Examining Use of Warranties in Marine Insurance

'The term 'warranty' has been described as 'one of most ill used expressions in the legal dictionary'. There are several types of warranties in marine insurance ranging from express warranties to implied warranties that are divided to seaworthiness, legality of voyage non-deviation, neutrality, nationality, safety, legality. In this essay special importance will be given to the notion of seaworthiness and different aspects of it. It was often the case that warranties in marine insurance were considered to serve the insurer and damage the insured [2] , and because of this perception we will examine the relevant case law to shed a new light on the present situation. Even though the insured's status has improved in recent time, the results of our research show that it is not always the case.

2. Background

The use of warranties has originated in the UK law [3] . When discussing warranties we need to distinguish them from conditions. John F Wilson states "Condition is a basic term, warranty is minor. Breach can be compensated for by the award for damages." [4] Marine Insurance Act 1906 s. 33 defines warranty as a condition that needs to be abided, if not done so the insurer can be released from the responsibility from the day of the breach. Conditions are thought to be fundamental to the contract, warranties are not; therefore breach of condition automatically rescinds the contract but the breach of warranty does not. It makes the insurer liable for the cost happening before the breach and insured for damages occurring after the breach. Lord Diplock in Hong Kong Fir Shipping Co v Kawasaki [5] stated for the term to be condition it needs to comply with sections 12-15 of the Sale of Goods Act 1979. The Hong Kong Fir Shipping case is also notable case for the establishment of the innominate terms by Lord Diplock. Innominate terms notion examine the core of the contract; it is concentrated on the circumstances of the breach and not whether the term was a condition or warranty. This was scrutinized in Reardon Smith Line Ltd. v Hansen-Tangen [6] by the House of Lords as thought to be too limited in practice, even though innominate terms are well established in the Contract Law. Some examples of warranty clauses are: 'maintenance of vessel, size of bunkers, redelivery of vessel, vessel's speed'. [7] Breaches of warranties are allowed only if there is a change of circumstances to which the warranty is not applicable anymore or if the warranty deviates from the law. [8] We shall continue with express warranties moving on to implied warranties and finally to different aspects of seaworthiness.

3. Express and Implied Warranties

Express warranties are defined by the s.35 of the Marine Insurance Act 1906. They are expressly implied in the contract or written in the policy. General terms regarding the warranties are regulated by the s.33 of the MIA 1906. Implied terms on the other hand are not expressly stipulated but considered to be agreed upon. Express and implied warranties have the same status and both are equally binding. Marine Insurance Act 1906 contains implied terms of neutrality, nationality, and good safety, legality, legality of voyage, non deviation and seaworthiness. Summarization of the previously mentioned: the ship must remain in neutral character; the ship can not change the nationality while in risk. It must be in good safety and legality, the voyage needs to be legal. The ship should not deviate from the course, and it needs to be deemed as fit for voyage.

4. Seaworthiness

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'A ship is deemed to be seaworthy when she is reasonably fit in all respects to encounter the ordinary perils of the seas of the adventure insured' [10] The origins of the notion of seaworthiness have evolved to preserve the wide range of interests in marine insurance. It also serves to protect from possible perils and hazards at sea. Seaworthiness has many different aspects and views, i.e. we need to distinguish between 'statutory seaworthiness' and warranty type of seaworthiness. Breach of the statutory seaworthiness attracts criminal offence; breach of warranty seaworthiness does not [11] . Baris Soyer emphasizes that the absence of a universal definition creates confusion [12] . Moreover, he claims that the marine insurance and common law have different definition of seaworthiness but he claims that at the end the result is the same [13] ; an example of such a case we can find in The Firemen's Fund Case Insurance Co v Western Australian Insurance Co Ltd and Atlantic Insurance Co Ltd [14] . Soyer asserts that The Firemen's Fund Case serves as an example of two different definitions being in accordance and the way how they 'complete each other' [15] . However, these are still two different definitions and it is not easy to unify them in all cases. Moreover, the broadness of the definition results (with different interpretations) in taking different components into matter for e.i.. type of the ship as it was the case in Burges v Wickham [16] ; type of the cargo, where it departed from the first interpretation, etc. This situation defines seaworthiness as a relative term [17] . In Burges v Wickham [18] , a river steamer lost at sea was held to be seaworthy in the occurring circumstances. Insurers were notified of the state of the vessel, extra premium was paid. The insurers' claim of the ship being made for river and not sea journeys did not withstand as in those occurring circumstances the boat was held to be seaworthy as the insurer was notified the list of facts. In order to make the notion of seaworthiness approachable and clear we should clarify all aspects of it. Since we have different perception and interpretation of it in marine insurance and the common law, we believe that clarification is more than neccessary. It is not only that seaworthiness lacks a clear definition but it is often mixed with safety since there is a common oppinion that a seaworthy ship is a safe ship although these two terms belong to two different categories. A¢â‚¬A¦'The first of these categories deals with "seaworthiness" which, strictly speaking, should only concern matters impinging upon the ship's ability to encounter the ordinary perils of the sea. The second category is concerned with conditions onboard the ship that affect the health, safety and welfare of human lives. One could accurately conclude that" safe" and "seaworthy" are different concepts; while "seaworthy" is one part of a "safe" ship, it is not the only considerationA¢â‚¬A¦ [19] It is important to make a distinction between these two categories since different legal action (a civil versus a criminal action) is applied against a ship's owner.

5. Hague/Visby, Hamburg Rules and Rotterdam Convention

The standard for seaworthiness has been achieved through The Hague, Hague/Visby rules, Hamburg rules and in the USA Harter Act. However, different aspects give us different views and no permanent codification. The Hague, Hague/Visby and Hamburg rules insist on the burden of the proof being on the carrier; Art.5 (1) of the Hamburg rules equals Art.4, 2 (q) of the Hague Rules. When comparing Hague/Visby and Hamburg rules we can conclude they are not so different. However Hague/Visby ones have been far more criticized than the Hamburg Rules especially in relations to freight forwarders and contracting carriers as well as technological developments and EDI [20] . The work of the UN UNICTRAL and CMI have done the preliminary work for the new Convention; the Rotterdam Convention which should replace both Hague/Visby and Hamburg Rules. The Convention is open for signature since September 2009. The text of Rotterdam Rules 2009, even though thought to replace the Hague/Visby and Hamburg Rules, still does not have a complete and universal definition of seaworthiness. Example of such is addressed in Art. 14 (a) stating A¢â‚¬A¦The carrier is bound before, at the beginning of, and during the voyage of the sea to exercise the due diligence to: a) make and keep the ship seaworthyA¢â‚¬A¦ [21] The Rotterdam Rules Convention signed by twenty state parties so far should replace both Hague, Hague/Visby rules and Hamburg rules [22] . The question about seaworthiness arises in a manner that the clear definition of it was not given in the Convention. It was addressed only in Art 14. (a) mentioned above, and briefly in Art.17 (5) (a) (i) in regards with carrier's liability. If we deplete completely those two conventions we can only rely on case law and seaworthiness definition becomes relative the way it is. In Foley v Tabor [23] Eric CJ construed the following definition: 'A¢â‚¬A¦seaworthiness is a word which the import varies with the place, the voyage, the class of ship, or even the nature of the cargo'. Seaworthiness has already been defined in a very broad interpretation but not a clear definition has been given yet. It seems that we'll be able to rely on the relevant case law in the near future.

6. ISMC and STCW Codes

There are also implementations of ISMC and STCW documents in regulating shipping in general, developing from SOLAS Convention chapters IX and XI [24] . However, in regards with seaworthiness and ISMC it can be concluded that for example, even if the state of ohe ship is in accordance with the Code it does not make it automatically seaworthy because of possible concealed deficiency in the hull [25] . We can conclude that even if we abide all the rules we really do not have a hundred percent guarantee of seaworthiness. Even if we abide a set of rules, since there is no codification of laws on the term of seaworthiness, flaws can be easily found. It seems that we have to unify the definition in order to achieve the results. STCW code concentrates on the standard of the behaviour appropriate for the seafarers and personnel, and the lack of such compliance can render the ship unseaworthy, however, often the behaviour of the personnel can not be foreseen and predicted.

7. What deems the ship as unseaworthy?

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Referring to different views, the standard for seaworthiness is clearly stated in the Steel v Stateline [27] . It tells us that the ship needs to be fit for voyage in the beginning of the journey and to be able to withstand any of the usual perils at the sea. The ship needs to be seaworthy at the start of the journey, it needs to be fit to carry cargo, and it needs to have proper and trained crew. The Master must conserve the ship in the seaworthy state and repair if necessary [28] . In case of departing from the set standards the ship will be regarded as unseaworthy. In certain situations covered by s. 49 of the MIA 1906 of allowed deviations from the given route if so is deemed as necessary. Example of such is Scaramanga v Stamp [29] where it was held that the deviation to save a human life is allowed, however a deviation to save property is not. The burden of the proof lays on the insurer. In order to use the defence under 39(5) MIA 1906 stating A¢â‚¬A¦In a time policy there is no implied warranty that the ship shall be seaworthy at any stage of the adventure, but where, with the privity of the assured, the ship is sent to sea in an unseaworthy state, the insurer is not liable for any loss attributable to unseaworthinessA¢â‚¬A¦ The insurer must prove that such was the case and that the ship was unseaworthy at the beginning of the voyage in order to use the principle under 39 (5). Soyer states that the ship soon after starting the voyage becomes unusable if there is no destructive storm or act of violence. There is also a presumption that the ship was not seaworthy at the beginning of the voyage. [30] The burden of proof is therefore switched to the assured rather than the insurer to prove otherwise. [31]

8. Relevant case law

The Star sea The Star Sea [32] biggest 'trademark' is the duty of outmost good faith Art.17 MIA 1906. Moreover, that same case gives a good angle on seaworthiness and privity. We shall concentrate on the latter. The Star Sea cargo vessel got on fire which was started accidentally and was not successfully put down by the ship's master. The fire spread through the boat destroying it completely, making it a 'complete constructive loss'. [33] The notice that the ship will be abandoned was given to the insurers on the 12th but was not accepted as first. The insurers claimed that the vessel was unseaworthy because of the acts of the master of the boat. The court held that master's 'incompetence' in putting down the fire amounts to unseaworthiness as he was supposed to act as a form of an agent of the owner, the notion of privity. Three main points were considered in the Star Sea: unseaworthiness, causative loss and privity [34] . When it comes to causative loss it needs to be proven by the assured that the accident was covered under insured perils of the sea. Privity of the assured needs to be proven in order to use the defence of s.39 (5) of the MIA 1906 [35] . Privity of the contract theory in contract law states that only parties to the contract and no one else can enforce the contract [36] . In the Star Sea only losses dating back to the fire were covered by the insurer, any supplementary losses are not covered as in accordance with the different notion of warranties and conditions. If that same case was tried after the implementation of the ISM Code, the end result would probably be the same. Under International Safety Management ISM Code 2002 6 (1) it is stated that 'The Company should ensure that the master is properly qualified for command'. We can agree with security measures in the ISM Code but from different perspectives they can seem pretty harsh. Even, if for example, the background check is done, mistakes still happen. What would happen if the ship master did not disclose all of its history? Then we would be against someone who had no knowledge about a certain fact. It was stated in the Star Sea para. 26 A A A¢â‚¬A¦If the ship-owner deliberately refrains from examining the ship in order not to gain direct knowledge of what he has reason to believe is its unseaworthy state, he is privy to the ship putting to sea in that unseaworthy stateA¢â‚¬A¦ But, what would happen if the ship owner did not do it deliberately? Kassem in his doctoral thesis about The Legal Aspects of the Sea WorthinessA´ [37] made an interesting suggestion that the state of ship worthiness should be established prior to the voyage. The suggestion seems reasonable and by far useable. If case we could do it, we would avoid many complications regarding the seaworthiness. Most likely the system would be a slightly more complicated prior to the beginning of the voyage but it would save both the insurer and the carrier of possible complications in regards to it. Ship needs not only to be seaworthy for the voyage but also in accordance with the standard to carry the assigned goods Art.40 (2) MIA 1906. Making sure that everything is in accordance to the given standards prior to the voyage, it would make the notion of unseaworthiness and court implications less complicated. Issues referring to deviations and repairing of the ship during the voyage covered by the MIA 1906 could always appear, but a strict division could help us to separate those terms in an easy manner. Of course the insurer can rely on Art. 18 MIA 1906 and disclosure of all material facts and Art. 17 relating to the utmost good faith which would try to prove that the claim was made fraudulently. Fraudulent claims should, of course, be stopped but, sometimes it is hard to know which fact is material and which is not. Ship owner against the ship master would have possible remedies in torts in misrepresentation or fraud; however seaworthiness in general brings us to rather delicate and complicated situations. In Rio Tinto v Seed we have a bit of a positive light on the topic that the ship master's mistake must be of great importance to render a ship as unseaworthy. We also agree with Kaseem's notion of avoiding different detailed articles [38] to serve as a definition and we would recomand a more general development through ISM Code. This would provide us with more clear and understandable rules and situations. Even though the Rotterdam rules should serve to supplement both Hague, Hague/Visby and Hamburg rules, one of the burning issues of seaworthiness does not seem resolved in in these rules. We also need to establish, when considering seaworthiness, whether the policy was time policy where implied warranties do apply or whether it was a voyage policy such as the case of The "Marina Isis" [39] in the Singapore Court of the Appeal. Tug vessel was lost during the travelling between Japan and Singapore. It was held that there was no warranty of the route that the vessel should take, and the Court rendered it to be a time policy, not voyage policy, and accordingly it is not falling under s. 39 (1) and s.39 (5). Similar outcome was found in Malayan Motor & General Underwriter Re Ltd v MH Almoil 'The Al Jubail IV [40] . The Al Jubail was rendered to be a mixed policy under s. 25 of the MIA 1906. Lai J in Al Jubai p.640 stated that we must look at the policy as a whole and give the parties a chance to make a proper conclusion. It renders us to conclude that we have to take into consideration a whole range of different factors to get a relevant description of the seaworthiness. We would like to point out that a universal framework of the standards relevant for the seaworthiness should be given in advance as the type of policy before starting the journey. In the 'Implied warranty of seaworthiness' paper theory of Arnold was quoted from his book 'Law of Marine Insurance and Average' stating that it is not necessary for the insurers to list the number of possible perils that might occur because the cause of the problem is ambiguity, whether something is a seaworthy or not. It is always doubtful. [41] This theory was disregarded by the Court in the case of Popi M [42] as being a 'Sherlock Holmes' approach. We believe that this theory has its validity despite its minor inconsistencies, especially when the list of possible perils is not known to us. Of course there is a list of the usual perils that might occur, but there could always be exceptions not covered by the policies, that are automatically rendering the ship owner as liable just because they are not clearly stated. We would like to suggest that there is a need to make a universal seaworthiness description based on common standards, relevant both for common law and marine insurance and as such it would resolve many doubts. After all, we have two different formulas with fairly the same results, unification and strict formula, and it might just be a panacea for numerous cases of seaworthiness so far being resolved by the court. An example of Arnold's formula, if it were implemented, it could be considered as notable in the Marel [43] case. It was held there that the insured must not only prove that the ship was not in an unseaworthy state but also to prove that the damage that has happened was covered by the policy. It would be far easier, from the insured's point of view, to list the things in the contract of carriage that are not covered rather than the covered ones as unexpected situations can always occur. Seaworthiness can also occur in different stages of arriving and leaving from different ports as regulated by the s.39 (3) of the MIA 1906. The ship needs to be in fit state and comply with the given rules, and an example of such case is Thin v Richards [44] . A defect that would be temporary and could be repaired during the voyage would not fall under unseaworthiness as in McFadden v Blue Line [45] has been proven. Seaworthiness, as stated in the s.39 (1) of the MIA 1906, shows clearly that the ship needs to be in fit state when embarking on the voyage, but even though, there is a duty for seaworthiness when beginning the voyage and policy and contract need to be obliged with; the mere duty, it is not strictly defined as a continuing one. Hence, there isn't a strict set of rules to be abided; different complications are expected to arise. It is stated in the MIA 1906 s.39 (5) In a voyage policy there is an implied warranty that at the commencement of the voyage the ship shall be seaworthy for the purpose of the particular adventure insured If case we set up a strict formula to be complied with and render the seaworthiness an occurring process until the ship has arrived to the destination, we might get far better results. For example Arnold's formula of not listing the perils of the sea might be more successful if we would list what is not covered rather than that what is covered. Seaworthiness is a vast process with many possible implications arising because we have different formulas in common and marine insurance law and the rules are set up in different articles in Acts, Codes and Conventions. If the Rotterdam Convention, when thoroughly implemented, could give us a permanent and strict view, as it was meant to substitute Hague and Hamburg Rules, the situation would be vastly improved.

9. Conclusion

Shipping in the 21st century is considered as the most efficient method of transporting goods. It was amongst the first industries to adopt international safety standards. Seaworthiness is considered to play an important role in the development of marine insurance.

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