Illegality in Marine Insurance Law

Feng Wang

• Publisher: Informa Law from Routledge
• Year: 2016
• Print ISBN: 9781138655638
• eBook ISBN: 9781317222873
• Edition: 1
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

Illegality in Marine Insurance Law is the first book to deal specifically with illegality in the context of marine insurance law. Previously, this issue has only ever been partially covered within analysis and criticism of Section 41 of the Marine Insurance Act 1906 and warranties. However, Dr Wang Feng goes much further than this by considering its impact on the common law relevant to marine insurance in many jurisdictions worldwide.

The book addresses whether the existing law represents an accurate codification of the former authorities and whether Section 41 truly reflects existing legal principles. As well as this, the book examines how correctly to approach illegality within the context of marine insurance, considering the fundamental changes to the rule of breach of warranty introduced by the Insurance Act 2015.

Of interest to academic researchers and practitioners in common law and civil law jurisdictions, this book provides rigorous analysis of the illegality issue and a conceptual approach for various approaches to reform marine insurance law. It is a unique and comprehensive guide to illegality in marine insurance law.

Part 1
The Warranty of Legality in Marine Insurance Law

Chapter 1
Marine insurance law of warranty in general

As one of the oldest parts of English marine insurance law, the foundation of the basic principles of warranty can be traced back to the eighteenth century. ¹ After 300 years of development, the regime is mature, but also rigid. Since 2006, several consultation or issue papers have been published by the Law Commission in order to change this rigid and unfair regime of warranty law, or to abolish it. ² In order to understand the necessity of reform and the specificity of warranty of legality, this book begins with an introduction of general warranty rules in marine insurance law. This introduction addresses marine insurance law, which relates to general warranty and includes express warranty and implied warranty. This part also introduces warranties in marine insurance law in general, including the origin, classification of warranties, construction rules, and waiver of warranty. Relevant sections in the Marine Insurance Act 1906 are also introduced; however, only the sections that relate to section 41 are considered.

1.1 Warranties in contract law

A warranty is one of the oldest terms in marine insurance law and in contract law. Contractual terms were clarified into condition and warranty by the end of the nineteenth century. For example, in the Sale of Goods Act 1893, s 12(2)–(3), there are implied warranties that a buyer shall have and enjoy quiet possession of the goods, and the goods shall be free from any charge or encumbrance in favour of any third party. ³ It has been suggested that warranties in contract law have been misused. For example, in some cases they have been used as a condition, ⁴ and in other cases as a promise of understanding of the contract from one party to another. The reason for such chaos is that people want to define different types of warranties with a single concept, which is not possible.

In fact, aside from marine insurance law, which will be introduced later, warranties in general contract law that also embrace non-marine insurance contracts are described in Chitty on Contracts as “a term of the contract, the breach of which may give rise to a claim for damages but not a right to treat the contract as repudiated”. ⁵ The differences between warranty and condition in general contract law are whether the breach of a contractual term addresses the root of the contract and whether it affects the substance and foundation of the venture that the contract intends to carry out. ⁶

In a more recent case, Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd, ⁷ the court recognised another type of contract term, an “intermediate term”; a breach of this term entitles the injured party to select between terminating the contract and suing for damages. As a result of the judgment of this case, terms that will be viewed as a warranty have become rare. On the other hand, the word warranty does not necessarily imply warranty terms; it can also describe contractual terms, which are less important, as breaching them will not entitle the other party to terminate the contract. Furthermore, in circumstances where there is no warranty term in a contract, the injured party can also treat the breach of this condition as a breach of warranty and not repudiate the contract. Instead, the injured party will seek to benefit from the contract or sue for damage. This is known as suing on a “warranty ex post facto”. ⁸

1.2 Origin and development of warranties in insurance law and marine insurance law

This section addresses the difference between warranty and representation in the early development of warranty, and the difference between warranty in insurance and marine insurance law; there is no implied warranty in non-marine insurance law. In addition, this section focuses on the differences between warranty in contract law and warranty in marine insurance law. This section also explains how to create a warranty, namely express or implied. Warranty in marine insurance is similar to a condition precedent or a condition in contract law. As demonstrated above, the word warranty does not have a specific meaning in general contract law; it is simply a type of contract term. However, cases are not the same in insurance law and marine insurance law, and the meaning of the word “warranty” becomes increasingly meaningful.

The early development of warranty in marine insurance contracts can be traced back to policies that ancient Italian merchants drafted in the thirteenth century. The fundamental principle of warranty in insurance law was founded by a marine insurance case in England by Lord Mansfield. In De Hahn v Hartley, ⁹ there was a term of the policy that required 50 or more crew on board before sailing. However, the ship sailed with only 46 men on board. When the court was determining whether such a clause on the margin of the insurance policy could be seen as a warranty, Lord Mansfield held that the requirement of sailing the ship with a certain number of men on board was a warranty. He stated that: “a warranty in a policy of insurance is a condition or a contingency, and unless that is performed, there is no contract”. ¹⁰

In another identical case, Bean v Stupart, ¹¹ Lord Mansfield also concluded that a warranty is a condition on which a contract is based. This is not the case in warranty of legality, the rationale of which originates from a common law case, and the word “warranty” was not used in the first place. ¹² Other express warranties originate from these two mentioned cases with their fundamental nature. ¹³ Lord Mansfield also outlined the implied warranty of seaworthiness in Eden v Parkinson, ¹⁴ in which his Lordship stated: “By an implied warranty, every ship insured must be tight, staunch, and strong; but it is sufficient if she be so at the time of sailing. She may cease to be in 24 hours after departure, and yet the underwriter will continue liable”. ¹⁵

Along with the early judgments of Lord Mansfield on warranty in marine insurance law, numerous authorities on this issue prior to 1906 also outlined several fundamental principles. Sir Mackenzie Chalmers later codified all of these principles in the Marine Insurance Act 1906, ss 33 and 34. All types of marine insurance warranties share these features, whether it is an express warranty or an implied warranty. Therefore, by summarising these unique features of marine insurance warranty, it may be helpful for readers to understand the severe nature of implied warranty in current law.

The most fundamental rule is the strict compliance principle, which is codified in section 33(3) of the Marine Insurance Act 1906. As stated in s 33(3): “a warranty, as above defined, is a condition which must be exactly complied with”. ¹⁶ In addition, non-exact compliance is viewed as a breach of contract, unless such a breach occurs because of a change of circumstances that renders the warranty inapplicable to the circumstances of the contract, or when compliance with the warranty is rendered unlawful by a subsequent law. ¹⁷

As observed by academics the exact compliance principle is not unique in marine insurance law. ¹⁸ What makes this principle different from a similar principle in general contract law is the severe consequence of breach. ¹⁹ However, it does not seem that in order to evade such a severe consequence, the English courts will offer latitude for the strictness of compliance of a marine insurance warranty by applying the de minimis non curat lex rule. This is because applying this rule will be a violation of former authorities. According to the judgment in De Hahn v Hartley: “It is perfectly immaterial for what purpose a warranty is introduced, but, being inserted, the contract does not exist unless it be literally complied with”. ²⁰ Therefore, according to this statement, even though only one can of pork is short out of 1,000 cans of pork, which the assured is warrantied to carry, this will amount to a breach of warranty.

The second reason for not applying the de minimis rule is that such a rule can only be applied to a representation in general contract law and not to an express warranty in a marine insurance contract. This is because there is a difference between representation and express warranty. Lord Mansfield clarified this point in De Hahn v Hartley: “While a representation may be satisfied with a substantial and equitable compliance, a warranty requires a strict and literal fulfilment”. ²¹ The third reason is that, although in some cases there is a rejection of a literal compliance test, this is because of the construction of warranty by the court. ²² Therefore, even though the outcome may be similar, the rationales underlying these two tests are different.

The next rule is that no causal link is required between the breach of warranty and the loss that is suffered by the assured. In addition, it does not matter whether the breach is material to the risk or not. This is the principle that has received the most criticism since it was written. In addition to De Hahn v Hartley, another conclusive authority on this issue is the House of Lords case Thomson v Weems. In this case, the insurer issued life insurance to the assured. In the policy form there was a question about whether the assured was temperate, and whether the assured had always been strictly so. The assured answered this question positively and declared that this was the basis of the contract. In an action on the policy after the death of Mr Weems, House of Lords unanimously held that the declaration of Mr Weems was an express warranty. In addition, it is not of any importance whether the express warranty is material or not, as there is no requirement for a causal link between the loss and the breach of warranty. ²³

The reason for the existence of this principle is addressed by Lord Goff in The Good Luck: “If a promissory warranty is not complied with, the insurer is discharged from liability as from the date of the breach of warranty, for the simple reason that fulfilment of the warranty is a condition precedent to the liability of the insurer. This, moreover, reflects the fact that the rationale of warranties in insurance law is that the insurer only accepts the risk provided that the warranty is fulfilled. This is entirely understandable; and it follows that the immediate effect of a breach of promissory warranty is to discharge the insurer from liability as from the date of the breach”. ²⁴

This approach has been criticised on numerous occasions. As early as the 1980s, the English Law Commission began to notice that “it seemed quite wrong that an insurer should be entitled to demand strict compliance with a warranty which was immaterial to the r...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• CONTENTS
• Foreword
• Preface
• Table of cases
• Table of statutes
• INTRODUCTION
• Part 1 The warranty of legality in marine insurance law
• Part 2 Background to common law illegality
• Part 3 Common law rules in marine insurance: A necessary reform or a supplementary instrument?
• Bibliography
• Index