable by the
shipowners from the underwriters under the running down clause. The liability to the
Administration existed although there had been no negligence on the part of the ship, but the
liability is none the less one in tort: compare the cases of a common carrier and a common
innkeeper, where the liability depends on custom of the Realm. In each case, however, there
is a breach of something in the nature of a duty imposed by the common law, and therefore a
liability in tort arises. This is relevant in considering the meaning of the words "by way of
damages." These words may be considered from a technical point of view, but it is argued
that they should be construed from a business point of view.
*753
[MACKINNON L.J. Under the French law a liability might have arisen although the ship and
the pilot boat never touched each other.]
Yes, but here there was a collision, and the damage was caused by the collision, so that the
case comes directly within the running down clause.
51
The cause of action against the underwriters is for unliquidated damages in the nature of an
indemnity: see Baker v. Adam 2 (a case of total loss) and Castelli v. Boddington. 3 This
amount now being claimed was sued for in the French Courts as damages and it would have
been so sued for in England. In the case of a liability on a ship-owner for damage done
without any fault on his part the liability is for damages: see River Wear Commissioners v.
Adamson 4 and Great Western Ry. Co. v. Owners of S.S. Mostyn. 5 In the case of a collision
clause the Court will lean strongly in favour of the assured: David M'Cowan v. Baine and
Johnston. 6
In Mayne on Damages, 10th ed., p. 1, damages are defined as follows:
"Damages are the pecuniary satisfaction obtainable by success in an action."
That covers everything in the present case. The words "by way of damages" were put in to
exclude costs. In McArthur on The Contract of Marine Insurance, 2nd ed., p. 324, it is said:
"The nature of the damages covered consists in 'any sum or sums' which the assured shall, in
consequence of the collision of the ship insured with any other ship or vessel 'become liable
to pay, and shall pay by way of damages to any other person or persons.' These words if they
stood alone would include all damages consequent upon collision whether to person or
property but the proviso appended to the clause excepts from them - (1.) liability 'for removal
of obstructions under statutory powers'; (2.) liability 'for injury to harbours, wharves, piers,
stages, and similar structures'; (3.) liability in respect of the cargo or engagements of the
injured *754 vessel'; and (4.) liability 'for loss of life or personal injury'"
: see also Taylor v. Dewar. 7 It is not necessary for the present purpose to attack Furness
Withy & Co., Ld. v. Duder. 8 There the shipowners had brought a liability on themselves by a
contract with very special terms. It is different from the case where by common law or statute
a liability is imposed on a shipowner. The words here cover all liabilities to which the
shipowners become liable by reason of their ship being in collision. It would be strange if the
more negligent was the management of the ship the more they could recover under the
collision clause, while if there was no negligence at all they could recover nothing.
This clause in question arose out of De Vaux v. Salvador 9 , which showed that policies of
marine insurance were defective in not covering shipowners in respect of certain liabilities.
Faced with that decision the insurance world produced the clause now in question to fill up
the gap. It covers all the liabilities the ship may incur through a collision. It is wrong to
classify all these liabilities to which a ship may be exposed as being either contract or tort.
For in England such a classification is not entirely accurate or exhaustive. When harbour
authorities sue under the Harbours, Docks and Piers Clauses Act, 1847, s. 74 , in respect of
damage done to a harbour by a ship, they sue for damages. The Air Navigation Act, 1920, s.
9 , created a right to damages independently of any fault or negligence. It is wrong to assume
that in all systems of jurisprudence there must be some element of fault to give a right to
damages as is required to make an English tort. The liability here is for "damages" within the
meaning of the clause even if not "damages" stricto sensu. The parties have provided a
"dictionary" to interpret the word.
Another reason why "damages" in the clause in question should be given a wide meaning is
because of the proviso, which expressly excludes from the application of the clause liabilities
which are clearly not damages in its ordinary *755 meaning. The exception of payments for
52
removal of obstructions is only explicable on this footing: see The North Britain
Engineer . 11
10
and The
[MACKINNON L.J. I am impressed by the fact that here the liability had not as its proximate
cause the collision.]
It never has, for negligence is always in English law the proximate cause: Adelaide
Steamship Co. v. Attorney-General. 12 Nor is it to the point to say that here the liability might
have arisen without any collision. It is sufficient that there was here a collision, and therefore
that the running down clause in the policy applies. As used in this clause, the words "by way
of damages" would not exclude a liability to the other ship in respect of payments by them of
workmen's compensation. The word "damages" must be given a very wide meaning, although
it would exclude penalties and costs.
The Court should not treat the claim here as outside the clause as not being something which
in English law would be a claim for damages.
H. U. Willink K.C. and Cyril Miller for the respondent were not called upon.
SIR WILFRID GREENE M.R.
The question raised by this appeal turns upon the construction of the common form running
down clause in a policy of marine insurance, as applied to the particular circumstances of the
case. It therefore becomes necessary to consider, first of all, the actual language used in the
clause and then to consider the nature of the subject-matter to which it is said the clause
applies.
The obligation undertaken by the underwriters is this: "If the ship hereby insured shall come
into collision with any other ship or vessel and the assured shall in consequence thereof
become liable to pay and shall pay by way of damages to any other person or persons any
sum or sums in respect of such collision" - that is the event upon which the underwriters'
liability springs up. Now, it is to be noticed that it is not a liability to make any payment to
any other persons in respect of the collision, but a liability to pay "by way of damages."
Accordingly the clause does not extend to every pecuniary liability arising in respect of the
collision but only to such liabilities as arise by way of damages. The word "damages" is one
which to an English lawyer conveys a sufficiently precise meaning. This document is an
English contract which falls to be construed according to English law. That does not, of
course, mean that in its application to liabilities arising under foreign law (an application
which the parties, of course, clearly contemplated as possible) the operation of the clause is to
be excluded merely because some liability arising under foreign law as a result of a collision
does not precisely coincide with the liability which is recognized in the Courts of this
country. Nevertheless it is necessary in my opinion, in construing a document of this kind, to
give to the word "damages" its ordinary meaning in English law. "Damages" to an English
lawyer imports this idea, that the sums payable by way of damages are sums which fall to be
paid by reason of some breach of duty or obligation, whether that duty or obligation is
imposed by contract, by the general law, or legislation.
Now, the measure of the duty, of course, will depend upon the particular law. A statute may
impose an absolute obligation not to do certain things, and as the result of that the person
53
injured by the doing of such a thing may have a right to damages. That is a question of the
measure of the duty. An example which was referred to in the course of the discussion is to
be found in the Air Navigation Act, 1920, s. 9, sub-s. 1, under which damages are recoverable
from the owner of aircraft who causes damage irrespective of negligence or intention: it is a
standard of duty not to do certain things imposed by that statute. Looking at it from another
point of view, there are certain classes of liability to make pecuniary payments which clearly
fall outside the word "damages." For instance, compensation paid under the Lands Clauses
Act or a matter of that kind is certainly not damages. Workmen's compensation payments are
certainly not damages in the ordinary sense of the word, and in spite of Mr. McNair's
argument to the contrary I find it quite impossible to suppose that workmen's compensation
payments are included in the word "damages" in this clause. The foundation of that class of
liability is something entirely different from the foundation of the liability which gives rise to
a claim for damages.
Proceeding with the clause, it is to be noticed that in the last branch of the clause there occurs
the phrase "but when both vessels are to blame." That phrase seems to me to throw light upon
the construction of the earlier part of the clause and to confirm what I have been saying about
it. The phrase, "but when both vessels are to blame," imports the idea that what the clause is
dealing with is a case where the vessel insured is to blame, that is to say, has been guilty of
some breach of duty (normally, the duty to take care), and the last part of the clause makes
special provision for the case where the other vessel also is to blame.
Then comes the proviso, and an argument was based upon it to this effect. It was said that the
proviso upon its true construction covers matters which would not fall within the word
"damages" in its ordinary meaning - matters such as liability under s. 74 of the Harbours,
Docks and Piers Clauses Act, 1847 , to pay for removal of obstructions under statutory
powers or to pay for injury to wharves, piers and so forth. The argument is of this nature: it is
said that because the proviso extends to cover cases of statutory liability, imposed without
reference to any breach of duty at all, therefore the word "damages" in the main part of the
clause must be given a very wide and loose meaning. I cannot give that force to the proviso.
The two cases that were relied upon on this part of the argument were The North Britain 13 ,
and a later case in the House of Lords, that of The Engineer 14 , a case in which the same
point arose. In the case of the North Britain, the claim against the underwriters was truly a
claim for damages, because it was a claim by the owners of the North Britain, the vessel
insured, to be reimbursed by the underwriters the sum which they had been compelled to pay
to the owners of the other vessel who had incurred the statutory liability to pay for the
removal of their vessel as an obstruction. The liability of the North Britain was a liability to
pay to the owners of the other vessel its share of that particular head of damage suffered by
them in consequence of the negligence of the North Britain. It was argued in that case that the
proviso only extends to cases where the liability to make a payment for removal of
obstructions under statutory powers arises apart altogether from a liability to pay damages,
and that, as in that case the liability was a liability to pay damages, the measure of which was
the amount which the other vessel had to pay for removal of the obstruction, the proviso did
not cover it and it fell to be governed by the main clause. It will be seen therefore that the
point in that case is very far removed from anything which we have to consider here; but it is
argued that in that case it was said that the clause extends not merely to payments for removal
of obstructions which are payments by way of damages but also to payments for removal
where no question of damages arises. It seems to me that the observations in that case are, if
anything, against the contention of the appellants. Lindley L.J., for instance, agrees 15 with
the view expressed by Gorell Barnes J. in the Court below that the proviso is not an exception
54
and that it is put in by way of precaution. Lindley L.J. says that he regards "the proviso as a
warning that you are not to read the clause so as to include the consequences mentioned in
the proviso" and then he says: "The true meaning of the proviso is that 'this clause shall in no
case extend to any sum which the assured shall have to pay for removal of obstruction
consequent on such collision.' I know the clause itself says in terms 'shall pay by way of
damages'; but I do not think the construction which I am adopting involves the insertion of
any words at all. It is, 'in no case shall extend to any sum the assured shall become liable to
pay' - that is, pay in respect of any ship by way of damages or otherwise." Lindley L.J.
therefore is reading the proviso as extending not merely to cases where the payment falls to
be made by way of damages, but to cases where it falls to be made not by way of damages.
That is in agreement with what he has just said that he is regarding the proviso, in so far as it
goes beyond the subject-matter of the main clause, as something put in ex abundanti cautela.
Davey L.J. in his judgment also appears to take the same view that the proviso is to that
extent put in ex abundanti cautela: and indeed to find a proviso inserted in such a context for
such a purpose is a thing of common occurrence.
The case of The Engineer 16 is one to which I do not think I need refer except to say that the
House there approved the observations of Davey L.J. I find myself quite unable to find in this
proviso any words sufficient to give to the word "damages" the extended and inaccurate
signification which the appellants would have us give to it. The difficulties into which the
appellants get in trying to construe the word on some such basis as that is illustrated by the
fact that they feel constrained to include within the word workmen's compensation payments,
which are not damages at all, but to exclude such things as penalties. On what principle that
distinction can be drawn I am quite unable to appreciate.
Therefore, taking the matter of the construction of this clause, the conclusion to which I have
come is that the payments "by way of damages" to which it refers are payments the obligation
to make which arises from a fault of some kind on the part of the ship insured. That is in
accordance with a decision of Branson J. in the case of Furness Withy & Co., Ld. v. Duder. 17
That was a case where the obligation to make a payment arose, not by reason of a local law
but by reason of a special contract into which the owners of the vessel had entered with the
Admiralty, who provided the only tugs which were available at the spot. It was under that
contract that the payments fell to be made. Branson J. had in that case to deal therefore with a
point which is on all fours with the present point, save for the fact that the obligation arose
not by legislation but by contract. He construed the clause in this way. He said: "I think the
clause means that where in consequence of a collision there arises a legal liability upon the
shipowners to pay a sum which can properly be described as damages for a tort, then the
underwriters will indemnify them. The expression 'become liable to pay .... by way of
damages' indicates, to my mind, a liability which arises as a matter of tort, and not as a matter
of contract." As I said earlier in this judgment the word "tort" in regard to a document
intended to apply to foreign countries under foreign jurisdiction must not necessarily be read
in the precise technical sense of English law. It would not be necessary to find that the act
should necessarily be tortious by English law, but it must be at any rate of that character.
Now I come to examine the nature of the payment in this case. The first thing to be observed
about it is that the liability to make the payment falls upon the vessel without any regard to
the question whether it has or has not been guilty of any fault or breach of duty. The
obligation which arises is an obligation to make good the damage suffered by the pilot vessel
in the circumstances stated, whether or not there is a collision, whether or not the vessel
insured is to blame, whether or not the pilot himself is negligent, provided that his negligence
55
is not the type of negligence described as "faute lourde." It has nothing in the world to do
with any duty on the vessel itself, but it is a provision under which the vessel is compelled to
bear a particular charge irrespective of any question of duty imposed upon it. In the present
case the liability would have arisen equally if the pilot vessel, without touching the Trident ,
had been swamped by a sea owing to the failure of its steering-gear. It so happened that that
failure led, not to the pilot boat being swamped, but to its colliding with the Trident . But the
liability would have been precisely the same in either case. Looking at the terms of the
French law - without doing what the learned judge found it unnecessary to do and I find it
unnecessary to do, namely, to express any concluded opinion as to the true category into
which this class of payment ought to be put - one thing which is to my mind quite clear is
this, that it cannot be put into the category of "damages" within the meaning of this particular
clause. It is based on an entirely different conception, and the liability which arises under it is
not a liability to avoid collision, it is not an obligation to navigate carefully or to do acts of
that kind; it is merely a liability to make a payment of that particular character; it has no
reference whatsoever to any act or default on the part of the vessel insured.
That is the conclusion to which I should have come upon an examination of the language of
the French law itself; but evidence was called before the learned judge, given by two
distinguished French lawyers, one of whom, the lawyer called by the respondent, had very
special experience in Maritime Law, and there again, without considering whether or not the
evidence of the respondent's expert is evidence which we are bound to accept or ought to
accept, I am quite clearly of opinion that the evidence of the appellants', expert is evidence
which cannot be accepted. What he said was this, that liability under the French Decree was
based upon negligence; he said that "faute" is at the bottom of it and that it raises a
presumption of "faute." That seems to me to be a thing which it is quite impossible to extract
from this provision. There is no conception in it at all of fault on the part of the vessel.
The result in my opinion is, in a sentence, that the very special liability imposed by art. 7 of
the French law of March 28, 1928, is not one which, upon the true construction of the running
down clause, falls under the head of a sum which the assured became liable to pay by way of
damages in respect of the collision. Whatever else it may be, it is in its nature outside the
word "damages" as used in that clause. In my opinion the learned judge was perfectly right in
his conclusion and the appeal must be dismissed with costs.
MACKINNON L.J.
I agree. The plaintiffs seek to recover three-quarters of the amount of a certain sum which
they have become liable to pay. I entirely agree with the Master of the Rolls that they fail to
establish any right to recover that sum, because they fail to establish that theirs was a liability
to pay "by way of damages." This appeal therefore fails from a consideration of those four
words, "by way of damages."
I think that the same result is arrived at by a consideration of three other words in a
neighbouring part of the clause. Those three other words are "in consequence thereof." It has
been a well settled rule for over seventy years, in regard to the construction of marine
insurance policies, that where, in an added clause in a policy, there are words like "in
consequence thereof," you must, in dealing with causation, look at the proximate and not the
remote cause. I say that was settled over seventy years ago; it was so in the case of Ionides v.
Universal Marine Insurance Co (1863) 14 CB (NS) 259, where the words were "all
consequences of hostilities." So here, where you have the words "in consequence thereof,"
56
they mean "and the assured shall as a result proximately caused by the collision be liable to
pay." This liability of the appellants was not proximately caused by the collision. Indeed it
was not caused by the collision at all. This liability was caused by the French law, which
created a liability on the ship to pay for any damage caused to the pilot boat by any cause,
though, of course, "any cause" included collision.
A similar conclusion was arrived at in a case which at first sight is not very pertinent, and that
is the case of Inman Steamship Co., Ld. v. Bischoff (1882) 7 App 670. There there was a
claim for loss of freight under an insurance policy against the loss of freight by perils of sea.
It was held that the freight that was lost could not be recovered. For the loss was not caused
by perils of the sea, but was caused by the operation of the contractual right of the charterers
to stop the payment of freight, even though the exercise of that right by the charterers was
made possible by the insured ship having been damaged by perils of the sea.
In the result for these reasons, in addition to those given by the Master of the Rolls, I think
the appellants fail to establish that the respondent is liable to pay them the sum of 13s. 1d.
FINLAY L.J.
I agree both with the judgments which have just been delivered and with the judgment which
was delivered by my brother Goddard. There is only one passage in his judgment to which I
should like to call attention, because I think it accurately deals with the question of what the
position was by French law. My brother Goddard, of course, had the advantage of hearing
and seeing the experts who were called, and what he says is this:
"It seems to me that, certainly so far as it is a matter of coming to a decision upon the
evidence of the French lawyers, there is no conception of delict or tort in the cause of action
which is given by the French Decree to the pilot boat. It seems to me that the probable theory
which underlies the legislation, though it does not matter, when it is a matter of policy of law,
what theory underlies the legislation, is that the pilot boat is rendering a service for the
benefit of the ship which requires pilotage and, therefore, any damage which the pilot boat
may receive in the course of rendering that service is to be regarded as an expense of the
pilotage and is to be paid by the ship in just the same way as she would have to pay the
pilotage dues, or whatever is the correct expression used in France, as remuneration for the
service which the pilot renders."
Applying that passage, it seems to me, for the reasons which have been given by my brethren,
clear here that in the first place this was not a payment by way of damages in any possible
sense in which that word could be used in an English clause of this character, and in the
second place it appears to me to result, as my brother MacKinnon has pointed out, that the
payment, whatever it was, was not made in consequence of the collision but was made
because the French law has imposed a liability - nothing to do with collision, though collision
is one of the matters which may arise - to make a payment in case of damage suffered by the
pilot vessel during the pilotage, during the manoeuvres necessary for embarking and
disembarking the pilot.
On all the grounds which have been assigned by the Master of the Rolls and by my brother
MacKinnon, as well as for the reasons which were assigned by my brother Goddard, I
entirely agree in the result.
57
Appeal dismissed.
“Paid by the assured” (The pay to be paid rule)
The “Collision Liability Clause” enables the assured, who having paid the third party, to be
indemnified by the insurer in respect of the money so paid. This rule stems from the “pay to be paid”
doctrine, widely employed in the P & I insurance field; and was applied in the Re Nautilus SS Co
(1935) 52 LlL Rep 183 & The Fanti [1991] 2 AC 1
In Re Nautilus Steam Shipping Co Ex parte
Gibbs & Co [1936] Ch. 17
The Issues
Insurance—Third Party Risks—Insured Company—Liquidation—Third Parties (Rights
against Insurers) Act, 1930, s. 1—Liability incurred before passing of Act—Liquidation after
Act.
The Third Parties (Rights against Insurers) Act, 1930, s. 1, sub-s. 1, provides:
"Where under any contract of insurance a person (hereinafter referred to as the insured) is
insured against liabilities to third parties which he may incur, then - (a) in the event of the
insured becoming bankrupt or making a composition or arrangement with his creditors; or (b)
in the case of the insured being a company, in the event of a winding-up order being made, or
a resolution for a voluntary winding-up being passed, with respect to the company .... if,
either before or after that event, any such liability as aforesaid is incurred by the insured, his
rights against the insurer under the contract in respect of the liability shall, notwithstanding
anything in any Act or rule of law to the contrary, be transferred to and vest in the third party
to whom the liability was so incurred".
The Facts
On September 21, 1925, a policy of insurance was taken out by a company insuring it against
third-party risks. On October 6, 1925, an accident to a third party occurred and the insurers
thereupon became liable to the company in respect of the accident. On July 10, 1930, the
Third Parties (Rights against Insurers) Act, 1930, came into operation. On October 13, 1931,
an order was made for the compulsory winding up of the company.
On a summons taken out by the third party in the winding up of the company asking to be
subrogated to the rights of the company against the insurers, Bennett J., holding himself
bound by Ward v. British Oak Insurance Co. [1932] 1 K. B. 392, refused the application:Held (reversing the decision of Bennett J.), that the winding up of the company having
supervened after the Act of 1930 came into operation, s. 1 of that Act became operative and
enured to transfer the benefit of the policy of insurance from the company to the third party.
58
APPEAL from a decision of Bennett J. on a summons taken out in the liquidation of the
Nautilus Steam Shipping *18 Co., Ld., by Gibbs & Co. (a firm) asking (inter alia) for a
declaration that the applicants were entitled as against the liquidator on payment to the owner
of the sailing ship Dharma of such sums as had been or should be found to be payable to the
said owner for damages and costs awarded or to be awarded in certain litigation in the
republic of Chile in respect of a collision between the steamship Pear Branch, of which the
company were the owners, and the sailing ship Dharma, to be subrogated to the rights of the
owner of the sailing ship Dharma against the underwriters and/or insurers under the
provisions of the Third Parties (Rights against Insurers) Act, 1930.
The following
September 21,
against claims
liability arose.
statement of facts is taken from the judgment of Lord Hanworth M.R. On
1925, a policy of insurance was entered into insuring the insured company
by third parties, and it was a policy which covered the period in which a
On October 6, 1925, a collision took place between a vessel, the Pear
Branch belonging to the Nautilus Steam Shipping Company and a vessel called the
Dharma. The Pear Branch went into Valparaiso after the collision and proceedings in rem
were threatened by the owner of the Dharma under the Admiralty jurisdiction there
prevailing. In order to prevent the Pear Branch from being detained there was a bond entered
into on behalf of the company by Messrs. Gibbs & Co., the well-known firm in Chile and
Argentina. The liability which arose in the matter of damage to the Dharma was ultimately
determined at £6200. That was determined in 1928 and Messrs. Gibbs & Co. in accordance
with their bond paid that sum and they were reimbursed by the insurance company. But that
did not exhaust the possible liability of the colliding vessel to the owner of the Dharma, and a
claim was made for loss of profits which might have been earned by the Dharma owing to her
being disabled by the collision from being placed under charter. That claim has not yet been
finally determined. The matter has been litigated and in the Chilean Courts apparently has
gone from one Court to the Court of Appeal and is still under consideration. On 19 October
13, 1931, a compulsory order to wind up the Nautilus Steam Shipping Company was made
and the proceedings which are before us in respect of which Bennett J. gave judgment were
for the purpose of obtaining a declaration as to what were the rights of Messrs. Gibbs & Co.
in respect of any sum which might be payable under the policy of insurance as moneys due to
third parties under the contract of insurance entered into between the Nautilus Shipping Co.,
the owners of the Pear Branch and their insurers. Two dates must be remembered; one is the
date of the collision, which was some time ago, October 6, 1925, and the other the date on
which there was a compulsory order made to wind up the company, on October 13, 1931
Bennett J., holding himself bound by Ward v. British Oak Insurance Co.[1932] 1 KB 392,
refused to make the declaration asked for on the ground that the liability of the insurers to the
Nautilus Steam Shipping Co. arose before the Act of 1930 came into operation.
Gibbs & Co. appealed.
LORD HANWORTH M.R.
This appeal must be allowed. It raises a very interesting point and a point undoubtedly of
some importance. The facts are these. [His Lordship stated the facts as above set out and
continued:] This question of the rights of third parties to receive the insurance moneys which
59
accrued under a policy of insurance to the insured persons who were liable to the third parties
has raised questions from time to time. In In re Harrington Motor Co.[1928] Ch 105 the
applicant recovered judgment for damages and costs in an action against a limited company
for personal injuries caused to him by the negligence of one of its servants. Before execution
could be levied the company went into liquidation, and the insurance company with which
the company in liquidation was insured against third-party risks paid the amount of the
damages and costs to the liquidator. Now, the reason why that sum was payable at all to the
liquidator as representing the insured company was because there had been a liability
declared in favour of the third party for personal injuries which he, the third party, had
suffered. Not unnaturally he thought that inasmuch as that sum had been paid by the insurers
to their insured, the company which was liable to him for personal injuries, it would be fit
and proper that the money so received by the insured company should be paid over to him.
But it had to be held in that case that the money which was paid by the insurance company
was paid by them under the contract of insurance which obtained between the insurance
company and the company which had caused the injuries to the third party. Inasmuch as the
liquidation had supervened the money which was paid over to the liquidator was general
assets in the hands of the liquidator and could not be earmarked or paid over to the third party
who had been insured, but remained assets in the hands of the liquidator for general
distribution amongst the creditors of the company. The judgments in that case pointed out
that that position was an unsatisfactory one and that in certain legislation - such as the
Workmen's Compensation Act 1925 steps had been taken to give the injured party a definite
and direct right to receive moneys which were receivable by the person who was insured and
who had received in respect of the injuries moneys with which to defray his own liability.
Upon that the Third Parties (Rights against Insurers) Act, 1930, was passed, and it received
the Royal assent on July 10, 1930. Sect. 1, sub-s. 1, provides:
"Where under any contract of insurance a person (hereinafter referred to as the insured) is
insured against liabilities to third parties which he may incur" then certain results are to
follow. Those opening words to my mind connote a declaration of a nexus between the
person who is insured and his insurers. The section refers to what may be called a state of
insurance between the insured and the insurers. So long as no loss is incurred the relationship
between the insured and the insurers is one which continues the nexus between the parties,
but which is merely indicated by the steady and regular payment of premiums. It does not
follow that there is any money which shall be received under the policy; it merely declares
that there is a state of insurance existing between the insured and the insurers.
Now when that state of insurance so exists, the Act provides for two events:
"If .... any such liability as aforesaid [that is a liability to third parties] is incurred by the
insured, his rights against the insurer under the contract in respect of the liability shall,
notwithstanding anything in any Act or rule of law to the contrary, be transferred to and vest
in the third party to whom the liability was so incurred."
The events which are contemplated are the event of the insured person becoming bankrupt, or
in the case of a company of the company going into liquidation. I put the words in the
shortest possible form and leave out words like "composition" or "making arrangements" and
the other words in relation to a company. So that we have a direct liability, or, rather, the
rights of the insured person against his insurer are transferred to and vest in the third party to
whom the liability was so incurred. Here, of course, there was a liability incurred though not
60
yet quantified by the collision in 1925. The liquidation of the Nautilus Steam Shipping
Company and the appointment of the liquidator, who is respondent to this appeal, took place
after the Act was in operation.
The question of the interpretation to be put upon this Act came before the other Division of
the Court of Appeal in Ward v. British Oak Insurance Co. and it was held that the section was
not retrospective so as to affect cases in which the liability had been incurred before July 10,
1930, when the Act came into operation. The basis of that decision, which is stated somewhat
broadly, was this. The writ in the action had been issued on February 22, 1928, before the Act
was in operation, and the liquidation became effective in 1927.
Bearing in mind In re Harrington Motor Co., what was the position upon those facts? It was
this, that although there was a contract of insurance, inasmuch as there had been a voluntary
winding-up of the company liable to the third party and a liquidator had been appointed, the
position was one which was comparable to the issue which had been determined in In re
Harrington Motor Co. There was a right which had accrued to the liquidator to receive the
moneys which were payable in respect of the damages payable to the third party and, as
Greer L.J. puts it,
"One of the assets of the company was the liability of the respondents to pay the amount of
the insurance. That was an asset divisible among the creditors, notwithstanding that the
amount which it might provide for any particular creditor might be small."
That being the existing position, the Third Parties (Rights against Insurers) Act, 1930, was
then passed, and Greer L.J. points out that:
"It is clear from the dates that if that Act transferred to the appellant the right to recover from
the respondents it could only do so by depriving the creditors of James & Clark, Ld., of a
right which had already accrued to them. There are numerous cases which clearly show that
the Courts lean against so interpreting an Act as to deprive a party of an accrued right."
But in the present case although there was a possible liability in damages there was not any
order for liquidation until October 13, 1931, some months after the Third Parties (Rights
against Insurers) Act was in operation. When one turns to s. 1 the words which I have already
read seem to me to deal with a situation which is different from that which had to be dealt
with in Ward's case, but cover a case where there is a liquidation after the Act had come into
operation. Let me read two sentences again of s. 1: "Where under any contract of insurance a
person .... is insured against liabilities to third parties which he may incur," then, in the event
of bankruptcy or liquidation, "if, either before or after that event, any such liability as
aforesaid is incurred by the insured" that must mean "has been or is or shall be incurred,"
because in dealing with a case before the event of bankruptcy the word "is" is necessarily
inappropriate if it is to connote the existing moment of time. Something that had taken place
before the event of bankruptcy and before the event of liquidation can be only introduced by
giving a wide interpretation and meaning to that word "is."
It appears to me, therefore, that this Act was intended as and when after its passing there was
a bankruptcy or a liquidation and a question arose whether or not the sum payable by the
insurers was to be handed over to the trustee in bankruptcy or the liquidator in the liquidation
for the general benefit of the creditors to give to the third party in respect of his rights against
the insured - in respect of the liability that the insured has incurred to him, the third party - a
61
right to have the insured's rights against the insurers transferred to and vested in him. It
appears to me, therefore, that upon the facts of the present case, the liquidation supervening
after the Act was in operation, there is a clear distinction from the Ward case , and that when
one considers carefully s. 1 and interprets its somewhat imperfect language, the section must
be held to be operative and to enure to transfer the benefit of the policy from the insured to
the third party.
It has been said and was said in Ward's case that one must look very carefully to see that one
is not taking away by an Act of Parliament rights which have already accrued unless it can be
found in very clear terms that that was the intention. Slesser L.J. refers to that and says:
"In my opinion the wording is not clear enough to escape from the rule that vested interests
are not intended to be interfered with by legislation, except when that intention is expressed
in clear words."
What did he mean by "vested interests"? There is a well-known decision of Sir George Jessel
M.R. [In re Joseph Suche & Co., Ld. (1875) 1 Ch. D. 48], who had to deal with a point which
is not dissimilar under s. 10 of the Judicature Act of 1875, which directs that in the winding
up of a company whose assets may prove insufficient for payment of debts the same rules
shall be observed as may be enforced under the law of bankruptcy. The question was whether
under those terms the Act was retrospective or not. Sir George Jessel held that in a case
where a supervision order had been made before the commencement of the Act to secure
creditors, although their claims had not been ascertained they were entitled to prove for the
full amount of their debts without deducting the value of their securities, and he decided it
upon the general rule that where the Legislature alters the rights of parties by taking away or
conferring any right of action its enactments, unless in express terms they apply to pending
actions, do not affect them. Then he refers as an exception to the case of procedure.
This, of course, as in that case, was not a question of procedure. But in the present case the
creditors with their rights did not exist until the order was made for the winding up of the
company. It was then and then only that they became entitled to have their aliquot part of the
assets of the company distributed to them on a basis of equality. That right accrued to them
on October 13, 1931, and not before. They might have had what has been expressed in the
course of the argument to be some hopes, although they cannot actually have had any hopes,
being creditors of the company, that the company should be put into liquidation. But as
creditors their rights have to be determined not earlier than October 13, 1931, and at that date
this statute had become operative to say what is to happen in respect of the sum payable by
the insurers to the insured arising out of a liability of the insured to the third party.
To my mind the case is different from that of Ward v. British Oak Insurance Co. by which the
learned judge below felt himself to be bound, and for these reasons the appeal ought to be
allowed.
Case Study Two
62
Firma C-Trade S.A. v Newcastle Protection
and Indemnity Association (The Fanti)
[1991] 2 A.C. 1
Third Parties (Rights against Insurers) Act 1930
'(1) Where under any contract of insurance a person (hereinafter referred to as the insured) is
insured against liabilities to third parties which he may incur, then - (a) in the event of the
insured becoming bankrupt or making a composition or arrangement with his creditors; or (b)
in the case of the insured being a company, in the event of a winding up order being made, or
a resolution for a voluntary winding up being passed, with respect to the company, or of a
receiver or manager of the company's business or undertaking being duly appointed, or of
possession being taken, by or on behalf of the holders of any debentures secured by a floating
charge, of any property comprised in or subject to the charge; if, either before or after that
event, any such liability as aforesaid is incurred by the insured, his rights against the insurer
under the contract in respect of the liability shall, notwithstanding anything in any Act or rule
of law to the contrary, be transferred to and vest in the third party to whom the liability was
so incurred . . . (3) In so far as any contract of insurance made after the commencement of
this Act in respect of any liability of the insured to third parties purports, whether directly or
indirectly, to avoid the contract or to alter the rights of the parties thereunder upon the
happening to the insured of any of the events specified in paragraph (a) or paragraph (b) of
subsection (1) of this section . . . the contract shall be of no effect. (4) Upon a transfer under
subsection (1) . . . of this section, the insurer shall . . . be under the same liability to the third
party as he would have been under to the insured . . .'
The Facts
Insurance—Marine—Protection and indemnity risks—Third party liability—Liability
incurred by members of P. & I. clubs to cargo owners—Club rules containing 'pay to be paid'
provision—Members wound up—Whether valid claim by cargo owners against clubs—Third
Parties (Rights against Insurers) Act 1930 , s. 1(3)
The Facts
In the first appeal a cargo claim had arisen in respect of the loss of cargo on board a motor
vessel whose owners had entered it in the P. and I. club of which they were a member. The
club rules provided by rule 4:
63
'a member shall be protected and indemnified against all or any of the following claims and
expenses which he shall have become liable to pay and shall in fact have paid . . . (q) for loss
or damage caused to . . . property . . . carried on board a ship entered in this class . . .'
The member did not defend the cargo owners' action against it and a default judgment was
obtained for damages with interest. The judgment was not satisfied and subsequently the
member was ordered to be wound up by the Companies Court. Thereupon the cargo owners
instituted arbitration proceedings against the club in which they claimed an indemnity against
them under the Third Parties (Rights against Insurers) Act 1930. The umpire made an award
in favour of the club. On appeal by the cargo owners, Staughton J. allowed the appeal.
In the second appeal the vessel in relation to which a cargo claim had arisen was entered by
the owners in the P. and I. club of which they were a member. The rules of the club included
rule 2 under which they undertook to:
'Protect and indemnify members in respect of losses which they as owners of the entered
vessel shall have become liable to pay and shall have in fact paid.'
The cargo owners asserted claims against the member arising out of voyages in the later part
of 1965. Those claims were litigated in Florida and in 1975 the cargo owners obtained
judgment against the member for damages including interest. The judgment was not satisfied
and in April 1982 the Companies Court ordered the member to be wound up. Subsequently
the cargo owners began two actions against the club in which they claimed a direct indemnity
for their losses under the Act of 1930. Leggatt J. dismissed the actions on the ground that the
rules in force at the relevant time contained a Scott v. Averyarbitration clause. In subsequent
arbitration proceedings, the arbitrator found in favour of the club. On appeal Saville J.
affirmed his decision.
On an appeal by the club against the decision of Staughton J. and an appeal by the cargo
owners against the decision of Saville J., both appeals being heard together, the Court of
Appeal affirmed the decision of Staughton J. and reversed the decision of Saville J.
On appeals by the clubs to the House of Lords:Held, allowing the appeals,
(1) that on the ordinary and natural construction of the 'pay to be paid' provisions of the clubs'
rules payment by the members to the third parties, namely, the cargo owners, was a condition
precedent to payment by the clubs to the members, and that there was no principle of equity
which enabled those express provisions to be disregarded or overridden (post, pp. 23A, 27FH, 28C-E, 30C, D, 31F-32A, 39G).
Collinge v. Heywood (1839) 9 Ad. & E. 633 considered.
(2) That the 'pay to be paid' provision being the terms of the contracts of insurance made
between the members and the clubs did not purport, either directly or indirectly, to avoid
those contracts or to alter the parties' rights under them upon the members being ordered to
be wound up, so as to render those provisions to that extent of no effect under section 1(3) of
the Third Parties (Rights against Insurers) Act 1930 (post, pp. 23A, 29A-B, 30C, D, 39G).
64
(3) That in the circumstances the members admittedly having no accrued rights to be
indemnified by the clubs, the cargo owners could not, in consequence of the statutory transfer
of rights under section 1(1) of the Act of 1930, have transferred to them any better or larger
rights against the clubs than those which the members previously possessed; and that
accordingly, the cargo owners' claims against the clubs failed (post, pp. 23A, 29D-F, 30C,
39G).
Richard Aikens Q.C. and Jonathan Hirst for the appellants in the first appeal.
There are four issues to be determined.
(i) What is the correct construction of rule 4 of the club's rules? The rules of the club
constitute the terms of the contract of insurance between the club and its members. As a
contract of insurance it is, broadly, a contract of indemnity. A claim on such a contract is a
claim for unliquidated damages. In order to found the cause of action, it is necessary that the
liability (for which the indemnity is sought) has been ascertained or agreed.
Rule 4 defines the two circumstances in which the club's liability to make payment to the
member arises: (a) the member has become liable to pay one of 'the claims' or 'expenses' set
out in the rule and (b) the member has in fact paid in respect of that liability. This
construction is supported by the terms of rule 29 relating to accrued rights. Accordingly, the
position of the insured (the member) under rule 4 is different from a normal contract of
indemnity, where the right to claim an indemnity arises (at the latest) once the liability has
been ascertained or agreed.
Staughton J. and the Court of Appeal were both correct in holding that if a member of the
club had not paid a third party claim, then the only right which was capable of being
transferred to a third party under section 1(1) of the Act of 1930 was, at best, an inchoate or
contingent right to be paid. The member had no existing rights against the club prior to
payment of the third party by the member.
(ii) Is the construction of the rule affected by any rule in equity? This question is to be
answered in the negative, for the reasons given by Bingham and Stuart-Smith L.JJ. in the
Court of Appeal.
(iii) What is the effect of section 1(1) of the Act of 1930 on the rights of a member of the
club? As to the reasons for the passing of the Act of 1930 and the particular injustices it was
intended to remedy: see Bradley v. Eagle Star Insurance Co. Ltd. [1989] A.C. 957, 967. On
what is meant by 'rights' under section 1(1): see that case in the Court of Appeal [1989] 1
Lloyd's Rep. 239, 247-248.
For section 1(1) to apply there has to be a contract of insurance whereby a person is insured
against third party liability; and two events have to occur, namely (in the case of a company),
(a) that a winding up order etc. (see section 1(1)(b)) has been made against the insured and
(b) a liability to the third party has been incurred by the insured .
What is meant by 'rights' in section 1(1)? Staughton J. [1987] 2 Lloyd's Rep. 299, 306 and the
Court of Appeal [1989] 1 Lloyd's Rep. 239, 249, 258 held that 'rights' meant existing and
contingent or inchoate rights, so that contingent or inchoate rights could be transferred.
65
(iv) Does rule 4 fall foul of section 1(3) of the Act of 1930? On this question the reasons of
the Court of Appeal are correct. As stated by *7 Slade J. in In re Allobrogia Steamship
Corporation [1979] 1 Lloyd's Rep. 190, 198, the purpose of section 1(3) is to make certain
that, in any of the events specified in section 1(1), the third party should be able to take the
full benefit of the rights against the insurer, unaltered and undiminished by any provision in
the contract which is designed directly or indirectly to cancel, prejudice or reduce such rights
in the event of one or more such events taking place. For the reasons given by the Court of
Appeal rule 4 does not have the 'substantial effect' of avoiding the contract (between the
member and the club) or altering the rights of the parties (that is, the member and the club)
upon the winding up of the member. Rule 4 simply sets out rights; it does not purport to
avoid them in certain circumstances, nor to alter them. The insolvency or the winding up of
the member may alter the ability of the member to fulfil the pre-condition of payment of the
claim. However, the right to be paid or the terms upon which a payment will be made by the
club to the member are not changed by insolvency or winding up.
The Act of 1930 makes it clear that, subject to section 1(3), the contractual rights, as between
the insured and the insurer, will govern the rights of a third party after the transfer of rights
has taken place under section 1(1). The effect of the arguments of the cargo owners is to put
the cargo owners in a better position than the insured member. This was not the object of the
Act of 1930. It's object was simply (a) to avoid the liability insurance moneys going into the
pool of assets for the benefit of creditors generally and (b) to prevent the parties to the
contract of insurance from seeking in their contract to alter or abrogate contractual rights
which would (but for the stipulated events) continue to exist.
Stewart Boyd Q.C. and Graham Dunning for the appellants in the second appeal.
Rule 2 of the club's rules provides that the member is to have no claim on the funds of the
club unless and until he has become liable to pay a loss or claim and is actually out of pocket.
Three issues are raised by this appeal in connection with this rule. (i) Does the 'pay to be paid'
provision apply at all if the member is insolvent? The respondents argued that on its true
construction this rule had no application where the member lacked the means to pay or where
the effect of making payment before reimbursement by the club would be to drive them into
insolvency. They also argued that in equity the member was entitled to indemnity under the
rule without first having paid the loss or claim: Bingham L.J. [1989] 1 Lloyd's Rep. 239, 244246 and Stuart-Smith L.J., at pp. 259-260, correctly rejected those arguments.
(ii) Does section 1(3) of the Act of 1930 invalidate the 'pay to be paid' provision in so far as it
applies on the winding up of the member? The answer is in the negative for the reasons given
by Saville J. [1987] 2 Lloyd's Rep. 529, 532-534 and by the Court of Appeal [1989] 1 Lloyd's
Rep. 239, 250-251, 260, 263-264, namely, that the 'pay to be paid' provision is not a
provision which 'purports, whether directly or indirectly, to avoid the contract or to alter the
rights of the parties thereunder' upon the member's winding up.
(iii) What effect does the 'pay to be paid' provision have after a transfer of rights to a third
party under section 1(1) of the Act of 1930? This question was answered correctly by Saville
J. [1987] 2 Lloyd's Rep. 529, 532-534: after transfer to a third party under the Act of 1930 the
'pay to be paid' provision continues, as before the transfer, to require payment by the member
as a pre-condition of the right to indemnity.
LORD BRANDON OF OAKBROOK.
66
My Lords, these two appeals, which have been heard together, raise the same important
question of law in the field of marine insurance. It is a question which has been long debated
but never until now come before the courts for decision.
The question arises in this way. It is the long-established practice of shipowners to enter their
ships in Protection and Indemnity Associations ('P. & I. Clubs') for the purpose of insuring
themselves against a wide range of risks not covered by an ordinary policy of marine
insurance. By so entering one or more of their ships in a P. & I. Club shipowners become
members of that club. P. & I. Clubs operate on a system of mutual insurance under which the
successful claim of one member is paid out of the contributions of, and the calls made on, all
the members including himself. Each member is accordingly both an insurer and an insured.
Among the wide range of risks covered by P. & I. Clubs is liability incurred by members to
cargo owners for loss of or damage to cargo carried in an entered ship.
P. & I. Clubs have bodies of rules governing the relationships between the club and its
members and between one member and all the other members. When shipowners enter one of
their ships in a P. & I. Club there comes into being a policy of marine insurance relating to
that ship on the terms of the club's rules.
The rules of most, if not all, P. & I. Clubs contain what is commonly called a 'pay to be paid'
provision. That is a provision, capable of being expressed in a variety of different terms,
which stipulates that a member, in order to be entitled to an indemnity in respect of liabilities
or expenses incurred by him, must first himself have discharged the liabilities or expenses
concerned. It may happen, however, that, after a member of a P. & I. Club has incurred an
insured liability, for example a liability for loss of or damage to cargo carried in an entered
ship, he is disabled by insolvency from discharging it. The question then arises whether the
owners of the cargo lost or damaged are entitled, under the Third Parties (Rights against
Insurers) Act 1930, to recover an indemnity directly from the P. & I. Club in which the ship
concerned is entered. That is the question which arises for decision by your Lordships in each
of these two appeals.
In the first appeal the ship in relation to which a cargo claim arose was the motor vessel
Fanti, owned by a Ghanaian company called Central Shipping Lines ('the member') and
entered by it in the Newcastle Protection and Indemnity Association ('the club'). The rules of
the club in force at the material time provided:
'4. The member shall be protected and indemnified against all or any of the following claims
and expenses which he shall have become liable to pay and shall in fact have paid . . . (q) For
loss or damage caused to . . . property . . . carried on board a ship entered in this class . . .'
In March 1983 the Fanti left Rostock on a voyage to Nigeria with a cargo of cement in bags
owned by Firma C-Trade S.A. ('the third party'). About eight days later the ship developed
serious leakage resulting in the entry of sea water into certain of her cargo holds and other
spaces. A distress call was sent out and the Fanti was escorted into Portuguese waters off
Cascais by a salvage tug. Subsequently both ship and cargo were abandoned to the salvors.
Soon after the casualty the third party began an action against the member in the High Court
here claiming damages for loss of its cargo. The member did not defend the action and in due
course the third party obtained a default judgment against it for $748,953 including interest.
The judgment was not satisfied and on 30 July 1984 the Companies Court, on the petition of
the third party, ordered the member to be wound up. The third party then instituted arbitration
67
proceedings against the club claiming an indemnity against them under the Act of 1930. The
umpire made an award in favour of the club against which the third party appealed by leave
to the Commercial Court. The appeal came before Staughton J. [1987] 2 Lloyd's Rep. 299 by
whom it was allowed.
In the second appeal the ship in relation to which a cargo claim arose was the steam tanker
Padre Island, owned by Steam Tanker Padre Island Inc. ('the member') and entered by them
in the West of England Ship Owners Mutual Insurance Association (London) Ltd. ('the club').
Under rule 2 of its rules the club undertook to:
'Protect and indemnify members in respect of losses or claims which they as owners of the
entered vessel shall have become liable to pay and shall have in fact paid . . .'
A long list of losses and claims followed, including (j) cargo claims.
Before I state the reasoning on which the decisions of Staughton J. and Saville J. were
founded, it is necessary for me to set out the material provisions of the Act of 1930 as
applicable at the material time. In its long title the Act of 1930 is described as 'An Act to
confer on third parties rights against insurers of third party risks in the event of the insured
becoming insolvent, and in certain other events.' Section 1 provided at the material time [see
above]
The reasoning of Staughton J. [1987] 2 Lloyd's Rep. 299 in his judgment in favour of the
third party can be summarised as follows. First, upon the winding up of the member there
were transferred to the third party all the contractual rights of the member against the club, so
far as they concerned the claim in issue, even though the member as yet had no cause of
action against the club; among those rights was the term that the member must have paid the
claim before it had a remedy against the club; once the winding up order had been made there
ceased to be any requirement that the claim should be paid before the club could be liable; the
rights of the member had been transferred to the third party and it would have been
impossible or anyhow futile for the third party to pay itself: see p. 306, cols. 1 and 2.
Secondly, the 'pay to be paid' provision in the club's rules had the effect of altering the rights
of the parties under the contract of insurance upon the member being ordered to be wound up.
It did so either directly (see p. 307, col. 2) or indirectly (see p. 309, col. 2). Either way the
'pay to be paid' provision was rendered of no effect as between the third party and the club by
section 1(3) of the Act of 1930.
The reasoning of Saville J. [1987] 2 Lloyd's Rep. 529 in his judgment in favour of the club
can be summarised as follows. First, it was accepted by the third party that at no time had the
member itself had an existing right to be indemnified by the club in respect of the third
party's claims because such a right only arose under the rules of the club when the member
had discharged its liabilities for such claims which had not happened. It was impossible to see
how it could be said that any present right to an indemnity of any kind had been transferred
under section 1(1) of the Act of 1930 to the third party. Under that Act the third party only
obtained a transfer of the member's rights, so that, if the member had no existing right to an
indemnity, then no such right could be transferred to or vested in the third party: see p. 532,
cols. 1 and 2; p. 533, col. 2; p. 534, col. 1.
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Secondly, the member had at best a contingent right to an indemnity which would arise upon
its discharging its liability to the third party, that is to say, a contingent right to be reimbursed
upon payment. That right was totally unaltered by the order that the member should be
wound up; in the words of section 1(3) of the Act of 1930 nothing in the contract of insurance
purported, whether directly or indirectly, to alter that right upon the order for winding up
being made: see p. 534, col. 1.
There were appeals to the Court of Appeal both by the club against the decision of Staughton
J. and by the third party against the decision of Saville J. The two appeals were heard
together in July 1988 by a court consisting of O'Connor, Bingham and Stuart-Smith L.JJ. On
30 November 1988 reserved judgments were delivered by which the court unanimously
dismissed the club's appeal against the decision of Staughton J. and allowed the third party's
appeal against the decision of Saville J.: [1989] 1 Lloyd's Rep. 239.
The reasoning on which the judgments in the Court of Appeal proceeded can be summarised
as follows. First, no cause of action against either club was transferred under section 1 of the
Act of 1930, because neither member at the time of winding up had a cause of action. Such
contingent rights, however, as the members had in respect of the third party claims concerned
were so transferred: those contingent rights would only grow into effective rights of
immediate indemnity upon payment by the members of those claims: see p. 248, col. 2, and
p. 249, col. 1, per Bingham L.J.
Secondly, under the rules of the two clubs it was the members who were subject to the burden
of making payment and entitled to the benefit of the right to be indemnified. Upon the
statutory transfer taking place it was more natural to treat both burden and benefit as being
transferred to the third parties. The bundle of rights and duties which were transferred
included the right or duty to arbitrate, the right of payment and the condition of prior
payment. However, the condition of prior payment was impossible to perform once the
statutory transfer had taken place and was therefore ineffective, leaving the third parties with
immediate rights against the clubs for an indemnity: see p. 250, col. 1, per Bingham L.J. and
p. 258, cols. 1 and 2, per Stuart-Smith L.J.
Thirdly, so far as section 1(3) of the Act of 1930 was concerned, the condition of prior
payment expressed in the two insurance contracts did not have the substantial effect of
avoiding the contracts upon the winding up of the members. Nor could it be said that this
condition had the substantial effect of altering the rights of the parties upon the members
being ordered to be wound up. What was affected or altered by the members being ordered to
be wound up was the ability of the members to enjoy their rights, and not the rights
themselves. Those rights remained the same before and after the event save that, upon the
order for winding up being made, they were transferred to the third parties: see p. 251, cols. 1
and 2, per Bingham L.J., p. 260, col. 2, per Stuart-Smith L.J., and p. 264, col. 1, per
O'Connor L.J.
Both clubs now appeal to your Lordships' House against the decisions of the Court of Appeal
with the leave of that court.
My Lords, it is not in dispute that the 'pay to be paid' provisions in the rules of the two clubs
which I set out earlier were terms of the contracts of insurance made between the members
and the clubs. That being so, it seems to me that it is necessary, in order to determine these
appeals, to pose and answer three questions.
69
First, immediately before the members were ordered to be wound up, what rights, if any, did
the members have against the clubs under their contracts of insurance in respect of the
liabilities which the members had previously incurred to the third parties?
Secondly, did the 'pay to be paid' provisions, being terms of the contracts of insurance made
between the members and the clubs, purport, whether directly or indirectly, to avoid those
contracts, or to alter the rights of the parties under them, upon the members being ordered to
be wound up, so as to render those provisions to that extent of no effect under section 1(3) of
the Act of 1930?
Thirdly, having regard to the answers to the first and second questions, what rights against
the clubs, if any, were transferred from the members to the third parties upon the members
being ordered to be wound up?
With regard to the first question, on the ordinary and natural construction of those rules of the
clubs which contained the 'pay to be paid' provisions, the members were not entitled to be
indemnified by the clubs in respect of liabilities to third parties which they had incurred,
unless and until the members had first discharged those liabilities themselves. In other words
payment by the members to the third parties was a condition precedent to payment by the
clubs to the members. That interpretation of the relevant rules appears to have been accepted
before Staughton J. and Saville J. In the Court of Appeal, however, it was argued for the first
time on behalf of the third parties that under equitable principles the members were entitled
to be indemnified by the clubs as soon as the existence and the amounts of the liabilities had
been established and without any need for them to discharge such liabilities first themselves.
The difficulty in the way of this argument for the third parties, however, lies in the express
'pay to be paid' provisions in the relevant rules of the clubs. In principle it is difficult to see
how equity could disregard or override those express provisions, and no authorities were
cited to your Lordships which supported the contention that it could. The Court of Appeal
rejected this argument based on equitable principles put forward for the third parties for that
reason and I consider that they were right to do so.
In the result I would answer the first question by saying that immediately before the members
were ordered to be wound up they had only contingent rights against the clubs in respect of
the liabilities to third parties incurred by them. The rights were contingent in that it was a
condition precedent to the members being indemnified by the clubs in respect of those
liabilities that they should first have been discharged by the members themselves.
With regard to the second question, it was contended for the third parties that section 1(3) of
the Act of 1930 rendered the 'pay to be paid' provisions in the clubs' rules of no effect, on the
ground that they purported, directly or indirectly, to alter the rights of the parties under their
contracts of insurance upon the members being ordered to be wound up.
There are, in my view, substantial difficulties in the way of this contention. The 'pay to be
paid' provisions applied throughout the lives of the contracts of insurance made between the
members and the clubs, imposing a condition necessary to be fulfilled before any liability of
the clubs to indemnify the members could arise. They were not provisions which only applied
upon the happening of a specified event such as an order for the winding up of a member.
They applied equally before and after such an event. It is no doubt true that, upon any
member being ordered to be wound up because of insolvency, that member would be likely to
70
be prevented from discharging any liability to a third party which he had incurred and so be
unable to obtain an indemnity from his club in respect of it. This situation, however, does not
result, directly or indirectly, from any alteration of the member's rights under his contract of
insurance. It results rather from the member's inability, by reason of insolvency, to exercise
those rights.
Both Saville J. and the Court of Appeal rejected the argument for the third parties based on
section 1(3) of the Act of 1930, and in my opinion they were right to do so. I would, therefore
answer the second question by saying that the 'pay to be paid' provisions, being terms of the
contracts of insurance made between the members and the clubs, did not purport, either
directly or indirectly, to avoid those contracts, or to alter the rights of the parties under them,
upon the members being ordered to be wound up, so as to render those provisions to that
extent of no effect under section 1(3) of the Act of 1930.
With regard to the third question, there are two views as to what rights against the clubs, if
any, were transferred from the members to the third parties upon the members being ordered
to be wound up. The first view, which was taken by Staughton J. and the Court of Appeal, is
that the third parties had transferred to them rights to be indemnified by the clubs, subject to a
condition precedent that they, the third parties, first paid to themselves the amounts of the
liabilities to them which had been incurred by the members; that such a condition precedent
was impossible for the third parties to satisfy because a person cannot pay money to himself,
and that it therefore became ineffective or inapplicable; and that, in the result, the rights
transferred to and vested in the third parties were accrued rights to be indemnified by the
clubs.
The second view, which was taken by Saville J., is as follows. The members admittedly had
no accrued rights to be indemnified by the clubs, because they had not satisfied the condition
precedent of discharging the liabilities to the third parties themselves; the third parties could
not, as a result of the statutory transfer of rights, have transferred to them any better or larger
rights against the clubs than those which the members had previously possessed; in the result,
therefore, the parties did not have transferred to them any accrued rights to be indemnified by
the clubs.
My Lords, with respect to Staughton J. and the Court of Appeal, I have no doubt that the
second view is to be preferred to the first. It is abundantly clear from the express terms of the
Act of 1930 that the legislature never intended, except as provided in section 1(3), which I
have held not to apply to the 'pay to be paid' provisions in the clubs' rules, to put a third party
in any better position as against an insurer than that of the insured himself. Section 1(1)
expressly provides that on the happening of any of the specified events 'his' - i.e. the insured's
- 'rights against the insurer under the contract in respect of the liability shall . . . be transferred
to and vest in the third party . . .' Section 1(4) expressly provides that 'Upon a transfer under
subsection (1) . . . of this section, the insurer shall . . . be under the same liability to the third
party as he would have been under to the insured . . .' The effect of these provisions is that, in
a case where the insurer would have had a good defence to a claim made by the insured
before the statutory transfer of his rights to the third party, the insurer will have precisely the
same good defence to a claim made by the third party after such transfer.
In the two present cases it is not in doubt that the clubs would have had good defences to any
claims to an indemnity made by the members before they were ordered to be wound up, on
the ground that the condition precedent to their rights to such indemnity, namely, the prior
71
discharge by the members of their liabilities to the third parties, had not been satisfied. It
must follow that the clubs had the same good defences to claims for an indemnity made by
the third parties after the members were ordered to be wound up.
My Lords, having regard to the answers which I have given to the three questions discussed
above, I am of opinion that the clubs' appeals against the decisions adverse to them made by
the Court of Appeal should in both cases be allowed. On that basis certain other points in the
second appeal, which were raised before the courts below and dealt with by them; do not
require to be dealt with by your Lordships.
LORD ACKNER.
My Lords, I have had the advantage of reading in draft the speeches of my noble and learned
friends, Lord Brandon of Oakbrook and Lord Goff of Chieveley. I agree with them and for
the reasons given I, too, would allow the appeals.
LORD GOFF OF CHIEVELEY.
My Lords, I agree that the appeals of the two clubs should be allowed for the reasons stated
by my noble and learned friend, Lord Brandon of Oakbrook. I only add a few words of my
own out of respect for the arguments of counsel, which I found to be of the greatest assistance
in elucidating the questions at issue in these appeals.
The central question is one which has troubled maritime lawyers, in the City of London and
in the Temple, ever since the enactment of the Third Parties (Rights against Insurers) Act
1930. It is whether the Act confers upon a third party, who has a claim against an insolvent
shipowner whose ship is entered in a P. & I. Club, under rules covering the relevant risk, an
effective right to proceed directly against the club for the loss or damage suffered by him
despite the presence of a condition of prior payment in the club's rules. It is a matter of
common knowledge that many opinions have been written by distinguished maritime lawyers
on this subject, and that in those opinions differing views have been expressed. I believe that
I am right in saying that those opinions have focussed primarily upon the impact of section
1(3) of the Act of 1930, and upon the question whether a condition of prior payment in a
club's rules is rendered of no effect by that subsection because it indirectly alters the rights of
the parties under the contract of insurance embodied in the rules upon the happening of an
event specified in section 1(1) of the Act of 1930. Some lawyers, who perhaps adopted what
may be described as the more orthodox approach, considered that the clause did not so alter
the rights of the parties, and so was not rendered ineffectual by section 1(3); others,
motivated to some extent (I suspect) by supposedly unhappy consequences if the condition
was not rendered ineffectual, adopted a more generous interpretation which led to what they
perceived to be the beneficial result which the legislation was seeking to achieve.
This point was, to my mind, the central point in the two appeals before your Lordships'
House. However, litigation at the pitch of intensity at which these cases have been conducted
acts as a catalyst, from which new ideas can well arise; and here we have seen the emergence
of two new arguments never before advanced in the present context. The first, which I shall
call the 'futility point,' was taken by the third party (whom I shall refer to in each case as 'the
cargo owners') for the first time before Staughton J. in Firma C-Trade S.A. v. Newcastle
Protection and Indemnity Association (The Fanti) [1987] 2 Lloyd's Rep. 299; this found
favour with Staughton J. in that case, though not with Saville J. in Socony Mobil Oil Co. Inc.
72
v. West of England Ship Owners Mutual Insurance Association Ltd. (The Padre Island) (No.
2) [1987] 2 Lloyd's Rep. 529, and proved in due course to be the decisive point against the
clubs on both appeals.
The second, which I shall call the 'equity point,' was first taken by the cargo owners before
the Court of Appeal. It was rejected by them, but it re-appeared before your Lordships'
House, refurbished and really transformed in an argument addressed to your Lordships by
Mr. Sumption, who had not appeared in the courts below.
I turn first to the point which in the Court of Appeal proved to be decisive against the clubs,
which I have called the futility point. In brief, the point is this. A member's right of indemnity
in respect of any relevant claim or expense under the rules of either club is conditional upon
his having first paid such claim or expense. The statutory transfer of that right of indemnity to
a third party carries with it transfer of the term that the member must first have paid such
claim or expense. The third party cannot however pay himself; accordingly that term
becomes, upon such transfer, of no effect, either (1) because it has become impossible of
performance; or (2) because it is futile to require a person to pay himself, and the law does
not require the performance of futile conditions; or (3) because there is a merger of interests.
It was the second of these two reasons which attracted Staughton J. [1987] 2 Lloyd's Rep.
299, 307; the first attracted Bingham L.J. in the Court of Appeal [1989] 1 Lloyd's Rep. 239,
250; Stuart-Smith L.J. at p. 258 was attracted by all three; O'Connor L.J. at p. 263 agreed
with both Bingham L.J. and Stuart-Smith L.J. on this point.
I do not deny that I was from the beginning startled by the point, and closer acquaintance did
not make me any better disposed towards it. It is, to my mind, fundamentally flawed. I start
from the position that what is transferred to and vested in the third party is the member's right
against the club. That right is, at best, a contingent right to indemnity, the right being
expressed to be conditional upon the member having in fact paid the relevant claim or
expense. If that condition is not fulfilled, the member has no present right to be indemnified
by the club. Here the relevant claim or expense was never paid, by the member or indeed by
anybody else on his behalf. That condition not having been fulfilled, the member had no
present right to indemnity, and the statutory transfer of his right to a third party cannot put the
third party in any better position than the member. It is as simple as that. The fundamental
flaw in the argument, as I see it, is that it assumes that the statutory transfer of the contingent
right to the third party has the effect that the third party has then to pay himself. This appears
from the brief passage in the judgment of Staughton J. [1987] 2 Lloyd's Rep. 299, 306, which
embodies his conclusion on this point, in which he said:
'I therefore conclude that, as Mr. Clarke contends, upon the winding up of the members in
this case there were transferred to the claimants all the contractual rights of the members, so
far as they concerned this claim, even though the members as yet had no cause of action.
Among those rights was the term that the members must have paid the claim before they had
a remedy against the association. After the transfer, that became a term that the claimants
must have paid themselves. Such a term makes no sense. I do not consider that, in the
ordinary or legal meaning of payment, a person can pay himself. At any rate it would be a
futile exercise to do so.'
Likewise Bingham L.J. [1989] 1 Lloyd's Rep. 239, 250 concluded:
73
'Under the rules it is the same party (the member) who is subject to the burden of making
payment and entitled to the benefit of enjoying the right to be indemnified. Upon the statutory
transfer taking effect it is, I think, more natural to treat both burden and benefit as being
transferred to the third party transferee so that both still attach to the same party.'
With all respect, I do not agree. What is transferred under the statute is the right. That right is
expressed to be conditional upon the happening of a certain event; and the right as transferred
remains so conditional. It is, in my opinion, misleading to describe that event as a 'burden,'
since this is the language of obligation and appears to connote a duty which is transferred
with the right. But there is no duty on the member to make prior payment; there is simply a
contractual term that, if he does not do so, he has no right to be indemnified. The statutory
transferee of the member's right is in no better position than the member; and so, if the
condition is not fulfilled, he too has no right to be indemnified. On this point, I find myself to
be in agreement with the judgment of Saville J. in The Padre Island (No. 2) [1987] 2 Lloyd's
Rep. 529, 533, when he said that to adopt the submission of the cargo owners:
'would be to read section 1(1) as having the effect, not of transferring and vesting in the third
party 'the insured's rights against the insurer under the contract in respect of the liability,' but
of creating in the third party a right to an indemnity which the insured never possessed and
which accordingly never could be transferred and vested in the third party.'
For this reason alone, I am unable to accept the futility argument. I wish however to add that
(1) the argument of the cargo owners raises, in my opinion, a question not of futility but of
impossibility. Furthermore I know of no general rule that the mere fact that a condition
becomes impossible of performance renders the condition of no effect. Whether it does so or
not must depend on the construction of the contract; and it may well be that, as here, the fact
that it cannot be performed will simply mean that it is never fulfilled. (2) I can see no room
for the operation of the doctrine of merger in the present cases, which are concerned with a
non-promissory condition and not with circumstances in which the right and liability arising
out of an obligation become vested in the same person in the same right.
In reaching his conclusion, Bingham L.J. was influenced by the decision of Leggatt J. in The
Padre Island [1984] 2 Lloyd's Rep. 408, that the right (or obligation) to arbitrate against the
club is one to be enjoyed by (or imposed on) the third party transferee when the statutory
transfer takes effect. In my opinion, however, that case is to be distinguished from the present
cases. The agreement to arbitrate is one which regulates the means by which the transferred
right is to be enforced against the club. As such, it is inevitable that such an agreement must
be treated as transferred to the statutory transferee as part of, or as inseparably connected
with, the member's rights against the club under the rules in respect of the relevant liability:
see section 1(1) of the Act of 1930. No such consideration applies however in respect of the
condition of prior payment.
I turn next to the second of the two arguments which emerged in the course of this litigation,
viz. the equity point. Before the Court of Appeal the argument ran as follows. At common
law, it was held that an indemnity does no more than protect the indemnified person against
actual loss; but equity went further and was prepared to require the indemnifier either to pay
the creditor direct or to pay the indemnified person before he had paid the creditor. This
equitable doctrine was invoked by the cargo owners before the Court of Appeal in the present
cases [1989] 1 Lloyd's Rep. 239, 245 'both as an aid to construction of the rules and as a
principle of law denying effect to the condition of prior payment.' However, the argument of
74
the cargo owners was rejected on three grounds by Bingham L.J. (with whom, on this point,
both O'Connor and Stuart-Smith L.JJ. agreed): first, in so far as the equitable rule was
invoked as an aid to construction, the draftsman of the rules had shown a clear intention to
exclude it; second, because there was no principle upon which a court of equity could,
without more, override the clearly expressed contractual agreement of commercial parties;
and third, if the case was one in which a court of equity could relieve a party from a clearly
expressed contractual obligation, it would be necessary for that party to seek equitable relief
by the setting aside of the offending provision, and no such relief was sought from either
arbitral tribunal who alone (in the exercise of their discretion) could grant it.
Before your Lordships' House, however, the argument assumed, in the hands of Mr.
Sumption, a more elaborate form and a more formidable aspect. The basic elements in his
submission may be summarised as follows.
(1) The purpose of the condition of prior payment was to prevent a member from making a
profit from his insurance cover by receiving payment from the club but failing to pay the
third party. This problem does not however arise if a member is being wound up, because
upon a winding up the assets are held for the creditors; nor does it arise if the club makes
payment direct to the third party.
(2) If a club (as it may do) makes payment direct to the third party, it thereby discharges the
member's liability to the third party and so fulfils the condition that the member (on whose
behalf the club has paid) must have paid the third party's claim. In such a case, the club
cannot rely on the circular argument that payment has not already been made. If payment
direct to the third party will satisfy the condition of prior payment, it follows that the club is
contractually bound either to pay the member who has in fact paid the claim, or simply to pay
the claim direct to the third party.
(3) If however the club is not so bound, and the condition of prior payment operates at law to
exclude the club's obligation to pay a member who has not in fact paid the third party's claim,
equity will resolve the deadlock by requiring the club either to pay the third party direct, or to
pay the member for the purpose of his paying the third party, thereby ensuring that both the
condition precedent and the club's obligation are satisfied. The basis on which equity
intervenes is as follows:
(a) At common law, a contract of indemnity gave rise to an action of assumpsit for
unliquidated damages for failing to prevent the indemnified person from suffering damnum
by paying the third party. A condition of prior payment was implicit in the nature of the
contract.
(b) Equity, though recognising the existence of the condition, would not allow reliance on it
when the effect would be to defeat the indemnity altogether rather than to achieve the object
of the condition, i.e. to ensure that the liability in respect of which the indemnity existed was
indeed discharged. This is because equity looks to the substance rather than to the form of a
transaction.
(c) The mere fact that the contract contained a condition of prior payment cannot displace the
equity. On the contrary, the condition is a pre-requisite of the operation of the equitable
doctrine.
75
(d) Although the equity may be displaced by language which reveals the parties to have
intended the result which applying the condition will have, it will not be excluded by words
directed to another problem, e.g. preventing the member of a club from making a profit from
the club's payment by receiving it and yet not paying the third party's claim.
(e) Procedurally, it was never necessary to invoke the equity by applying for specific
equitable relief. It originally operated by a decree of specific performance of the contract of
indemnity. Nowadays, following the Chancery Amendment Act 1858(Lord Cairns' Act) (21
& 22 Vict. c. 27) and the Supreme Court of Judicature Act 1873 (36 & 37 Vict. c. 66), relief
can take the form of a judgment for the relevant money sum.
I found Mr. Sumption's argument most impressive; but on consideration I am unable to
accept his submissions, for the following reasons.
First of all, I take his submission that the club is contractually bound to pay the third party
direct, as an alternative to paying the member who has in fact paid the third party. For my
part, I assume it to be correct that, as your Lordships were told, clubs do on many occasions
make payment direct to third parties. I am also prepared to accept that, if a club does so, its
payment to the third party is expressly or impliedly authorised or ratified by the member, and
so operates to discharge the member's liability to the third party. But further than that point, I
am unable to accompany Mr. Sumption's reasoning. First, it appears to me that the club's
payment does not at the same time operate to fulfil the condition of prior payment. On the
contrary the club, by paying the third party direct and so discharging the member's liability to
the third party, indemnifies the member against that liability although he has not fulfilled the
condition of prior payment; accordingly the club, by so doing, waives the requirement that
the member should first have paid the third party. Second, even if it were the case that the
club's payment did operate to fulfil the condition of prior payment, the most that can be
drawn from this fact is that it may be consistent with the rules that the club may, if it wishes,
pay the third party direct and so fulfil the condition of prior payment. I can see no basis for
concluding that, as a matter of construction of the rules, the club is under any obligation to
indemnify the member by paying the third party direct.
Turning to Mr. Sumption's propositions on the equitable doctrine itself, I see great force in
his submission that it has never been necessary to invoke the equity by seeking specific
equitable relief in the form of an order setting aside the offending condition. On the contrary,
equity appears to have operated by means of what is effectively a decree of specific
performance of the contract of indemnity. It follows that I am unable to accept the third
ground upon which Bingham L.J. rejected the more limited submission on this point
advanced before the Court of Appeal. Even so, I find myself in agreement with Bingham L.J.
[1989] 1 Lloyd's Rep. 239, 245, that equity will not override 'the clearly expressed
contractual agreement of commercial parties,' and that the condition of prior payment in the
present case constitutes such an agreement. I do not consider that Mr. Sumption has been able
to overcome this difficulty, for two reasons.
First of all, I am unable to accept his submission that a condition of prior payment is, at
common law, implicit in a contract of indemnity. I accept that, at common law, a contract of
indemnity gives rise to an action for unliquidated damages, arising from the failure of the
indemnifier to prevent the indemnified person from suffering damage, for example, by having
to pay a third party. I also accept that, at common law, the cause of action does not (unless
the contract provides otherwise) arise until the indemnified person can show actual loss: see
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Collinge v. Heywood (1839) 9 Ad. & E. 633. This is, as I understand it, because a promise of
indemnity is simply a promise to hold the indemnified person harmless against a specified
loss or expense. On this basis, no debt can arise before the loss is suffered or the expense
incurred; however, once the loss is suffered or the expense incurred, the indemnifier is in
breach of contract for having failed to hold the *36 indemnified person harmless against the
relevant loss or expense. There is no condition of prior payment; but the remedies available at
law (assumpsit for damages, or possibly in certain circumstances the common count for
money paid) were not efficacious to give full effect to the contract of indemnity. It is for this
reason that equity felt that it could, and should, intervene. If there had been a clear implied
condition of prior payment, operable in the relevant circumstances, equity would not have
intervened to enforce the contract in a manner inconsistent with that term. Equity does not
mend men's bargains; but it may grant specific performance of a contract, consistently with
its terms, where the remedies at law are inadequate. This is what has happened in the case of
contracts of indemnity. As a general rule, 'Indemnity requires that the party to be indemnified
shall never be called upon to pay' (see In re Richardson [1911] 2 K.B. 705, 716, per Buckley
L.J.); and it is to give effect to that underlying purpose of the contract that equity intervenes,
the common law remedies being incapable of achieving that result.
Next, I am unable to accept Mr. Sumption's submission that a condition of prior payment in
the contract is not effective to displace the equity. As I have already stressed, if the condition
is in sufficiently clear terms, it would be contrary to principle that equity should grant
specific performance of the contract inconsistently with the terms of the contract. In the
present cases, the condition of prior payment is perfectly clear. The clubs are only bound to
indemnify a member against claims or expenses which he shall become liable to pay and
shall in fact have paid. The reason why this provision was included in the rules seems to me
to be immaterial. I should record that Mr. Boyd, for the West of England Club, put forward a
rather different reason for its inclusion from that proposed by Mr. Sumption. He suggested
that, in a mutual insurance association such as a P. & I. Club, it is essential that members
should be able to assume the financial probity of other members, because all of them are
insurers as well as insured. To that end, it is customary to require each member to discharge
his own liability before he can be indemnified against it by the club. Each member is, after
all, running his own business; it is up to him to make sure that a claim against him is well
founded, and the best way of ensuring that is to require him first to pay the claim before
seeking indemnity from the club. I must confess that I was much attracted by this submission.
Your Lordships do not however have to choose between Mr. Sumption's and Mr. Boyd's
submissions on this point, especially as it is not inconceivable that they are both correct. For
the fact remains that the rules provide unambiguously that there is no present obligation on
the club to indemnify the member unless the condition of prior payment has been fulfilled;
and for equity to grant specific performance of the contract, inconsistently with that
condition, would, as I have said, be contrary to principle.
For these reasons there is, in my opinion, no room for the operation of the equitable principle
in the cases before your Lordships. There remains, however, what I consider to be the central
question in these cases. This is whether the condition of prior payment is rendered of no
effect by section 1(3) of the Act of 1930. Since however I find myself to *37 be in complete
agreement on this point with the judgment of Saville J. in the Padre Island (No. 2) [1987] 2
Lloyd's Rep. 529, with which I understand the Court of Appeal also to have been
substantially in agreement, I can deal with the point briefly.
77
The question is whether the condition of prior payment in the club rules purports, directly or
indirectly, to avoid the contract or to alter the rights of the parties upon the happening to the
member of any of the events specified in paragraphs (a) and (b) of section 1(1). Here we are
not concerned with the possibility of the contract being avoided, only with the possibility of
the rights of the parties being altered. For present purposes, the only event specified in
section 1(1) which could conceivably be of relevance is an order for winding up of the
member.
Saville J. [1987] 2 Lloyd's Rep. 529, 534, having pointed out that the member has at best a
contingent right under the rules to be reimbursed on payment, observed that that right was
totally unaffected by a winding up order. He said:
'in the words of section 1(3) nothing in the contract, directly or indirectly, purported to alter
(i.e. had the effect of altering) that right - for it remained exactly as it had been throughout.
After the winding up order, as before, the owners had the same contractual right as they
always had, namely, that which I have stated.'
He then identified what he saw as fatal flaws in the submissions advanced on behalf of the
cargo owners. In particular, he considered that the argument confused the rights conferred by
the club rules with the personal ability of the member to exercise or enjoy those rights. With
that criticism I, like Bingham L.J. in the Court of Appeal, find myself to be in complete
agreement. Following the insolvency of the member, or a winding up order, his contractual
rights remain the same; there is a contingent right of reimbursement as before, though it is
one which the member is, in the new circumstances, less able to exercise. Saville J. went on
to identify two further flaws in the argument: first, that it treated as one and the same thing
the member's inability to pay the cargo owners, and the winding up order, though they are
separate and distinct; and second, that the argument led to the proposition that any monetary
obligation of the insured under the contract of insurance upon which his rights against the
insurer are wholly or partly dependent, is struck down by section 1(3) upon the happening of
a winding up order by reason of insolvency. To these criticisms also, I can see no answer.
Indeed, the judgment in The Fanti [1987] 2 Lloyd's Rep. 299of Staughton J., who formed a
different view, identified the relevant event specified in paragraph (b) of section 1(1) as being
insolvency, rather than winding up, which is inconsistent with the words of the subsection,
and further did not confront the fact that, even if the relevant event was insolvency, the
contract did not purport to alter the rights of the parties upon the happening of that event - the
rights remained the same, the effect of the event being simply to render the condition of prior
payment more difficult to perform.
Before your Lordships Mr. Clarke, for the cargo owners in The Fanti, submitted that the
contract altered the rights of the parties thereunder directly upon the making of a winding up
order, because whereas before the winding up the member had a right to pay and be paid,
after winding up he did not have that right because payment by him would be unlawful. I am
however unable to accept this submission, for the simple reason that the mere fact that the
member could not lawfully pay after the winding up did not mean that the contract purported
to alter the rights of the parties in that event. The rights of the parties remained exactly the
same; all that happened was that, following the member's insolvency, and a fortiori following
the winding up, the member was no longer able to fulfil the condition of prior payment
which, as both Saville J. and Bingham L.J. pointed out, is quite different.
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Mr. Sumption urged upon your Lordships that section 1(3) is not limited to cases where the
legal substance of the right is altered; on the contrary, it extends to cases where the legal
substance is unchanged, but the practical effect is altered. Indeed he went so far as to suggest
that section 1(3) is directed not to the form of the contract term, but to the result. This
submission I do not feel able to accept, because in my opinion it is inconsistent with the
words of the subsection.
It is evident that certain of the judges in the courts below (I refer in particular to Staughton J.
in the Fanti [1987] 2 Lloyd's Rep. 299, 310, and to Stuart-Smith L.J. in the Court of Appeal
[1989] 1 Lloyd's Rep. 239, 258-259) were much affected by what they perceived to be the
unfortunate consequences which would follow if the cargo owners were denied a direct
action against the clubs. Indeed, Stuart-Smith L.J. went so far as to say that, if the argument
of the clubs were to prevail, any liability insurer could drive a coach and horses through the
Act by the simple device of incorporating a pay to be paid clause in the policy. To my mind,
this statement both exaggerates the danger and ignores the policy underlying the Act of 1930.
In his judgment, Bingham L.J., at pp. 247-248, summarised in eight points his general
approach to the construction of the Act. With that admirable summary, I respectfully agree.
In it, he stressed that the primary purpose of the Act was to remedy the injustice highlighted
in particular in In re Harrington Motor Co. Ltd., Ex parte Chaplin [1928] 1 Ch. 105, in which
it was held that payment by an insurance company to an insolvent insured of a sum due under
a liability policy, fell to be distributed among the creditors of the insured, of whom the
injured party was only one: see Bradley v. Eagle Star Insurance Co. Ltd. [1989] A.C. 957, per
Lord Brandon of Oakbrook. He also stressed that under the Act there were to be transferred
to the third party only such rights as the insured had under the contract of insurance, subject
always to section 1(3) of the Act which in effect prevented contracting out of the statutory
transfer. This being the statutory scheme, it is very difficult to see how it could be said that a
condition of prior payment would drive a coach and horses through the Act; for the Act was
not directed to giving the third party greater rights than the insured had under the contract of
insurance. But it is also necessary to observe that, in contrast to, for example, employers and
motorists, Parliament has not generally required (apart from special cases, such as the
Merchant Shipping (Oil Pollution) *39 Act 1971) that shipowners should be compulsorily
insured against liability to third parties. Where Parliament does require compulsory
insurance, it generally provides in the relevant legislation that clauses in the contract of
insurance which defeat the purpose of such insurance will be ineffective (see, e.g., sections
148 to 150 of the Road Traffic Act 1988, and regulation 2 of the Employers' Liability
(Compulsory Insurance) General Regulations 1971 (S.I. 1971 No. 1117), made pursuant to
the Employers' Liability (Compulsory Insurance) Act 1969). This however is not the general
rule in the case of shipowners' liability to third parties. Indeed, so far as cargo owners are
concerned, it is of course well known that cargo is ordinarily insured with cargo underwriters,
so that no doubt in the present cases the battle was effectively fought between two groups of
insurers. There may conceivably be cases in which there is loss of life or personal injury,
arising from default on the part of shipowners or their employees, in which insolvency of the
shipowners could have the effect that a P. & I. Club in which the relevant ship was entered
could, in theory, decline to make payment direct to the injured party or his next of kin. Your
Lordships were informed that, in such a case, the directors of one, if not both, of the clubs in
the present litigation waive the condition of prior payment; indeed, it is not to be forgotten
that the directors of P. & I. Clubs are themselves shipowners, who are capable of having
regard to the wider interests of their industry. Not a single example was given to your
Lordships of an individual claimant in such a case being defeated by a club invoking the
79
condition of prior payment. Manifestly, P. & I. Clubs did not incorporate the condition of
prior payment in their rules for the purpose of defeating the application of the Act of 1930,
since the condition was a regular feature of P. & I. Club rules long before 1930. Moreover, it
seems highly unlikely that other liability insurers would (if they were free to do so)
incorporate any such condition in their policies for that purpose, because to do so would be
likely to render their insurance policies less marketable in a competitive world. In all the
circumstances, therefore, I do not consider that the decision of your Lordships' House in the
present cases is likely to lead to adverse consequences of the kind feared by Staughton J. and
Stuart-Smith L.J. No doubt those responsible for legislation in this field will in any event be
monitoring the position, and they can, if there proves to be any practical need for it, promote
the appropriate remedial legislation.
For the reasons I have given, I too would allow the appeals of the clubs in both cases.
Appeals allowed with costs.
“The Legal Costs”
The ¾ Collision Liability Clause, in reads, “The Underwriters to pay 3/4ths of the Assured’s legal
costs in contesting liability/limiting liability where Underwriters have given their prior
written consent”.
This clause sets out the parameters of the insured/assured contractual relations vis-à-vis the
payment of the legal costs in defending an action for damages by the assured. It does not,
however, deal with the assured’s legal costs in making a claim against third parties. The
following case deals with the predecessor of the current ¾ Collision Clause, which
incidentally did not cover legal costs.
Hall Bros Steams
IB9006800E42711 Court of Appeal
Cases
IE28111D011E711 %5B1939%5D+1
¶
01 March 1939
Case Study One
Xenos v Fox (1868-69) L.R. 4 C.P. 665
The Issues
Ship and Shipping—insurance—Suing and Labouring Clause—running—down Clause.
The Facts
A policy was made subject to a stipulation that, in case the vessel should by accident or
negligence run down or damage any other vessel, and the assured should thereby become
liable to pay and pay as damages any sum not exceeding the value of ship and freight, by or
in pursuance of any judgment of any Court given in any action defended with the consent of
80
the underwriters, they (the underwriters) would bear and pay a given proportion of the sum so
paid.
The owners were sued for running down another vessel, and obtained a judgment in their
favour, but were put to costs:—
Held, —affirming the judgment of the Court of Common Pleas,—that these costs were not
recoverable from the underwriters either under the running-down clause or under the usual
suing and labouring clause.
SS Smyrna with the defendants under a Lloyd's policy for
£6000. While navigating a branch of the River Danube, the SS Smyrna, collided
The plaintiff insured the
with the SS Mars, and the SS Mars sustained such injuries that she shortly afterwards sank
and was lost.
Mars sued the Smyrna and her owners in the Consular Court, at
Galatz, Turkey, for the recovery of damages for the loss of the Mars. The plaintiff resisted
The owners of the
the claim, and the Court gave judgment, dismissing the suit, leaving each party to bear their
own costs. The owners of the Mars appealed to the Supreme Consular Court at
Constantinople. That Court confirmed the judgment of the Court below, with costs. The
owners of the
with costs.
Mars
again appealed to the Privy Council, and the appeal was dismissed,
Having, incurred considerable costs in these proceedings, the plaintiff, brought this action to
recover a proportion of their legal costs, under the policy
The policy was subject to the running-down clause, as per slip attached. The slip was as
follows:
“And we, the assurers, do further covenant and agree that, in case the said vessel shall, by
accident or negligence of the master or crew, run down or damage any other ship or vessel,
and the assured shall thereby become liable to pay, and shall pay, as damages, any sum or
sums not exceeding the value of the said vessel Smyrna and her freight, by or in pursuance of
any judgment of any court of law or equity given in any suit or action defended with our
previous consent in writing, or by or in pursuance of any award made upon reference entered
into by the assured with our previous consent in writing, we, the assurers, shall and will bear
and pay such proportion of three fourth parts of the sum so paid as aforesaid as the sum of
£6000 hereby assured bears to the value of the said vessel Smyrna and her freight.”
The policy also contained the usual suing and labouring clause:
“And, in case of any loss or misfortune, it shall be lawful to the assured, their factors,
servants, and agents, to sue, labour, and travel for, in, and about the defence, safeguard, and
recovery of the said goods and merchandize, and ship, &c., or any part thereof, without
prejudice to this insurance.”
81
The Running Down Clause was thus silent on the legal costs; nevertheless, the plaintiff
alleged that they had defended the actions with the consent of the insurer, but this argument
was rejected by the court as immaterial, in the light of the policy
Sir G. Honyman, Q.C. (Watkin Williams and Cohen with him), for the plaintiff.
The running-down clause was introduced in consequence of the decision of the Court of
Queen's Bench in De Vaux v. Salvador 4 Ad. & E. 420 ; and, although the costs in question
are not, strictly speaking, “damages,” yet, in construing this clause, regard must be had to the
obvious intention of the parties, and the liberal interpretation which is always applied to the
language of policies of insurance: Paterson v. Harris 1 B. & S. 336. At all events, the money
was paid for the purpose of averting a loss which otherwise would have fallen upon the
underwriters, and so is recoverable under the suing and labouring clause: Kidston v. Empire
Marine Insurance Company Law Rep. 1 C. P. 535. The main object of the suing and
labouring clause is to give the assured an interest in saving as much as possible for the
underwriters.
[LUSH, J. The suing and labouring clause does not come into operation until a loss or
misfortune has actually happened. The assured cannot, under that clause, claim the cost of
employing a tug to prevent the vessel going on shore.
BLACKBURN, J. The only “misfortune” here is, that the owners of the Mars were
unreasonable enough to sue the Smyrna without sufficient cause. In Kidston v. Empire
Marine Insurance Company, there was a total loss of the ship; and the claim was for expenses
incurred in rescuing the cargo from a situation in which there would have been a total loss of
that also.]
Then, the plaintiff had the consent of the underwriters to defend the proceedings;
consequently, he is entitled to recover, as for money paid, the expenses which he incurred in
making his defence.
COCKBURN, C.J.
I am of opinion that the judgment of the Court below was right. The suing and labouring
clause has no application whatever to the facts of this case. That clause applies to a loss or
misfortune happening to the thing insured. Nor has it any relation to the running-down clause.
The running-down clause is a distinct contract, under which the underwriters engage to pay a
proportion of any damages which may be awarded against the assured in a suit for a collision
which may be defended with their previous consent in writing. That is express. The view
suggested by Sir G. Honyman would, no doubt, be an equitable view of the matter. But the
parties have not so contracted, and we cannot do it for them. It can hardly be said that the
expenses in question were incurred by reason of the consent of the underwriters to the suit
being defended. That assent was given only with reference to the special terms of the
running-down clause. If damages had been recovered by the owners of the
the plaintiff that would have brought the case within the clause.
KELLY, C.B., CHANNELL, B., LUSH and HAYES, JJ, and CLEASBY, B.
Concurred.
Mars
against
82
Judgment affirmed.
EXCLUSIONS
The ¾ Collision Liability Clause, CL 8.4 reads as follows:
8.4 Provided always that this Clause 8 shall in no case extend to any sum which the Assured
shall pay for or in respect of
8.4.1 removal or disposal of obstructions, wrecks, cargoes or any other thing whatsoever
8.4.2 any real or personal property or thing whatsoever except other vessels or property on
other vessels
8.4.3 the cargo or other property on, or the engagements of, the insured vessel
8.4.4 loss of life, personal injury or illness
8.4.5 pollution or contamination, or threats thereof, of any real or personal property or thing
whatsoever (except other vessels with which the insured vessel is in collision or property on
such other vessels) or damage to the environment, or threat thereof, save that this exclusion
shall not extend to any sum which the Assured shall pay for or in respect of salvage
remuneration in which the skill and efforts of the salvors in preventing or minimising damage
to the environment as is referred to in Article 13 paragraph 1(b) of the International
Convention of Salvage, 1989 have been taken into account.
Some of these exclusions are self-explanatory, and need not be rehearsed here; save to say the
liability for the loss of life, personal injury or illness has traditionally been the preserve of P
& I Clubs.
Of interest here is Cl 8.1which, incidentally is in similar terms to Lord Lindley’s judgment in
the North Britain, to which now turn.
Case Study One
The North Britain [1894] P. 77
The Issues
Admiralty—Ship—Marine Insurance—Collision Clause—Construction of Proviso “that this
clause shall in no case extend to any sum which the assured may become liable to pay or
shall pay for removal of obstructions under statutory powers.”
The Facts
83
The plaintiffs' vessel, the SS
Britain, was insured with the defendant insurers under
a hull policy, including a Running Down Clause, subject an exclusion clause, which, inter
alia, stated:
“Provided always that this clause shall in no case extend to any sum which the assured
may become liable to pay or shall pay for removal of obstructions under statutory powers
… consequent on such collision. ….”
On February 10, 1891, the
North Britain
came into collision with the
SS
Paraguay in the river Scheldt, Belgium, and in consequence thereof the latter vessel
sank.
On February 21, the governor of the province of West Flanders, acting in the exercise of legal
powers conferred upon him by a Royal decree, gave the master of the
Paraguay notice
to commence within six days the removal of the vessel as an impediment to navigation,
otherwise such removal would be undertaken by the authorities at the expense of the
interested party. This notice not having been complied with, the authorities proceeded with
the work, and, on September 26, the governor of West Flanders caused the agents at Antwerp
of the owners of the Paraguay to be served with an order to pay to the cashier of the
State, within fifteen days, the sum of 26,390 francs (£1047. 4s. 6d.), being the amount
expended by the government in removing the wreck from the bed of the Scheldt. And so it
was done; the sum was duly paid and was subsequently recovered from the owners of the
North Britain, who in turn claimed it from their insurer under the policy.
Held, by the Court of Appeal (Lindley, A. L. Smith, and Davey, L.JJ.), reversing the
decision of Gorell Barnes, J., that the defendants were not liable, as the proviso exempted
them from indemnifying the plaintiffs for payments made directly or indirectly for removal
of obstructions under statutory powers.
LINDLEY, L.J.
This is an appeal from the decision of Gorell Barnes, J., and the question raised by the appeal
turns upon the construction of an addition made to an ordinary marine policy on ship.
The policy itself contains nothing which requires comment; but in the margin of it we have
printed certain special clauses, and one relating to collisions which I will read. Before I read
it I will state that there was a collision between the North Britain, the ship assured, and a ship
called the Paraguay, in the Scheldt, and the Paraguay sunk; and, being an obstruction in the
river, the Belgian authorities removed her, or ordered her to be removed, and that put the
owners of the Paraguay to considerable expense. Both vessels were to blame. She sought to
recover, and did recover, half the expense against the North Britain, and the North Britain
seeks to be indemnified for that expense under the policy.
The question is whether the clause I am about to read covers that item of damage.
Now, upon that, two views are presented to the Court. One is that this proviso only applies to
sums which the owners of the ship insured may become liable to pay directly for removal of
obstructions caused by itself - the ship insured. The other is that which is contended for by
the defendants in this particular case, that it covers whatever the plaintiffs may be called upon
to pay, even to the other ship with which the collision has taken place, if that other ship has
84
been ordered to pay for the removal of the obstruction.
The case is one of some little difficulty; but when we look at it, and at the object of the
clause, it appears to me that the construction which is put by the underwriters is the correct
one.
Now, what is the clause? The first part of the clause is by no means easy to construe. I am
warranted in saying that, because it is construed one way in England and another way in
Scotland. There is an ambiguity in the first part of the clause when you come to look at it.
The ambiguity arises in respect of the expression “in consequence thereof.”
The first clause is a damage clause; it is a clause under which the ship insured may have to
pay damages. The words “in consequence thereof,” namely, in consequence of the collision,
are ambiguous, because it is doubtful what sort of consequences are included in that
expression.
The proviso which I have read is a proviso to this clause. It begins, “Provided always that this
clause.” It is impossible to read that proviso as applying to that part of the clause which
immediately precedes, and which relates only to the mode of ascertaining the liability. That
would not make sense. The proviso is a proviso to the first part of the clause, and that is
agreed upon all hands.
Now, when we come to read the first part of the clause, with the proviso, it appears to me that
the object of the proviso is to remove the ambiguity to which the general language of the first
part of the clause gives rise; and I cannot see how it is possible to construe or cut down this
proviso so as to effectuate the intention of the parties, and so as to read it in the very narrow
view which has been adopted by Gorell Barnes, J. He says the proviso is not, technically
speaking, an exception. I do not think it is. He says it is put in by way of precaution. I think it
is; but what we have to construe is the clause with the proviso, and I regard the proviso as a
warning that you are not to read the clause so as to include the consequences mentioned in
the proviso. The true meaning of the proviso is that “this clause shall in no case extend to any
sum which the assured shall have to pay for removal of obstruction consequent on such
collision.” I know the clause itself says in terms “shall pay by way of damages”; but I do not
think the construction which I am adopting involves the insertion of any words at all. It is, “in
no case shall extend to any sum the assured shall become liable to pay” - that is, pay in
respect of any ship by way of damages or otherwise.
The clause admits of two constructions; but one construction appears to me, with great
deference to Gorell Barnes, J., not to give effect to the true meaning of this policy. I think,
therefore, the appeal must be allowed.
Case Study Two
Tatham, Bromage & Co v Burr The “Engineer.” [1898] A.C. 382
The Issues
Admiralty—Ship—Marine Insurance—Collision Clause—Construction of Proviso “that this
clause shall in no case extend to any sum which the assured may become liable to pay or
85
shall pay for removal of obstructions under statutory powers.”
The Facts
A collision clause in a policy of marine insurance, covering damages payable in respect of
a collision with another vessel, contained a proviso “that this clause shall in no case extend
to any sum which the assured may become liable to pay or shall pay for removal of
obstructions under statutory powers.” The insured vessel came into collision with another
vessel, which sank and was removed as an obstruction by commissioners under statutory
powers. Both vessels were to blame for the collision. The owners of the insured vessel paid
as damages to the owners of the sunken vessel a moiety of the sum which the latter had
paid to the commissioners for the expenses of the removal, and made a claim upon the
underwriters in respect of the moiety:—
Held, that the proviso must be construed as a business document prepared by men of
business for their own use, and as business men would understand it: that it was not
confined to payments made directly by the assured to the persons who caused the
obstruction to be removed, but included indirect payments such as the moiety in question,
and that the underwriters were not liable.
The North Britain, [1894] P. 77, approved.
THE following were the material parts of an agreed statement of facts in an action brought in
the Queen's Bench Division by the appellants against the respondent, and tried without a jury
by Bruce J.:—
In June 1895 the appellants, as owners of the SS Engineer, effected with the
respondent (inter alios) a policy of insurance subscribed by the respondent in the sum of £100
on the hull and machinery of the SS
Engineer, valued at £8500, for twelve months.
Attached to the policy were clauses, known as Institute Clauses, the material one being as
follows: There follows the Running Down Clause, and the Proviso et al
In April 1896 whilst the policy was in force the SS
Engineer came into collision with
SS Harraton near the entrance to the River Tees, and by reason of the collision
the SSEngineer was considerably damaged and the SS Harraton sank and
the
became a constructive total loss.
The place at which the SS Harraton sank was within the limits of the jurisdiction of
the Tees Conservancy Commissioners, who thereupon under their statutory powers took the
necessary steps to remove the obstruction caused by the wreck of the Harraton. The
expenses incurred by the commissioners amounted to £1346. An action was begun in the
Admiralty Division by the owners of the
Harraton
against the owners of the
Engineer and a counter-claim was entered on behalf of the appellants, but by agreement
between the parties in that action both ships were deemed to have been in fault, and the
damages suffered by both parties to the suit respectively as assessed by the registrar of the
Admiralty Division assisted by merchants were duly paid by each to the other.
86
The appellants as owners of the
Engineer
properly paid to the owners of the
Harraton
under the agreement £673, being a moiety of the £1346, for removing the
obstruction caused by the wreck as being a loss or damage sustained by the owners of the
Harraton incidental to and arising out of the collision, and thereafter the appellants
sought to recover that moiety from their underwriters (including the respondent), but they
declined to pay any part thereof, alleging that they were expressly excepted from liability in
respect of that sum by the terms of the proviso.
The question for the determination of the Court was whether the respondent was liable under
the policy to pay to the appellants such proportion of three-fourths of the sum of £673 as the
respondent's subscription bore to the value of the ship.
It being admitted that the case was undistinguishable from The North Britain1, Bruce J.,
following that decision, held that the respondent was not liable, and this decision was
affirmed by the Court of Appeal (Lord Esher M.R., A. L. Smith and Rigby L.JJ.).
The plaintiffs brought the present appeal.
EARL OF HALSBURY L.C.
My Lords, I certainly am not desirous of hearing this discussion prolonged, because for some
time I have arrived at a very clear conclusion in my own mind, and I confess I adopt the
paraphrase of this contract which the then Lord Justice Davey put upon it in The North
Britain [ABOVE] He says the clause means something of this kind:
“I will reimburse you, the injuring vessel, the bill which you have to pay the injured vessel
for damages; but, mind, I am not to be called upon to pay, directly or indirectly, for the
removal of obstructions under statutory powers.”
That I believe to be a very proper reading of the language which was actually used by the
parties.
My Lords, I agree with what Davey L.J. appears to have said in respect to the mode in which
that contract should be construed. In looking at a document between business men I do not
think it is wise to look at technical rules of construction. I think it is well to look at the whole
document, to look at the subject-matter with which the parties are dealing, and then to take
the words in their natural and ordinary meaning and construe the document in that way. I
have come to the conclusion that what the underwriters did mean to exclude in their contract
of liability was any payment of money for the removal of obstructions to navigation. These
damages or this money payable, whichever it is to be called, comes practically within the
description. It was a payment actually made by reason of the removal of an obstruction.
Therefore, applying the test I have suggested to the contract, I cannot doubt that that was
what the underwriters intended to exempt from the contract into which they entered.
Under those circumstances I think that the case which is supposed to have governed the case
now before your Lordships does govern it. I think that case was rightly decided; and I
therefore move your Lordships that this appeal be dismissed with costs.
87
Order appealed from affirmed and appeal dismissed with costs
The Sister ship Clause
The terms of the clause are as follows:
Should the vessel hereby insured come into collision with or receive salvage services from
another vessel belonging wholly or in part to the same Owners or under the same
management, the Assured shall have the same rights under this insurance as they would have
were the other vessel entirely the property of Owners not interested in the vessel hereby
insured; but in such cases the liability for the collision or the amount payable for the services
rendered shall be referred to a sole arbitrator to be agreed upon between the Underwriters and
the Assured.
The Sister ship clause (Cl 9 of the ITCH (95) is designed to enable a n owner of two vessels,
in the event of a collision of the two vessels, claim against the offending vessel, which,
otherwise, would not have been allowed, at common law; vide, Simpson et Al. v Thomson,
Burrell et Al (1877-78) L.R. 3 App. Cas. 279
The Issues
Collision of two Ships—One lost—Both belonging to the same Owner—Claims of
Underwriters and Others—17 & 18 Vict. c. 104, and 25 & 26 Vict. c. 63.
Two ships, the property of the same owner, collided; the underwriters paid the insurance
effected on the lost ship, and then claimed to rank pari passu, with the owners of cargo
destroyed, in the distribution of the fund lodged in Court by the owner as proprietor of the
ship which did the damage.
There is no independent right in underwriters to maintain in their own name, and without
reference to the person insured, an action for damage to the thing insured.
Although the underwriters have paid for a total loss, and are entitled to all the rights in the
injured ship which belong to its owner, yet if that owner cannot assert a right for damages
against the wrongdoer, neither can the underwriters.
The Facts
Dunluce Castle, on her passage from London to
Leith, was run down, and destroyed, by the Fitzmaurice; both vessels belonged to the
ON the 4th of February, 1876, the
same owner, one William Burrell, of Glasgow.
88
Under the Mercantile Shipping Acts Burrell petitioned the Court to limit his liability, as
owner of the Fitzmaurice, to those who had suffered by the collision, to a sum of
£3590; equalling the value of the ship in fault at £8 per ton.
The underwriters, who having insured the Dunluce Castle, had paid Burrell, as the
owner, under two time policies effected by him, £6000 as for a total loss. For this sum they
claimed to rank with Messrs Simpson & Co., owners of cargo lost; and the other claimants,
upon the fund of £3590.
Held, (reversing the decision of the Court below), that the underwriters had no such right
under the circumstances of the case.
Per THE LORD CHANCELLOR:—The underwriters' right must be asserted in the name of
the person insured, but if he be the person who has caused the damage, the right cannot be
maintained against himself.
Per LORD PENZANCE:—The underwriters of the lost ship have no right of action against
the owner of the ship that did the mischief, as he himself had no such right, inasmuch as,
being the owner of both vessels, any right of action he had must be a right of action against
himself, which is an absurdity, and a thing unknown to the law.
THE LORD CHANCELLOR
My Lords, Mr. Burrell, as the owner of the Fitzmaurice, the vessel that was in fault, and
admitting his liability, petitioned the Court of Session, under the Merchant Shipping Acts16,
to stop all actions instituted against him, paying into Court the sum of £3590, being the
tonnage liability fixed by the statute, and leaving *282 those who had any claim or right of
action against him to establish it against that sum.
In the proceedings consequent on Burrell's petition the Appellants, as owners of the cargo on
board the Dunluce Castle, made and established a claim against the fund, as did also the
master and seamen of the ship, in respect of their effects lost in the collision, and the
underwriters also made a claim on the ground that they had paid £6000 to Burrell under the
two insurances on the Dunluce Castle as upon a total loss, and ought to rank as creditors
against the fund in medio for that amount.
The Appellants resisted the right of the underwriters to share in the distribution of the fund;
but the Court of Session by the interlocutors17 under appeal have sustained the right of the
underwriters, and your Lordships have now to say whether that decision is correct.
My Lords, I ought in the first place to state that in my opinion the question must be
considered just as if the underwriters had brought an action against Burrell. It is true that
under the Merchant Shipping Acts all actions against Burrell have been restrained, and a
limited sum of money has been paid into Court to answer rateably, as far as it will suffice, the
claims of all persons who have brought, or might bring actions against him. But the Merchant
Shipping Acts do not profess to create any new right. On the contrary, they act in restraint of
existing rights, substituting merely a limited for an unlimited liability. The question must be
looked at, therefore, in the same way as it would be if, all other things remaining the same,
the underwriters were not in competition with any other claimants, but were suing Burrell for
89
damages on the ground that his ship, the Fitzmaurice, had through careless navigation run
down his other ship the Dunluce Castle, upon which, they, being the insurers, had paid as for
a total loss.
My Lords, the learned counsel who argued this case at your Lordships' bar on behalf of the
Respondents could not suggest that such an action had ever been brought, nor could they
point out in any text book or in any decided case, any authority that such an action could be
maintained.
*283
In order, however, to determine whether such an action could be maintained it is necessary to
ascertain the principle upon which the underwriters, having paid as upon a total loss, are held
to succeed to whatever can be recovered in respect of the thing insured.
The Lord President states this principle thus:
It is necessary to consider very particularly what is the effect of a total loss, either actual or
constructive, as in a question between the owners and the underwriters of the lost vessel.
There can be no doubt that whether the loss be actual or constructive, if it be a total loss, the
property of the sunk vessel passes to the underwriters. And it is also quite settled that all the
incidents of that property pass with it. But it is necessary to go a little deeper than that general
statement of principle, in order to see what is the precise relation of the underwriters and the
owners after the property of the vessel has so passed from the one to the other. It is quite clear
that in any transference either of an heritable subject or of a corporeal moveable by voluntary
conveyance, nothing passes as an incident of the subject of the nature of a claim of damages.
The disponee of an heritable subject, or the purchaser of a corporeal moveable, takes it just as
it stands at the time of that conveyance, with, of course, all the incidental rights belonging to
it as a piece of property; but it is quite clear that in such a case a claim of damage for injury
done to that property before transference takes place could never pass along with the
conveyance of the subject. Now it is quite settled that in that kind of vendition which takes
place by the operation of law, when the underwriter pays the contents of his policy upon a
sunk ship, a claim of damages against a vessel which has caused the loss of the ship by
collision does pass along with the property of what remains of the vessel; and therefore it is
quite obvious from that consideration alone, without going any further, that the transference
which is operated by force of law when the underwriter pays under his policy upon the lost
ship is something quite different from an ordinary voluntary conveyance of a corporeal
moveable.
And further on, the Lord President continues thus:
Then, is it to be said that when the property of the sunk vessel has passed to the underwriters
with all its incidents, including the right to claim against the offending ship for the damage
done by the collision, is it to be said that the owner of the offending vessel shall escape from
this liability because he was also owner of the sunk ship? I confess I am quite unable to see
any ground in law for holding that. It seems to me, on the contrary, to be quite clear that the
operation of the legal assignment of the ship from the owner to the underwriters is to carry
with it all the rights which would have belonged to any owner of that vessel, no matter who
he might be; and as soon as by that legal assignment the owner of the offending ship ceased
to be owner of the Dunluce Castle there was no longer any identity of persons between the
party who makes the claim and the party who is liable to satisfy the claim. That identity is put
an end to by the operation of *284 law, and therefore I think that the underwriters in these
circumstances would have a perfectly good ground for action against the owner of the
Fitzmaurice to make good the damage caused by the collision.
The view of the Lord President, therefore, appears to be, that after payment by the
90
underwriters as on a total loss, there is effected, by some independent operation of law, a
transfer of whatever, if anything, can be recovered in specie of the thing insured, and that
there is also created by a similar operation of law, and by reason of the transfer of the thing
insured, an independent right in the underwriters to maintain in their own name, and without
reference to the person insured, an action for the damage to the thing insured, which was the
cause of the loss.
My Lords, speaking with great respect for the Lord President, and the other learned Judges
who followed his opinion, I feel bound to say I am not aware of any authority for the view of
the case thus taken by him. The case cited by him of The North of England Insurance
Company v. Armstrong 19 does not appear to me to touch the question. The reasoning of the
Lord President would be inapplicable to the case of a partial loss; and yet no one would
dispute the right of underwriters, after paying to A. on a partial loss occasioned to his ship by
the collision of the ship of B., to sue B. if his ship was in fault. I know of no foundation for
the right of underwriters, except the well-known principle of law, that where one person has
agreed to indemnify another, he will, on making good the indemnity, be entitled to succeed to
all the ways and means by which the person indemnified might have protected himself
against or reimbursed himself for the loss. It is on this principle that the underwriters of a ship
that has been lost are entitled to the ship in specie if they can find and recover it; and it is on
the same principle that they can assert any right which the owner of the ship might have
asserted against a wrongdoer for damage for the act which has caused the loss. But this right
of action for damages they must assert, not in their own name but in the name of the person
insured, and if the person insured be the person who has caused the damage, I am unable to
see how the right can be asserted at all.
The case of Yates v. Whyte 20 involved questions analogous to *285 and, as it seems to me,
decisive of the present. The Plaintiff was there suing the Defendants for damaging his ship by
collision, and the Defendants sought to deduct from the amount of damages to be paid by
them a sum of money paid to the Plaintiff by his insurers in respect of such damage; and if
the insurers had possessed an independent right of action against the Defendants, the
Defendants might no doubt have been right in their contention. I think it desirable to read to
your Lordships what was said by some of the learned Judges in that case. Chief Justice Tindal
says 21:—
I think this case is decided in principle by that of Mason v. Sainsbury 22. There, a party
whose property had been burnt by a mob, was allowed, after receiving the amount of his loss
from an insurance office, to sue the hundred on the statute 1 Geo. 1 for the benefit of the
insurers. The only distinction between that case and the present is, that there the action for the
wrong was brought at the instance of the insurance office, which is not the case here. But it
establishes that a recovery upon a contract with the insurers is no bar to a claim for damages
against the wrongdoer. Lord Mansfield says: “Though the office paid without suit this must
be considered as without prejudice, and it is, to all intents, as if it had never been paid. The
question comes to this, Can the owner of the house, having insured it, come against the
hundred under this Act? Who is first liable? If the hundred be first liable it makes no
difference. If the insurers be first liable, then payment by them is a satisfaction, and the
hundred is not liable. But the contrary is evident from the nature of the contract of insurance.
It is an indemnity. We every day see the insured put in the place of the insurer. In
abandonment it is so; and the insurer uses the name of the insured. It is an extremely clear
case. The Act puts the hundred in the place of the trespassers; and on principles of policy, I
am satisfied it is to be considered as if the insurers had not paid a farthing.” That the insurers
may recover in the name of the assured after he has been satisfied appears from Randal v.
Cockran 23, where it was held that they had the plainest equity to institute such a suit. Such,
91
therefore, is the situation of the underwriters here, that this case has received its answer from
it. If the Plaintiff cannot recover, the wrongdoer pays nothing, and takes all the benefit of a
policy of insurance without paying the premium. Our judgment must be for the Plaintiffs.
Mr. Justice Park says24:—
I am of the same opinion. This point has been decided ever since the time of Lord Hardwicke;
so much so that it has been laid down in text-writers, that where the assured, who has been
indemnified for a wrong recovers from the wrongdoer, the insurers may recover the amount
from the assured. In Randal v. Cockran it was said they had the clearest equity to use the
name of *286 the assured, in order to reimburse themselves; and in Mason v. Sainsbury 25
the Judges were all unanimous; they held, indeed, that the insurers could not she in their own
names, but they confirmed the general doctrine that the wrongdoer should be ultimately
liable, notwithstanding a payment by the insurers.
Mr. Justice Vaughan says26:—
No case has been cited which establishes the point contended for on behalf of the Defendants,
while Randal v. Cockran and Mason v. Sainsbury are in point for the Plaintiff. In Mason v.
Sainsbury it was argued as here, that the Plaintiff having received his indemnity from the
insurers, could not recover a second time from the hundred; but Lord Mansfield said: “Who is
first liable? If the hundred be first liable, still it makes no difference; if the insurers be first
liabie, then payment by them is a satisfaction, and the hundred is not liable. But the contrary
is evident, from the nature of the contract of insurance. It is an indemnity. We every day see
the insured put in the place of the insurer.” And in Clark v. The Hundred of Blything 27, the
authority of Mason v. Sainsbury was expressly recognised by Lord Tenterden.
My Lords, these authorities seem to me to be conclusive that the right of the underwriters is
merely to make such claim for damages as the insured himself could have made, and it is for
this reason that (according to the English mode of procedure) they would have to make it in
his name; and if this is so, it cannot of course be made against the insured himself.
It may be said that this view of the law inflicts considerable hardship upon the underwriters. I
am not, however, satisfied that this is the case. Either the policy by which the underwriters
are bound is an insurance against perils of the seas arising from the negligent navigation of
any other vessel, even although that vessel belong to the person insured, or it is not. If it is not
an insurance against such a peril of the sea, the underwriters should defend themselves
accordingly, and decline to pay for the loss. If, on the other hand, the insurance is a contract
to indemnify against the consequences of the negligent navigation of any other ship of the
insured, it would be little short of an absurdity that the underwriters should in the first place
indemnify the insured for the consequences of that negligent navigation according to their
con tract, and immediately afterwards recover the amount back from the insured as damages
occasioned by this negligent navigation.
*287
I must, therefore, move your Lordships that the interlocutor of the 24th of November, 1876,
be varied, by inserting after the words “rank and prefer the whole of the other claimants,” the
words “other than the underwriters,” and by inserting a finding that the underwriters, Thomas
Thomson and others, are jointly and severally liable to the Appellants, Simpson & Co. and
others, with regard to the expenses occasioned by the discussion between the claimants
Thomas Thomson and others, and Simpson & Co. and others; and that the interlocutor of the
10th of March, 1877, should be reversed, with a declaration that the objections for Simpson &
Co., and Henderson, Hogg, & Co., ought to have been received.
LORD PENZANCE:—
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The facts which give rise to the question in this case are undisputed, and are these: Mr.
Burrell was the sole owner of two vessels, the Dunluce Castle and the Fitzmaurice, which
came into collision at sea. The collision was due entirely to the negligence of those in charge
of the Fitzmaurice, and the result of it was that the other vessel (the Dunluce Castle) and her
cargo were wholly lost. Mr. Burrell, as owner of the ship in fault, instituted this suit, under
the provisions of the Mercantile Shipping Acts, for the purpose of limiting his liability to
those who had suffered by the collision to a sum equalling the value of the ship in fault,
calculated at £8 per ton, and has paid into a bank under order of the Court that sum to be
distributed by the Court among those entitled to it.
The Respondents are underwriters who had insured the vessel which was sunk (the Dunluce
Castle), and who have paid Mr. Burrell, as the owner of that vessel, under a valued policy
effected with them by him, the sum of £6000 as for a total loss. For this sum they have
claimed to rank with the other claimants upon the fund in Court, and the question is whether
they are entitled to do so. The Court below have affirmed their right, and allowed the claim;
and it is from that decision that the present appeal is brought.
As the claim thus put forward is made under the provisions of the statutes above referred to, I
will call attention to those provisions. *288 The 25 & 26 Vict. c. 63, s. 54, provides “that the
owner of any ship shall not (except in cases of their actual fault or privity) be answerable in
damages in respect of loss or damage to ships or goods,” in an amount exceeding £8 per ton
of the ship doing the injury. And the statute 17 & 18 Vict. c. 104, s. 514 (which is
incorporated with the last-mentioned Act), provides that “in cases where any liability is
alleged to have been incurred by any owner” in respect of injuries to ships or goods, &c.,
“and several claims are made or apprehended,” a suit may be instituted by such owner “for
the purpose of determining the amount of such liability and for distribution of such amount
rateably among the claimants.”
From these provisions it is, I think, clear that no claim upon the fund can properly be made
except in respect of some “liability” of the owner to the claimant by reason of an injury or
wrong for which the owner would be “answerable in damages” to the person claiming. And
accordingly the objection made to this claim by the Appellants is that the underwriters of the
lost ship have no right of action against the owner of the ship that did the mischief, except
such, if any, as they may have derived from the owner of the lost ship in whose place they
may claim to stand; and that he himself had, and could have no such right of action, inasmuch
as being the owner of both vessels, any right of action he had must be a right of action against
himself, which is an absurdity, and a thing unknown to the law.
In answer to this objection it seems to have been considered by the Court below that by the
payment of a total loss and the cession or transfer to the underwriters of the vessel (or
whatever might remain of her) which followed thereupon by operation of law; some new
right of action sprung up, or was created, against the owner of the wrong-doing ship in favour
of the underwriters.
I say “new” right of action, because the right of action contemplated is something different
from, and other than, the right of action which resided in the owner of the injured ship, the
benefit of which could only be made available to the underwriters by transference from that
owner, and consequently could only be insured in his name.
My Lords, I entirely agree with the reasoning of the Lord *289 Chancellor upon this head,
and am of opinion that there is no warrant to be found in the existing decisions for such a
proposition.
But in the argument at your Lordships' Bar the learned Counsel for the Respondents took
their stand upon a much broader ground. They contended that the underwriters, by virtue of
93
the policy which they entered into in respect of this ship, had an interest of their own in her
welfare and protection, inasmuch as any injury or loss sustained by her would indirectly fall
upon them as a consequence of their contract; and that this interest was such as would support
an action by them in their own names and behalf against a wrongdoer. This proposition
virtually affirms a principle which I think your Lordships will do well to consider with some
care, as it will be found to have a much wider application and signification than any which
may be involved in the incidents of a contract of insurance. The principle involved seems to
me to be this—that where damage is done by a wrongdoer to a chattel not only the owner of
that chattel, but all those who by contract with the owner have bound themselves to
obligations which are rendered more onerous, or have secured to themselves advantages
which are rendered less beneficial by the damage done to the chattel, have a right of action
against the wrongdoer although they have no immediate or reversionary property in the
chattel, and no possessory right by reason of any contract attaching to the chattel itself, such
as by lien or hypothecation.
This, I say, is the principle involved in the Respondents' contention. If it be a sound one, it
would seem to follow that if, by the negligence of a wrongdoer, goods are destroyed which
the owner of them had bound himself by contract to supply to a third person, this person as
well as the owner has a right of action for any loss inflicted on him by their destruction.
But if this be true as to injuries done to chattels, it would seem to be equally so as to injuries
to the person. An individual injured by a negligently driven carriage has an action against the
owner of it. Would a doctor, it may be asked, who had contracted to attend him and provide
medicines for a fixed sum by the year, also have a right of action in respect of the additional
cost of attendance and medicine cast upon him by that accident? And yet it cannot be denied
that the doctor had an interest in his patient's safety. In like manner an actor or singer bound
for a *290 term to a manager of a theatre is disabled by the wrongful act of a third person to
the serious loss of the manager. Can the manager recover damages for that loss from the
wrongdoer? Such instances might be indefinitely multiplied, giving rise to rights of action
which in modern communities, where every complexity of mutual relation is daily created by
contract, might be both numerous and novel.
My Lords, I have given these illustrations because I fail to see any distinction in principle
between them and the right asserted by the underwriters in the present case; and if I am right
in so regarding them, they shew at least how much would be involved in a decision by your
Lordships whereby that right should be affirmed.
But the ground upon which I will ask your Lordships to reject this contention of the
Respondents' counsel is this—that upon the cases cited no precedent or authority has been
found or produced to the House for an action against the wrongdoer except in the name, and
therefore, in point of law, on the part of one who had either some property in, or possession
of, the chattel injured. On the other hand, the existence of authorities in which the suit has
been brought in the name of the owner, though for the benefit of persons having a collateral
interest, is somewhat strong to shew that such persons had no right of action in themselves.
For it is to be presumed that a person having such a right would pursue it directly, and not
indirectly through the name of another.
The observations of Lord Mansfield, in the case of Mason v. Sainsbury 28, which was an
action against the hundred for damage done to the petitioner's property, the value of which
underwriters had already paid, throw some light on the subject:
If the insurers be first liable, then payment to them is a satisfaction, and the hundred is not
liable. But the contrary is evident from the nature of a contract of insurance. It is an
indemnity. We see every day the insurer put in the place of the assured. In abandonment it is
94
so, and the insurer uses the name of the assured.
Chief Justice Tindal quotes this language in the case of Yates v. Whyte 29, and adds:
That the insurer may recover in the name of the assured after he has been *291 satisfied
appears from Randal v. Cockran 30, where it was held that they had the plainest equity to
institute such a suit.
And in the same case Justice Park31 said:
This point has been decided ever since the time of Lord Hardwicke, so much so that it has
been laid down in text-writers that when the assured, who had been indemnified for a wrong,
recovers against the wrongdoer, the insurer may recover the amount from the assured. In
Randal v. Cockran 32 it was said they had the clearest equity to use the name of the assured
in order to reimburse themselves, and in Mason v. Sainsbury 33 the Judges were all
unanimous; they held, indeed, that the insurers could not sue in their own names, but they
confirmed the doctrine that the wrongdoer should be ultimately liable notwithstanding a
payment by the insurers.
A question was raised in the course of the argument at your Lordships' bar, whether the
underwriters could have defended themselves against an action brought on the policy by Mr.
Burrell, on the ground that the loss was occasioned by a ship which belonged to himself and
was navigated by his agents and servants. The solution of this question, whichever way it be
solved, does not seem to me to advance the claim now made by the underwriters. If they had
a good defence against Mr. Burrell's claim they were bound to avail themselves of it, and
thus throw the loss upon Mr. Burrell, instead of paying him and claiming to throw the loss on
the other creditors of the distributable fund. If, on the other hand, they had no such defence, I
fail to see how that circumstance has any bearing upon or in any degree improves their
position in the claim they now make.
In the result, therefore, I submit to your Lordships that the only liabilities in respect of which
Mr. Burrell paid the fund into Court under the statute were those for which he was
answerable in damages; and that, as he could not be answerable in damages to himself, no
claim ought to be allowed against the fund in respect of any right derived from him and
enforceable only in his name; while on the other hand the underwriters have produced no
authority or even judicial dictum for the proposition that in their own right, and independently
of Mr. Burrell in his character of assured, they could have sued him for damages in his
character of owner of the Fitzmaurice; and for these reasons I concur in *292 all respects in
the motion placed before the House by the noble and learned Lord on the woolsack.
LORD BLACKBURN:—
My Lords, I have had the advantage of reading the opinion of the noble and learned Lord who
spoke last in this case, in which I completely agree. But as the Judges in the Court below
have given a judgment the other way, I think the respect which I sincerely feel for their
authority makes it proper to say why I dissent from their reasoning, or, in other words, to
point out what seems to me the fallacy in the judgment in the Court below.
My Lords, I do not doubt at all that where the owners of an insured ship have claimed or been
paid as for a total loss, the property in what remains of the ship, and all rights incident to the
property, are transferred to the underwriters as from the time of the disaster in respect of
which the total loss is claimed for and paid. The right to receive payment of freight accruing
due but not earned at the time of the disaster is one of those rights so incident to the property
in the ship, and it therefore passes to the underwriters because the ship has become their
property, just as it would have passed to a mortgagee of the ship who before the freight was
completely earned had taken possession of the ship: see Keith v. Burrows 34. This is at times
95
very hard upon the insured owner of the ship; he can, however, avoid it by claiming only for
a partial loss, keeping the property in himself, and so keeping the right to earn the accruing
freight. In such a case he recovers an indemnity for the amount of the loss actually sustained,
in calculating which all the benefits incident to the property retained by the shipowner must
be considered.
But the right of the assured to recover damages from a third person is not one of those rights
which are incident to the property in the ship; it does pass to the underwriters in case of
payment for a total loss, but on a different principle. And on this same principle it does pass
to the underwriters who have satisfied a claim for a partial loss, though no property in the
ship passes. This will appear clear if we suppose that the owner of the Dunluce Castle had in
this case been a different person from Mr. Burrell, *293 and that the Dunluce Castle, instead
of being totally sunk, had only been injured to the extent of 50 per cent. of her value. The
owner of the Dunluce Castle would have had a right of action to recover that 50 per cent.
from Mr. Burrell, not because he was the owner of the Fitzmaurice, but because he was the
master of the captain and crew whose negligence in the course of their employment
occasioned the damage. The underwriters could not resist payment of an indemnity to the
owner of the Dunluce Castle on the ground that he had a remedy over against Mr. Burrell,
but they would have had a right, if he had already recovered something from Mr. Burrell, to
have that considered in settling what that indemnity should be; or, if he had not yet recovered
from Mr. Burrell, they would, on the principle laid down in Randal v. Cockran 35, have a
right to get what they could from Mr. Burrell in order to recoup themselves.
Mason v. Sainsbury 36 and Yates v. Whyte 37 were both cases of partial loss only. The right
of the underwriters could not arise in those cases by relation back to the passing of the
property at the time of the loss, for there was no such passing of the property. It could only
arise, and did only arise, from the fact that the underwriters had paid an indemnity, and so
were subrogated for the person whom they had indemnified in his personal rights from the
time of the payment of the indemnity.
In England, the action must be in the name of the shipowner, not of the underwriters. I think
this material, as shewing that it is the personal right of action of the shipowner, the benefit of
which is transferred to the underwriters. In other systems of jurisprudence, or it may be in our
own as altered hereafter, the assignee of such a right may be able to sue in his own name. The
important question will still remain: Is it a transfer of a right of action, which cannot be
transferred unless it already exists; or a fresh right created? The whole reasoning of the Court
below is applicable to the case of a total loss, and of a total loss only. It would not be
applicable to the case of a partial loss of 99 per cent. or even more. I think, however, the
reason of the law is not more applicable to those who have indemnified for a total loss than to
those who have indemnified for a partial one.
*294
I have only further to observe, that if the law had been that the owners of a ship were to be
treated as a quasi corporation, and so the owners of the Dunluce Castle had had a right of
action for damages against the owners of the Fitzmaurice, irrespectively of whether some or
the whole of the shareholders in the two quasi corporations were identical, the case would
have been quite different. But such is not the law; and the Legislature in the Acts now in
consideration did not intend to give any right of action for damages which did not exist
before, but only to limit the amount recoverable under the existing law.
I think that the question, whether the underwriters had or had not a defence against any action
on the policy of Mr. Burrell, does not arise, and I prefer to say nothing about it.
LORD GORDON:—
96
My Lords, this case is attended with some difficulty; but having given it that anxious
consideration to which the opinions of the very learned Judges in the Court of Session are so
well entitled, I have come to the opinion that the appeal must be sustained. I have had the
advantage of seeing and considering the opinions which have been delivered by your
Lordships, and I concur in that of your Lordship on the woolsack. It is unnecessary, therefore,
that I should detain your Lordships by any lengthened remarks.
The discussion arises with reference to a fund which is of limited amount, and beyond which
there is no liability against the person who has provided the fund, viz., the owner of the
Fitzmaurice, which was the vessel doing the injury to the Dunluce Castle, in respect of which
all the claims arise. There are several claimants on the fund, in particular the owners of the
cargo which was on board of the Dunluce Castle at the time she was injured, and the
underwriters on that vessel. The fund is insufficient for payment in full of all the claims, and
the owners of the cargo object, and are entitled to object, to the right of these underwriters to
rank on the fund. The peculiarity in the case is that the same person is the owner of both
ships—both the ship which was sunk and that which did the injury. If the ships had belonged
to different owners, I think there can be no doubt that in such a case as here *295 occurs,
viz., a case of a total loss, the underwriters would have been entitled, as in right of the owner
of the injured ship, to vindicate a claim of damages against the owner of the vessel which had
caused the damage, and to participate in the fund in medio which forms the measure of the
offending shipowner's liability under the Merchant Shipping Acts. But that is not the case
with which your Lordships have to deal; and you must consider the case on the facts as they
arise, viz., that the same person was the owner of both ships.
I think there is nothing peculiar to Scotch law in the case, the systems of both countries in
regard to marine insurance being the same, and the provisions of the Merchant Shipping Acts
applying equally to both.
The view which I take of the case is a very short one, and it is this: I think the case must be
looked at as if the owner of the Dunluce Castle had not been insured. His having effected
insurances was a very proper and prudent act, but he did it for his own benefit, and the
underwriters cannot complain that they have had to meet the risk against which they insured.
Now I think it is clear that if the owner of the Dunluce Castle had not been insured he could
have had no claim against himself as the owner of the Fitzmaurice, which caused the injury
to the Dunluce Castle. The injury to that ship was substantially caused by its own owner, and
he could not be liable to himself for the damage so caused. And if he could not be liable to
himself, he could not assign any right, either expressly or by implication of law, to any third
person, as he had none to convey. No doubt the rights of underwriters are well established,
and it is one of these that on payment of the risk as for a total loss they are entitled to all the
rights in the injured ship which belonged to its owner; but they are not entitled to more. And
if the owner of the Dunluce Castle had no right to sue the owner of the Fitzmaurice, neither
can the underwriters on the Dunluce Castle, whose rights were derived from the owner of that
vessel.
I therefore concur in the judgment which your Lordship on the woolsack proposes.