King v Brandywine Reinsurance Company

The Basic Facts

The lightering of the Exxon Valdez;

The skimming of oil from the surface of the water;

Booming off sensitive areas of shoreline (for example to protect fish hatcheries);

Burning of oil on the surface of the water;

Washing the shoreline, by cold water and subsequently warm water flushing, coupled with the skimming of oil washed off the shoreline into the sea;

Moving rocks/pebbles etc into the tidal zone to allow natural tidal flushing;

Bioremediation (whereby compounds are added to the environment to assist in the natural process in which bacteria and other micro organisms alter the organic molecules in oil into other substances such as fatty acids and carbon dioxide);

The cleaning up of animals, including otters and birds.

Claims were made against Exxon and ESC by both the United States of America (Federal Government) and the State of Alaska, in respect of the losses which they had suffered. These led to the payment of some US$900 million by Exxon, pursuant to an Agreement and Consent Decree, approved on 8 October 1991.

Sums were claimed from and paid by Exxon (about US$267 million) to commercial fishermen for lost income due to fish stock damages, to Alaska Natives for lost harvest foods, to seafood processors, seafood processor employees and some other organisations for lost income, and to private landowners for damage to their land as a result of oil fouling.

Proceedings were brought in the US District Court for the District of Alaska and in the State of Alaska Courts by some 30,000 plaintiffs (fishermen, processors, Alaska Natives, landowners and others). These proceedings were consolidated. After a jury trial in Alaska, the claimants were awarded US$287 million compensatory damages, and US$5 billion in punitive damages. After appeals and remands the District Court has recently reduced the punitive damages element to US$4.5 billion.

Section I provided property insurance. Its essence was the cover of loss or damage to the property of the insured. It provided US$600 million cover above US$410 million of aggregate deductibles. It was given a separate policy no. of “03-0364B-88” and gave rise to a separate premium.

Section IIIA provided coverage for an array of marine risks, including in particular third party liabilities of vessel owners and operators. It was placed in three layers, which together provided cover of US$250 million per occurrence above aggregate deductibles of US$210 million.

Section IIIB was placed in the same layers as Section IIIA, and also provided cover of US$250 million per occurrence above aggregate deductibles of US$210 million. It provided general third party liability coverage. Sections IIIA and IIIB had their own (joint) policy number, viz “03-0366B-88” and gave rise to their own separate premium.

Did the Underwriters of Section I of the GCE have and meet a liability to Exxon for the costs incurred under items (iv) to (vii) of paragraph 4 above? That question involves consideration of the language of Section I and in particular whether the words “Removal of Debris” cover Exxon for those costs. It further involves consideration of clauses known as the “Notwithstanding clauses” in Section I by virtue of which it is suggested by the defendants that if there was coverage under Section IIIA and IIIB, there would not be coverage under Section I. It also involves consideration of Article IX(3) of Section I which the defendants suggest is a free standing provision which excludes liability for such costs under Section I.

Did the Underwriters of Section I have and meet a liability to ESC? In this instance, although the judge was with the claimants on certain aspects, they face one difficulty on which the judge was against them, on which we have already indicated at the hearing we are against them. It was not ESC which made the settlement; thus the Underwriters under the GCE never met any liability of ESC.

Did the Underwriters of Section IIIB have and meet any liability to Exxon for the third party liabilities summarised in paragraph 5 above?

Does the seepage and pollution exclusion in certain of the reinsurance policies exclude liability for the costs and liabilities to third parties?

There is also a critical question as to proper law – English or New York?

The Judgment below in Summary

That, in accordance with the defendants’ case, the governing law of the GCE was English law. The Judge rejected the claimants’ submission that the GCE was governed by New York law (judgment paragraphs 33-66).

That, as a matter of English law, there was no cover under Section I of the GCE because, on its true construction, it did not cover pollution clean up costs (paragraphs 86-116).

That had the GCE been governed by New York law, Section I would have been construed as covering pollution clean up costs (judgment paragraph 257).

That neither under English nor New York law would cover for clean up costs have been excluded from Section I by reason of Clause IX(3) (judgment paragraphs 154-159), but subject to the Notwithstanding clauses.

That under English and New York law even if there would otherwise have been cover for clean up costs under Section I, there was no cover because of the provisions of the Notwithstanding clauses (judgment paragraphs 118-153; 258-259).

That the claimants cannot recover on the basis of ESC’s putative claim under Section I. The Judge found that there had been no settlement of ESC’s notional claim, and that as a result the claimants could not claim under the Outwards Reinsurances in respect of any liability to ESC (judgment paragraphs 160-203).

That as a matter of English law, there was no cover for clean up costs under Section IIIB of the GCE (judgment paragraphs 204-236).

That as a matter of New York law there would have been cover for clean up costs under Section IIIB of the GCE (judgment paragraphs 260-261).

That the seepage and pollution exclusion which appeared in most of the Outwards Retrocessions excluded liability on the part of the defendants to indemnify the claimants in respect of clean up costs, even if they were covered under the GCE (judgment paragraphs 237-248).

The question was to be determined by an application of English conflict of laws principles.

It was to be assumed that Sections I, IIIA and IIIB were presented by the placing brokers to the participants on both the London and Scandinavian markets as a single package and during a very short period of time.

Each side has accepted throughout that all three sections should be treated as governed by the same proper law.

Thus Mr Edelman submitted on the proper construction of the GCE under New York law, removal of debris included removal of the remains of oil. As to construction as a matter of English law (if it were relevant) he submitted that the same conclusion should be reached.

Evidence of New York Law

We should add that Mr Edelman suggested that as far as New York law was concerned the judge had made a finding of fact as to the proper construction of the policy and as to the approach of the New York court in particular as to its approach to the decision of the Court in Georgia in Lexington. He said that the judge had clearly on this aspect preferred the evidence of Mr Woods (the claimants’ expert) to Mr Kimball (expert for the defendants). So he argued the Court of Appeal should be slow to interfere with those findings of fact. We raised during the hearing the possibility that the Court of Appeal had on some previous occasion stated that foreign law was a rather special finding of fact. The authorities we had in mind are: Dalmia Dairy Industries [1978] 2 Lloyds Reps 223 at 286, and Bumper Development Corp [1991] 1 W.L.R. 1362 at1370 where the court of appeal on two occasions approved the statement of Cairns J in the Divisional Court in Parkasho v Singh [1968] P. 233 at 250. It is only necessary to cite the passage in Purchas LJ’s judgment in Bumper:-

“(3)

The Court of Appeal, whilst slow to interfere as in all cases where the decision involves findings of fact, may in appropriate cases be somewhat more ready to question the trial judge’s conclusions than in normal cases: see Parkasho v Singh [1968] P.233, per Cairns J. giving the leading judgment:

“We are asked by the appellant wife here to say that the decision was wrong; that the justices were wrong in their interpretation of the foreign law. The question of foreign law being a question of fact in our courts, must this court regard itself as bound by the findings of the justices on this matter? In my view the question of foreign law, although a question of fact, is a question of fact of a peculiar kind and the same considerations do not apply in considering whether and to what extent this court should interfere with the decision of the magistrates, as in the case of the ordinary questions of fact which come before a magistrates’ court. It is not, I think, inappropriate to bear in mind that under the provisions of section 102 of the Supreme Court of Judicature (Consolidation) Act, 1925, it is provided that an issue of foreign law in a case which is being tried by a jury is a question of fact for the judge and not the jury. And bearing that in mind, and bearing also in mind the provisions of rule 73(7) of the Matrimonial Causes Rules, 1957 (S.I. 1957 No. 619) which enable this court to draw any inference of fact which might have been drawn in the justices’ court, I think it is our duty in this case to examine the evidence of foreign law which was before the justices and to decide for ourselves whether that evidence justifies the conclusion to which they came.”

Later in his judgment Cairns J [1968] P.233, 250 referred to the speech of Lord Wright in Lazard Bros. & Co v Midland Bank Ltd [1933] AC 289, 298, where reference is made to the Sussex Peerage Case 1844) 11 Cl. & F. 85, 116, and then to the passage from the judgment of Lord Langdale MR in Earl Nelson v Lord Bridport, 9 Beav. 527,537 cited above.

The approach of the Divisional Court in Parkasho v Singh was approved in the Court of Appeal in Dalmia Dairy Industries Ltd v National Bank of Pakistan [1978] 2 Lloyd’s Rep. 223, 286, per Megaw LJ:-

“But a finding of fact on an issue of foreign law is a finding of fact of a very different character from the normal issue of fact: we would adopt as correct the observations of Cairns J (as he then was) in Parkasho v Singh [1986] P.233, 250 as to the position of an Appellate Court on a matter of this kind. An Appellate Court must not by uncritical acceptance of a trial judge’s conclusions of fact shirk its function of considering the evidence afresh and forming its own view of the cogency of the rival contentions, whilst of course always remembering that the trial judge had the undoubted initial advantage of having seen and heard the witnesses.””

We confirm that although foreign law is a question of fact, it is in our view rather different from other findings of fact. Indeed there is as it seems to us a special feature of a case such as the present. It is to be noted that in Antilles (supra) part of the headnote reads:-

“To extent that no New York precedent existed on issue of which of costs incurred by shipowner to remove chemical debris from damaged cargo tanks following shipboard explosion and to clean and repair tanks were chargeable to hull insurer, maritime nature of marine hull and machinery insurance policy dictated that federal district court anticipate that New York state courts would look to English law in view of special reasons for keeping in harmony with marine insurance laws of England, a great field of such business.”

This was a matter to which Mr Kimball in his report drew attention in paragraph 61. The New York court in other words would, particularly in the area of marine insurance, find decisions of the English court persuasive. We further suspect that although it may be possible to say that different courts in different states and indeed different courts in different parts of the world will enjoy different ranges of respect, most courts will ultimately be most influenced by the reasoning of “persuasive” decisions which attract it most. If the position is that under New York law the decision of an English court as a matter of English law on the terms of this policy would have some persuasive effect, it would seem unreal to ignore that decision in reaching a view as to what New York law would hold. It is perhaps also important to remember that the role of an expert, unless the court is concerned with special meanings, is to prove the rules of construction of the foreign law, and it is then for the court to interpret the contract in accordance with those rules. In other words the view of the expert as to the meaning which would be given to the word “debris” is not admissible evidence unless he is saying that it has a special meaning under New York law [see Dicey & Morris 13^th Edition 32-189]. That again points to the Court of Appeal being entitled to review a question of construction simply being guided by the rules of construction of the foreign law including that court’s attitude to persuasive authorities.

Notwithstanding clauses

Mr Edelman’s argument then turned to the Notwithstanding clauses. At the end of the day the proper construction of this clause is only relevant if Mr Edelman has succeeded in persuading the court that “removal of debris” in Section I would on the ordinary meaning of those words include the clean up costs, but he recognised as did Mr Butcher that the proper meaning to be given to these clauses, and indeed to other terms of the GCE in other Sections, could influence the proper construction of the words “removal of debris”.

The Notwithstanding clauses appear in two places in Section I – in Article IV (3) and at the end of Article VII. The wording is slightly different but nothing turns on that and we can quote from Article IV(3):-

“Notwithstanding anything else contained herein to the contrary there shall be no recovery hereon for liabilities as described under Assured Liability Policy(ies) (as more fully defined and as covered under Policy No. 03-0366-88 and HA127188) or for “Directors and Officers” and “Fidelity” coverage. However, in respect of liabilities as described under Assured Liability Policy(ies) (as more fully defined and as covered under Policy No. 03-0366-88) it is agreed subject to the deductible as defined in Article IV Paragraph 2 that losses up to a further $200,000,000 in the aggregate annually may contribute to exhaust this policy aggregate(s) hereon. Further, in respect of “Directors and Officers” and “Fidelity” coverage it is agreed subject to the deductible as defined in Article IV Paragraph 2 that losses up to a further $90,000,000 any one occurrence and in the aggregate in respect of “Directors & Officers” may contribute to exhaust this policy aggregate(s) deductible(s) hereon.”

Mr Edelman recognised that at first blush what the clause appeared to be saying was that if a liability was covered by either of the other two Sections of the GCE, Section IIIA or Section IIIB, then it was not covered by Section I. He further appreciated because of the different levels at which Sections IIIA and IIIB provided cover as compared with Section I, that, for the clause to have any meaning, it was contemplating “covered” in the sense of “to be found described in”, as opposed to covered in the sense that “payment would be received”. But he pointed out that if the clause was construed literally as above it would have certain unexpected consequences. In a forceful reply he emphasised the clearest example of that unexpected consequence which he had set out in his skeleton in the following terms:-

“76.

The extent to which it would be commercially illogical for the word “liabilities” in the Notwithstanding clause to be given the wide meaning preferred by the learned Judge (i.e. such as to include first party costs and expenses) is illustrated by Section IIIA, Article 1(a)(ii). That Article provides, so far as is relevant:

“It is further agreed that this insurance is extended to also cover any loss sustained by the Insured or indemnify or pay on behalf of the Insured any sum or sums which the Insured may be obliged to pay or agrees to pay or incurs as expenses, on account of Removal of Debris or Wreck of vessels and/or craft as per schedule contained in Endorsement No.1 even if incurred solely as the result of governmental or other authoritative order.”

77.

Article 1(a)(ii) thus expressly contemplates cover for first party expenses incurred in the removal of debris. The Article applies to the long list of vessels which appear under the heading “Vessels not entered in ITIA” on page 69 of the Policy. It may be seen from Section I, Article 8(1)(d), on page 21 of the Policy, that the same cover is extended to all of Exxon’s vessels, including Exxon’s oil tankers. If the learned Judge’s conclusion were right, the cover which was given in this way by the Policy would immediately be withdrawn in respect of non-ITIA vessels by reason of the Notwithstanding clause; the costs and expenses would be recoverable only under Section IIIA, and for that reason would, given the Notwithstanding clause, be irrecoverable under Section I. It would, on the learned Judge’s approach, mean that if the liabilities covered by Section IIIA arising from the incident were such as themselves to exhaust cover under Section IIIA, the additional first party loss would not be recoverable at all, despite the clear effect of the insuring clauses in Section I. This cannot have been how the parties intended the Notwithstanding clauses to operate.”

In his skeleton he also deals with another unexpected consequence. It is accepted that ESC has no claim under Section IIIA for clean up costs by virtue of the ITIA exclusion clause. Exxon however does have such a claim as is now admitted. So, Mr Edelman’s argument runs, it would be surprising if as a result of ESC having no claim under Section IIIA, it thereby had a claim under Section I, whereas Exxon because it had a claim up to $250 million under Section IIIA did not have the claim for the further losses under Section I. So, Mr Edelman argued, if the words “removal of debris” did include the clean up of oil pollution when used in Section I, and if therefore it had been intended to grant that cover at the level at which Section I operated, i.e. in excess of £400 million, it would be an unexpected result for that same cover to be removed simply because the cover can be found described in Section IIIA.

Mr Edelman had various arguments by which he suggested the unexpected consequences could be avoided. First he argued that in fact the clause was concerned only to ensure that such liability cover as there might be under Section I (e.g. Collision Cover as per American Institute Hull Clauses – see Article V11(5)) was not provided under Section I if it was covered by Sections IIIA and IIIB. Second he argued that if that were not right, then the clause was only concerned with “liabilities” covered by Sections IIIA and B. He drew attention to the language:-

“… there shall be no recovery hereon for liabilities as described under the Assureds Liabilities Policies (as more fully defined and as covered under Policy Numbers 8KM52362 and 03-0366-88 as applicable) or for ‘Directors and Officers’ and ‘Fidelity’ coverage (form to be advised).”

As regards Section IIIA he argued (a) clean up costs were not covered by Section IIIA at all; or (b) if they were, they were not paid pursuant to a liability. On (a) the argument was that Exxon simply incurred the costs because they thought they ought to and not because they were under any liability to third parties. On (b) the argument was first that it was ESC who were a under a statutory liability under the law of Alaska and not Exxon; alternatively Exxon had to rely on the sue and labour provision. On that Mr Edelman had two points: first, the general condition 10 providing cover for sue and labour in Section IIIA referred to safeguarding and recovering “property insured” and seemed inapplicable to suing and labouring to mitigate liabilities. He had to accept however that a broader construction could be given to clause 2(g) “Basis of Recovery”. His second point was that such a provision simply provided a basis for recovering such costs, and did not affect the question whether the insurers were under a liability. He submitted that although there may have been a threat of being made liable, that was not as a matter of either English law or New York law sufficient to constitute a “liability”. As regards English law his submission was that Clauses 2(e) and (g) did not confer or extend cover but simply made provision for the basis of recovery. The reference to “liability” in clause 2(e) must be to liability in the sense in which the word is used in Post Office v Norwich Union Fire Insurance Society [1967] 1 Lloyd’s Rep. 216; Bradley v Eagle Star Insurance Co.Ltd [1989] 1 Lloyd’s Rep. 465, i.e. a liability to a third party which has been established by a judgment, settlement or award. It cannot mean the costs of mitigating a liability. He further submitted that the position as a matter of English law is clear and settled as a result of the decision of the Court of Appeal in Yorkshire Water v Sun Alliance [1997] 2 Lloyds Rep 21. The Court of Appeal in Yorkshire Water considered and rejected the relevance of the “imminent peril” cases. The imminent peril line of cases was not considered to be of relevance to cover under a liability policy. The Court of Appeal also held that the costs of avoiding or minimising a liability were not recoverable under a liability policy, absent express provision permitting such a recovery. Exxon' clean-up costs cannot therefore, he submitted, be characterised as a liability under Section IIIA.

As regards New York Law he referred to the following authorities. Kutsher’s Country Club Corp. v Lincoln Insurance Company 119 Misc. 2d 889, 465 NYS 2d 136 [C1/119.242-119.246]:

He emphasised in relation to each of the above points that Mr Kimball the expert called by the respondents agreed with the propositions. He further submitted that there is no New York authority for the proposition that, under New York law, there is coverage under a liability policy for expenses incurred in response to a governmental order to clean up.

Under Section IIIB the argument was slightly different in that there was damage to property but Mr Edelman argued again that a recovery pursuant to the sue and labour provision was not on the basis of a “liability”. The clause was simply a provision, which provided a basis for recovery of costs incurred in suing and labouring.

Mr Edelman’s arguments were on any view complex and in many respects legalistic and in attempting to summarise them we are sure that we have not done them full justice, but (and this seems to us to be the important point) they all started from the premise that it was necessary to be so legalistic because “removal of debris” in Section I did include clean up of an oil spill. If they did, then it was his argument that the Notwithstanding clauses should not be a bar. We accept that if “removal of debris” was intended to cover oil spill clean up costs, a court would examine very carefully whether cover expressly provided had then by some other provision been excluded. It was in this context that Mr Edelman was critical of the judge in his consideration of the Notwithstanding clauses which the judge held would have excluded liability as a matter of New York law even if as a matter of New York law "removal of debris" did include clean up costs. He went to the authorities dealing with the New York court’s attitude to exclusion clauses. Under New York law, he submitted that the courts would consider the clause to be exclusionary in effect (i.e. seeking to exclude or cut down cover expressly otherwise granted). In those circumstances the courts would require there to be clear and unmistakeable language before concluding that the clause prevented Exxon from making recovery for its first party loss under Section I: Seaboard Surety Co. v Gillette Co. 64 NY 2d 304, 311; 486 NY 2d 873, 876. Both experts agreed that the above represented a correct statement of the law of New York, although Mr Kimball suggested that the rationale for the rule was that a policy would be construed against the insurer who drafted it.

Whether one applies the New York cases or an English law approach, it would clearly be a powerful argument that where cover is expressly provided under the cover section, the court should lean against excluding that cover by reference to an exclusion clause, and if in this instance it was expressly provided that clean up costs should be covered by Section I, it would be fair as we understand New York law and English law, both of which would have regard to the substance rather than labels, to describe the Notwithstanding clauses as exclusion clauses. Mr Kimball’s evidence was that the New York court would say that this is “the sort of situation the parties have agreed where to allocate risks under the policy. They would not view it as an exclusion.” That line of reasoning assists to support the view that it was not intended that the words “removal of debris” would provide cover for clean up costs, but the premise for all these arguments is that “removal of debris” does expressly provide cover for clean up costs, and in that context the taking away of cover expressly provided would seem in substance to be an exclusion clause.

The fundamental question comes back in our view to whether “removal of debris” was providing cover for clean up costs of an oil spill, and in this context it is relevant to note that no part of Mr Edelman’s argument actually added any pointer to “removal of debris” being intended to cover an oil spill.

Article IX (3)

This provision in Section I provided an exclusion in the following terms:-

“This policy does not cover:- . . .3. Loss of or damage to property, liability for which is imposed upon the insured by Law, other than such property as may be included under the terms of this policy.”

If “removal of debris” included clean up costs the judge was in Mr Edelman’s favour that this exclusion would not have applied so as to exclude liability. The judge phrased his conclusion in the following terms.

“Section I is expressly confined to first party losses due to loss of or damage to the insured’s property. It is not concerned with liability for damage to third parties caused by the loss of or damage to their property. The contractual function of Article IX.3 is obviously to insulate cover under Section I from liability to third parties in respect of property now owned by the Insured. However, Section I cover includes the expense of removing debris of the insured property. Clearly that debris may have come to rest on the property of third parties. For example, damaged drums of noxious chemicals may have been deposited in private harbours or on private beaches as a result of insured perils in circumstances where the cargo owners are obliged by law to remove them or to pay for the owners of the endangered property to do so. In other words, damage or the threat of damage to a third party’s property is an inherent risk associated with the dissemination of debris. For this reason it cannot have been the intended effect of the Article IX.3 exclusion that debris removal expenses under Articles VII.4(b) and VIII.2(b) would be confined to removal the need for which was not occasioned by damage or the threat of damage to third parties’ property if the debris were not removed.

In my judgment, therefore, the exclusion would not operate to prevent recovery of clean-up costs if the words of Article VIII.2(b) covered oil pollution clean-up.”

Mr Edelman relied on this reasoning as supporting his argument that “removal of debris” did include clean up costs. It does he submitted support the construction of the policy which enables the insured to “remove debris” so as to avoid liability to third parties.

That is not contested by Mr Butcher. But Mr Edelman wished to take it a stage further and suggest that it did not exclude the remedying of damage to property caused by an oil spill. Once again Mr Edelman’s arguments do not add any pointer to the meaning of the words “removal of debris”. His argument is simply that if “removal of debris” includes clean up costs then it would be possible to construe Article IX(3) as the judge did, so as not to nullify the cover given.

Mr Butcher’s submissions

He approached construction first from an English law prospective although his ultimate submission was that since the approach to construction of the two systems of law was not in reality very different, it mattered not which law was applied. He began by stressing the serious nature of the risk involved with oil pollution and the enormous costs of the clean up. He questioned whether it would be likely that such a risk would be covered by the three words “removal of debris” in a sub-clause of a policy concerned with the insurance of property. He questioned whether it was likely that there was being added to the cover for the value of the oil (some $2 million) a liability for costs of the clean up of $600 million. He pointed out that the most obvious candidates for where removal of debris might become important would be the oil rigs and in their case so far as removal of debris was concerned caps were placed on the sums recoverable by Article VIII(1)(f).

“Major North Sea Platforms as scheduled in Endorsement No.5 are subject to sub-limit for Removal of Debris $255,000,000 (100%) each unit except ODIN which $131,000,000, STATFJORD A which $430,000,000 and STATFJORD B and C which $151,000,000 (10%).”

Was it, he asked rhetorically, likely that unlimited cover over and above that recoverable under the ITIA rules up to $600 million would be granted for clean up costs? He pointed out that Mr Edelman did not seem to be pursuing the argument made before the judge that in some way the extent of the cover was such that it could be inferred that the parties must have intended pollution to be included.

He then took us to what he submitted was important background as summarised in his skeleton in the following terms:

“As the Judge was aware, and was shown, the GCE, its terminology, and its treatment of pollution cover, were not made in a vacuum. In particular, the contract was made against a background in which oil pollution was a particular, recognised problem, and oil clean up costs were the subject of specific and explicit treatment in international agreements and insurance arrangements.

(i)

Thus, it has been recognised, at least since the Torrey Canyon disaster in 1967, that oil spills from ocean going tankers give rise to unique problems by reason of the widespread pollution which they can cause, potentially affecting vast areas, large quantities of wildlife, and causing disruption to many communities.

(ii)

As a result there have been international treaties and a great deal of national legislation which deals with responsibility for oil pollution.

(iii)

In particular, there has been the 1969 International Convention on Civil Liability for Oil Pollution Damage, made at Brussels, and implemented in the UK by the Merchant Shipping (Oil Pollution) Act 1971; and the 1971 International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage. Each of these refers to “Pollution Damage”, and defines this as “loss or damage caused outside the ship carrying oil by contamination resulting from the escape or discharge of oil from the ship … and includes the costs of preventive measures and further loss or damage caused by preventive measures”.

(iv)

This national and international legislation has been supplemented by action taken by the major tanker owners (including Exxon), in agreeing TOVALOP. As already indicated, under TOVALOP Participating Owners assume liability for “Pollution Damage caused by oil which has escaped or which has been discharged from a Tanker, and the cost of Threat Removal Measures taken as a result of the Incident. “Pollution Damage” means “loss or damage caused outside the Tanker by contamination resulting from the escape or discharge of oil from the Tanker … and includes the costs of Preventive Measures, wherever taken …”; and “Preventive Measures” means “any reasonable measures taken by any Person after an incident has occurred to prevent or minimise Pollution Damage”.

(v)

The raison d’etre of ITIA was to deal with the insurance implications of liability for oil pollution. In particular, ITIA insured against the obligations assumed under TOVALOP, including liability for the costs of Preventive Measures (see ITIA coverage quoted in paragraph 98 of the judgment [Core 133]).

(vi)

In addition to TOVALOP, oil companies (commencing in 1971) agreed CRISTAL, the Contract Regarding a Supplement to Tanker Liability for Oil Pollution. It provided supplemental compensation to persons who had sustained “Pollution Damage”. “Pollution Damage” includes both “physical loss or damage caused outside the Tanker by contamination resulting from the escape or discharge of Oil from the Tanker” and costs incurred in taking measures “to restore or replace natural resources”.

(vii)

Exxon, as the largest oil company in the world, was obviously well aware of all these matters, and intimately involved in them. It was a member of TOVALOP. Its tankers, including the Exxon Valdez, were entered in ITIA. Exxon was a member of CRISTAL. Within the Exxon organisation, the issue of oil pollution was, unsurprisingly, so-called, and characterised in the same way as in these various international conventions and agreements. To demonstrate this one need look no further than the terms of Article 15 of the Contract of Affreightment between Exxon Corp and ESC which regulated the very carriage during which the Exxon Valdez grounded.”

This is a background in which oil pollution was recognised as a particular problem, was so-called, and was the subject of elaborate national and international arrangements applicable to it. It is against this background that, he submitted, it is to be considered whether the parties intended, by the simple reference to “removal of debris or wreck of property and/or residual structure” to make any provision for the consequences of oil pollution and the notoriously difficult, complicated and expensive processes which may be involved in the clean up of an oil spill.

He referred us to the contract of affreightment in this case, and how it deals with “pollution damage” [Bundle Q1 page 1173 and onwards].

He referred us to the various dictionary definitions.

All he said favoured the view that debris meant bits of some larger solid which had broken into fragments. What, he submitted, was alighted on by Mr Edelman was the one definition (b) which contained the word “destroyed”. But he submitted it was illegitimate to argue because one definition contained the word destroyed, and because the oil in this case was destroyed therefore the destroyed oil was debris. In any event he submitted that the evidence was that the oil was not “destroyed”.

He then referred to those parts of the GCE policy itself which he submitted indicated that if oil pollution was being referred to the language was not simply “removal of debris”. The position is summarised in his skeleton in the following terms:-

“If one looks at the overall structure of the GCE, it is impossible to resist the conclusion that issues of oil pollution and its containment/mitigation/clean up were intended to be dealt with in Section III and not in Section I. Thus:

(i)

Section IIIA covers P&I risks. It has a specific exception in relation to ITIA-entered vessels. That is because, in relation to those vessels, potential liabilities will include oil pollution liabilities (under TOVALOP or international legislation), which were insured by ITIA, the specialist pollution P&I club. Accordingly, the GCE (by Section IIIA Interest and Coverage Provision 1(a)(iv)) provided:

“In respect of any vessel insured under this Policy which is a tanker as defined by the Rules of the International Tanker Indemnity Association Limited (hereafter ITIA) prevailing at the time of the loss, this insurance does not insure against:-

Any liabilities, costs and expenses which are insured by the Indemnity Provisions of the ITIA Rules prevailing at the time of the loss, nor for any amount in excess of ITIA limits…”

(ii)

Charterers’ liability for oil pollution is the subject of the express provisions at Section IIIA, 1(c).

(iii)

References to, and the relationship with, ITIA cover run through the whole of Section IIIA (see 1(a)(iv), 1(c), 1(e), 1(h)).

(iv)

The issue of coverage for pollution emanating from onshore facilities is dealt with in Section IIIB. Again, there is clear provision, in the form of Endorsements 2 and 2A. This cover plainly embraces clean up costs.”

It is right to say in this context that Mr Edelman in his skeleton relied on certain provisions in Section I as establishing that “pollution” was covered by that Section. Thus:-

“INSTITUTE POLLUTION HAZARD CLAUSE:

Subject to the terms and conditions of this Policy, this insurance covers loss of, or damage to the interests insured directly caused by any governmental authority acting under the powers vested in them to prevent or mitigate a pollution hazard, or threat thereof, resulting directly from damage to the interests insured for which the Underwriters are liable under this Policy, provided such act of governmental authority has not resulted from want of due diligence by the Assured, the Owners, or Managers of the interests insured or any of them to prevent or mitigate such hazard or threat …”

Mr Butcher submitted that in reality they too demonstrate that where pollution is contemplated it is described as pollution.

Mr Butcher further submitted that if one examined what clean up of oil pollution involved as described in paragraph 4(iv) to (vii) above the word removal was simply inappropriate – words such as “containing, neutralising, cleaning up” would be the expected language.

In answer to the point that in Article VIII 2(b) the main cargoes were oil, and a debris removal provision was repeated in that clause, he pointed out that solid cargoes were carried, and that the answer to Mr Edelman’s point as to why there should be differentiation between liquid cargo and solid cargo was simply the extent of the risk.

He argued that the structure of the GCE was to deal with pollution under Section IIIA. He ultimately accepted that he could not argue as had been argued in the Texas proceedings that it was the rules of the ITIA which covered oil pollution, and that by virtue of the ITIA exclusion the result was that oil pollution was excluded altogether from the GCE. He accepted that Exxon could recover for oil pollution under Section IIIA on the basis that the ITIA exclusion did not apply to them as Cargo owners, but he argued that the fact that it had been right to hold that the words of Section IIIA covered oil pollution and right to hold that the words of the ITIA exclusion had not succeeded in excluding that liability altogether, gave no support to the notion that oil pollution was intended to be covered by Section I.

He submitted that the judge was right to ignore the United States authorities when considering the question of construction from an English law stand point, but in any event he submitted that in reality the approach to construction of the New York court and the English court would not be very different and that the judge was in any event wrong in concluding that, as a matter of New York law, Section I would be construed so as to cover clean up of pollution.

He took us to the agreed joint statement of the experts on New York law which, so far as material, provided that:-

It was common ground between the experts that if extrinsic evidence was admissible, any evidence which throws light on the parties’ intentions, including evidence of their subjective intentions, can be admitted. The experts also agreed that if this extrinsic evidence did not resolve the question, a New York court would apply a construction, contra proferentem, against the drafter.

He submitted that the judge was wrong, when he came to consider construction as a matter of New York law, to think that some assistance could be gained from Lexington. It, he submitted, was not a case involving marine insurance. It did not involve an insurance with different sections of cover for first party damage and liabilities. It involved a construction against the insurer as the supplier of the wording. It is quite plain that the Georgia court was not addressed with the same arguments as have been advanced by the Defendant in this case. It was in any event a very thinly and questionably reasoned decision, which invented a definition of “debris” different from normal usage.

He referred us as had Mr Edelman to Bell Power Systems v Hartford Fire Insurance Co, and to the fact that the Superior Court of Connecticut clearly had difficulty with the definition of debris and the reasoning of the Georgia court in Lexington.

He also referred us to Compass v Cravens Dargan 748 P. 2d 724, a decision of the Supreme Court of Wyoming. In that case it was found that the costs of clean up of neighbouring property damaged by an oil leak were the responsibility of liability insurers and not property insurers (notwithstanding that the property insurance included a “removal of debris” provision).

On any view he submitted the reliance by the judge and the claimants on Antilles, which was simply a case in which the word debris had been used in a judgment to refer to the remains of a liquid chemical which had solidified and in its solidified state been dug out of the hold of a ship, was quite misplaced.

Mr Butcher also submitted that the judge having found as a matter of English law that the words “removal of debris” did not cover oil pollution clean up costs, it was illogical to find the parties’ presumed intention different as a matter of New York law, or at the very least he submitted he should have found as a matter of New York law that the phrase was ambiguous. On this basis the New York court would have examined the extrinsic evidence. That evidence was summarised in paragraphs 128 to 134 of Mr Butcher’s skeleton, and was unchallenged. Those paragraphs read:-

“128.

In the first place, the underwriters gave evidence (on behalf of some of the Claimant Syndicates, among others) which indicated that it had not been their intention to afford cover for oil clean up costs under Section I.

(i)

The leading underwriter, Richard Youell, who had enormous experience of the market, said “… one thing removal of debris is not, is pollution. Pollution is something quite different and quite separate.”

(ii)

Mr Youell’s assistant, Christopher Compton-Rickett, who took much of the responsibility for the underwriting of the property cover under Section I of the GCE, gave evidence as follows:

“Q. So removal of crude oil that’s floating on the water would not be covered under removal of debris?

A. Oh, no. Not at all. That’s clean-up and removal of pollution.

Q. What about removal of crude oil from – that washes ashore?

A.

That’s the same thing… Crude oil and other substances that pollute do not form the proper subject for removal of debris coverage, and always would be the subject of any pollution.

Article IX.3

He dealt next with the exclusion under Article IX .3. He submitted this supported the argument that it was not intended to cover by Section I damage to third party property. He submitted that clean up was concerned with remedying damage to third party property and the exclusion thus supported the construction that “removal of debris” did not encompass clean up costs.

Notwithstanding clauses

He relied on the dictum of Potter LJ in Commercial Union Assurance Co plc v NRG Victory Reinsurance Ltd [1998] 2 Lloyd’s Rep 600 at 603 where he said (and Lord Woolf MR and May LJ agreed with his judgment):

“It is common ground that the specified policy numbers … were a reference to section 3 of the GCE policy itself. Thus, on the face of it at least, the policy intended that losses sustained which might otherwise fall within the wording of section 1, but which were recoverable under section 3, should not also be recoverable under section 1.”

He suggested that the natural reading of the clause was that if a risk was covered by Section IIIA or IIIB, the Sections covering “liability risks”, then they were not to be covered by Section I. He submitted the judge was right in his view that it was intended that there should not be an overlap between the different Sections. Although the Sections covered different levels, and were not shoulder to shoulder, there was an area of cover i.e.$50 million where, if recovery could be made under Section I and Section IIIA, the result would be an entitlement to recover under both Sections and that was an unlikely intention. The intention was that there should be a clear distinction between “property” cover under Section I and “liability cover “ under Sections IIIA and IIIB, with the Notwithstanding clauses in the property cover providing primacy to the liability covers.

Mr Butcher recognised that even if removal of debris meant debris from a solid object such as a vessel or solid cargo, it was possible to think of examples where prima facie there could be recovery under Section I which on the wording of the Notwithstanding clauses might become irrecoverable because of coverage under Section IIIA, but his submission was that to extrapolate from such examples was to allow the tail to wag the dog. In any event it leant no support for removal of debris having the wider meaning covering oil pollution.

He in any event suggested that as matter of English law the authorities relied on by Mr Edelman Post Office Norwich Union; Bradley v Eagle Star; and Yorkshire Water v Sun Alliance did not demonstrate that where as here Exxon were actually remedying the damage, the insurers would not be liable. He further suggested that, if New York law was the appropriate law, the US authorities were clear that potential liability could equal liability. New York law he submitted considered “liability” in this context to be simply “amenability or responsibility”; it “expresses some form of obligation and when applied to contracts refers to legal responsibility” (Eberhard v Aetna Insurance Co. 134 Misc 386; 235 NYS 445 at 388, 448). He submitted that the New York authorities relied on by Mr Edelman were cases where there was a liability as a result of a government order, but that they laid down no rule that there had to be such liability. Indeed Aetna was to the contrary.

Judge’s judgment

He approached construction of Section I initially by reference to English law having held that to be the proper law of the policy. He reasoned on that basis as follows: (1) “debris” is not a word which normally comprehends liquids (para 88);(2) he rejected Mr Edelman’s reliance on the extent of the cover pointing to the inclusion of removal of “liquid cargo” (90 to 95);(3) he relied on the terms of Sections I and IIIA and IIIB which he set out and to which Mr Butcher has again drawn attention and concluded that the “policies treat removal of debris and liability for pollution as two distinct areas of cover”; (4) he considered the commercial environment or contractual matrix which he summarised in this way from paragraph 109 to 115:-

“109 The leading underwriters, Mr Youell and the underwriter directly concerned, Mr Christopher Compton-Rickett, of the Jansen Green Syndicate, Exxon Insurance Corporation, which was part of the Exxon group responsible for effecting Exxon’s insurances in general and this policy in particular, and the London placing brokers, Bowrings, in particular Mr Fortescue, Mr Mead and Mr Tyndall, were none of them strangers to Exxon’s global insurance cover or to insurance against pollution risks.

“110.

This court has not heard oral evidence on market background or commercial matrix but it has had the benefit of transcripts of deposition evidence given in the Texas proceedings by a number of witnesses from the parties concerned with the placing. Hearsay notices were served in respect of passages from those transcripts and were not objected to save on the grounds of admissibility. Most of that evidence is not admissible because it is evidence of negotiations or the subjective understanding or intention of those concerned or of personal opinions after the event, but several of those involved were extremely experienced in the insurance industry and in particular in the insurance of oil producers and tanker operators and the evidence which they gave of their experience of the insurance industry background clearly is relevant to the issues of construction under Section I.”

111.

Mr Anthony Fortescue, Chairman of Bowring Marine Ltd said that in his 30 years experience of the marine insurance market he had never heard anyone suggest that pollution cleaning up expenses were encompassed within the term “removal of debris”.

112.

Mr Roger Tyndall another very experienced broker at Bowrings who had been responsible for placing the 1988/89 policy for Exxon had not been instructed to obtain any form of pollution cover under the property damage policy.

113.

Mr Kettel had many years experience in the energy industry, including 16 years at Atlantic Richfield and 9 years at Chevron, in both corporations responsible exclusively for insurance matters. He had for 18 years been a member of the Oil Insurance Group consisting of about 15 insurance managers from the major energy companies, including Exxon, who regularly met to discuss insurance problems. He was also a board member of ITIA – the International Tanker Insurance Association, from 1975 to 1994. In an affidavit which he swore for the purposes of the Texas proceedings he stated that after the grounding of the Torrey Canyon in 1967, which was the first major oil spill, giving rise to a major coastal pollution problem, it became apparent that the energy industry required as much insurance for tanker pollution as the market had the capacity to cover. From the outset, because of the objective of maximizing market capacity, it was essential that insurers should be able to identify clearly the sources of their exposure to pollution risks. Consequently it became the practice in the marine insurance market to cover tanker pollution costs, liabilities and expenses through specialized policies that expressly addressed the pollution risk. ITIA was set up as a P&I Club specializing in pollution cover. It was in turn reinsured on the London market by virtue of its membership of the International Group of P&I Clubs which was protected by reinsurance in respect of pollution risks, led by the Janson Green Syndicate. Thus ITIA’s ability to provide pollution cover was limited by the extent of the reinsurance cover obtained by it from the London reinsurers. By 1989 that limit was $400 million. In the 1980s some insurers offered tanker pollution cover above the limits offered by ITIA but such insurance policies always specifically identified tanker pollution as the risk. By 1989 it was possible to purchase on the outside marine market for a very substantial premium up to $200 million cover in excess of the $400 million available from ITIA but there was not sufficient market capacity to purchase as much as $600 million pollution clean up cover in excess of the ITIA cover.

114.

It is true that Mr Kettel’s evidence was in one sense adduced as a market expert and that, although it was the subject of a hearsay notice, there was no order of this court permitting the calling of expert evidence other than that of New York Law and Alaskan Law. Nevertheless, that which I have summarised was not opinion evidence. Rather it was evidence of the state of the energy insurance industry in the years leading up to the time when this GCE policy was entered into. Most of this evidence is well known to the judges of this court by reason of that specialist background which is one of the main reasons why those involved in international commerce are so willing to refer their disputes to its jurisdiction. To ignore this historical background merely because it had not formally been the subject of a previous court order would therefore be quite unrealistic.

115.

Having regard to the structural and linguistic features of the GCE Policy to which I have already referred and to the commercial background against which the risk was placed, including in particular the limited availability of market reinsurance cover for primary pollution clean-up risks, I have come to the firm conclusion that paragraph 4(b) of Article VII of Section I is not, on its proper construction to be understood as including the cost of clean-up of oil pollution. The provisions of Article VIII, paragraph 2 - "Cargo and Stock" - contain nothing which is to be construed as expanding the meaning of Article VII paragraph 4(b) to include oil pollution clean-up costs. Paragraph 2 does not apply exclusively to liquid cargoes: it covers also cargoes consisting of "materials, supplies, equipment, tools and all other cargoes" as indicated in Paragraph 2(a)(iii). Matching the provisions in Article VIII, Paragraph 1(d) and (f) which deal with cost of removal of debris of property in the context of insured property other than cargo and stock, so Article VIII paragraph 2(b) deals with cost of removal of debris of cargo and stock. The fact that most of the cargo or stock may be in liquid form does not expand the meaning of debris, given that paragraph 2 expressly contemplates solid cargo.

He then considered the “Notwithstanding clauses” applying again English law. His conclusions are summarised accurately by Mr Edelman as follows:-

“a.

The effect of clause 2(g) of Section IIIA is that if and to the extent that the Insured, in its capacity as charterer or cargo owner, incurs expenses which are within the categories set out in 2(g) and connected with its legal or contractual liability as charterer or cargo owner for pollution or contamination, there will be cover under Section IIIA. [134]”

b.

The Notwithstanding clauses embrace costs and expense incurred pursuant to a sue and labour clause. [138]

c.

The general principles applicable to sue and labour with regard to the insurance of property or ships are equally relevant to liability insurance. [145]

d.

If (contrary to the Judge’s conclusion on Section I) “removal of debris” does extend to oil pollution clean-up costs, those costs could only be recoverable under Section I if Exxon were not entitled to recover it under Section IIIA on the ground that Exxon incurred a liability to a third party (viz the State of Alaska) in respect of such clean-up or the cost of it or because the cost was a sue and labour expenditure in the sense expressed in clause 2 (g). [149]

e.

The clean-up operation undertaken by Exxon was an expense of the character of sue and labour expenditure incurred to avoid an insured potential liability and therefore fell within the scope of clauses 2(e) and (g) of Section IIIA. [152]

f.

On the hypothesis that the cost of removal of debris was covered under Section I, the Notwithstanding clauses exclude the right of Exxon to recover the actual expenditure incurred since such expenditure was recoverable under Section IIIA. [153]”

In reaching those conclusions the judge is, we believe, keeping overly separate and insulating from each other two aspects of what is ultimately a single overall problem of construction. One aspect is to ask whether “removal of debris” in Section I includes clean up costs and for this purpose to consider what support is provided by the fact that clean up costs are covered by Section IIIA. The second aspect is the question whether, if “removal of debris” does include clean up costs, such costs are excluded by the nothwithstanding clauses. This insulation is also apparent when he comes to deal with construction under New York law which he deals with very shortly in the final paragraphs of his judgment. He is of the view having regard to Lexington and Antilles and the weight which he considered a New York court would give to those authorities that “Exxon would thus have been covered under Section I unless such cover were excluded by the Notwithstanding clauses” and his conclusion on balance was that since the costs of clean up were covered by Section IIIA, they would not be recoverable under Section I (paras 258 and 259).

Both parties to the appeal have criticisms of this aspect of the judgment. First Mr Butcher criticises the conclusion that reliance on Lexington and Antilles would have negatived all the points forcefully made when applying English law as to why on the proper construction of this particular policy “removal of debris” did not include clean up costs. Mr Edelman criticises the judge for finding that “removal of debris” would as a matter of New York law include clean up costs but then failing to apply the law of New York relating to exclusion clauses or indeed even to mention that law while dealing with the Notwithstanding clauses.

These paragraphs came at the conclusion of a very long and detailed judgment, and were unnecessary to the decision. We think there is cogency in the submissions first that the judge did not go back to consider the forceful points made when construing the phrase “removal of debris” as a matter of English law, and that he possibly failed to consider how the Notwithstanding clauses could support the construction he had placed on those words. If despite those points he had still concluded that it was intended that removal of debris would cover clean up costs under Section I, then there is force in the point that on that basis the Notwithstanding clause would be an exclusion clause and special rules of construction might need to be applied to it.

Discussion and conclusion on Section I

Our starting point is that we find it difficult to accept that a New York court and English court would reach a different conclusion on the construction of a policy negotiated as this one was between organisations well versed in what they were seeking to cover and well versed in the risks that were likely to materialise from the business being carried on by the various assureds. Both systems of law are seeking to identify what the parties agreed, and both systems of law use similar pointers to ascertaining that intention. On the judge’s findings it is simply Lexington and Antilles, neither a decision of the New York court, which he suggested would have convinced a New York court to find that removal of debris in Section I was intended to cover the clean up costs of an oil spill, unless the Notwithstanding clauses excluded the same. As already indicated we believe he dealt with this aspect somewhat briefly. The judge erred in not bringing in at this point of his judgment the compelling points which he had already accepted when considering what the parties intended as a matter of the construction of the policy on the basis that English law was the proper law.

The points which Mr Butcher made on Lexington (see paragraph 98) above are in our judgment powerful. Since a New York court would have found the decision of an English court considering the terms of this policy persuasive, it seems to us that logically the judge should have compared his reasoning as a matter of English law of this very policy with the reasoning of Lexington relating to an entirely different policy and asked which he found the more persuasive. We think furthermore that his view as to the proper construction of the Notwithstanding clauses primarily reinforced his view that “removal of debris” in Section I was not intended to cover clean up costs. The points made to the effect that removal of debris was not intended to provide cover for clean up costs for an oil spill are too formidable to be displaced by the reasoning in Lexington. Debris is not the natural way in which to describe “spilled oil” or pollution from spilled oil, and it would need some significant feature or other provision of the policies if it was to have that meaning in this policy. It was significant that when during the course of argument Rix LJ asked Mr Edelman how he would describe oil spilt onto a beach, he could not reply and absolutely properly could not reply “debris”.

Significantly, as there is more to clean up than “removal”, and where oil pollution is dealt with both in the conventions which form the background and in the policy itself, the words which describe the clean up are not “removal of debris”.

It follows that the starting point for consideration of the Notwithstanding clauses is that “removal of debris” does not cover clean up costs for an oil spill, and whatever difficulties there may be in construing the Notwithstanding clauses, no point can be made which points to “removal of debris” acquiring some special meaning for the purposes of this policy.

We do not find it fruitful to explore in detail the meaning of either Article IX .3 or the Notwithstanding clauses on the basis that “removal of debris” does include clean up costs. That would be an entirely different policy. We can see that if clean up costs had been specifically included as part of the cover under Section I, the argument that such cover should not be removed either by virtue of Article IX.3 or by virtue of one of the Notwithstanding clauses, would be powerful, and indeed one can see any court in New York or in England seeking to find a solution which did not do so. What one can say however is that the meanings given to those clauses by Mr Butcher do fit with the concepts (1) that removal of debris in Section I was not intended to cover clean up costs; (2) that Section I was not designed to cover damage to third party property; and (3) that oil pollution and clean up costs were the subject of the liability cover either under Section IIIA or depending on the answer to Mr Butcher’s argument on Section IIIB, Section IIIB.

We accordingly would uphold the judge’s construction of removal of debris simply on the basis that under neither New York law nor if it be relevant English law do the words “removal of debris” in Section I of the GCE cover clean up costs as described in paragraph 4 (iv) to (vii) above.

Section IIIB

We now turn to consider Exxon’s claim under Section IIIB, which the claimants seek to pass on in these proceedings to the defendants.

The argument put by Mr Edelman on behalf of the claimants was essentially that Exxon’s claim, whether under English or New York law, had been validly made by reference to article I.1’s reference to a loss occurrence in respect of “all transportation activities” and/or endorsement no 2’s reference in its paragraph (a) to liability for third party loss or damage “caused directly or indirectly by seepage, pollution or contamination arising out of the operations of the Insured”. Endorsement no 2 is headed “Seepage, Pollution and Contamination Coverage Endorsements”. Mr Edelman said that Exxon’s use, as cargo owner, of the Exxon Valdez for the transportation of its oil was a relevant “transportation activity” or “operation” for the purposes of those provisions.

On the other side, the argument put by Mr Butcher on behalf of the defendants was that those references to transportation activities or operations were limited by their context to essentially non-marine activities and operations focussed on Exxon’s drilling, production and exploration operations and the facilities involved in them, and did not encompass marine carriage in self-propelled vessels.

So far we have not had to say much about Section IIIB. At para 11(iii) above we have referred to it, neutrally, as providing general third party liability cover. The judge approached the issues under Section IIIB first by taking into consideration the structure of the GCE as a whole. He said (at para 220):

“…it is necessary to keep in mind the overall coverage structure which, it is to be inferred, was mutually intended to be created as between the brokers and the underwriters. This involved (i) protection against property damage in respect of property owned by or held in trust or under responsibility by the Insured and certain kinds of expenditure by the Insured relating to such property (Section I); (ii) protection against marine liabilities of a P and I nature, including oil pollution if not covered by ITIA (Section III A); (iii) third party liabilities of a non-marine nature arising out of the Insured’s commercial activities in relation to the energy industry (Section III B). As I have already concluded…the expenditure on oil pollution clean-up was recoverable by Exxon as cargo owner under Section III A and not under Section I. That right of indemnity under Section IIIA arose from the fact that such policy provided cover to a cargo owner who, not being a shipowner or bareboat charterer, did not have the benefit of cover from ITIA. As cargo owner Exxon therefore had the benefit of a wider scope of cover in relation to P and I risks, including ocean carriage than ESC as shipowner. In as much as Section III B does not provide P and I cover, the question arises whether it is to be inferred from the terms of that section, against the background of the overall structure of the cover provided by the insurers, that Exxon, not being the owner or bareboat charterer, was to have the benefit of cover of a scope which overlapped with that already granted to it as cargo owner in respect of marine liability risks under Section III A.”

Mr Edelman does not we think take issue with the judge’s overall summary of the GCE’s structure and his categorisation of its constituent elements, even if it has been his contention that all its three sections in their various ways, possibly unintentionally, cover Exxon’s pollution clean up costs. What he says, however, is that Exxon’s, as distinct from ESC’s, liability is not a “marine operation” but a “transportation activity”. He accepts that ESC, as shipowner, would have no claim within Section IIIB, but contrasts Exxon’s position.

To understand the parties’ submissions and the judge’s conclusions with respect to Section IIIB, it is necessary to set out the essential provisions, although we would refer to appendix B for completeness.

ARTICLE I

Insurers hereby agree, subject to the limitations, terms and conditions, hereinafter mentioned (including endorsements attached hereto).

1.

To pay the Insured or to pay on their behalf all sums which the Insured shall be obligated to pay as damages or incur as expenses by reason of the liability…on account of…“Property Damage” caused by or arising out of each loss occurrence…in respect of all offshore and/or inshore and/or onshore Drilling, Production, Exploration operations and all transportation activities including all Terminal and pipeline operations and including Automobile, Aircraft, and Aircraft refueling activities and onshore fire and explosion, also including General Average, Salvage, Salvage Charges, Sue and Labour in connection therewith.

ARTICLE II

Insurers’ liability hereunder shall not exceed One Hundred Million Dollars ($100,000,000) for any one loss occurrence and in the aggregate in respect of all liability from onshore drilling, exploration and production and pollution and personal injury resulting from onshore fire and explosion and all transportation activities including pipelines and terminals but not including auto, aircraft and/or aircraft refueling liability.

ARTICLE VI

This policy does not insure:…

(f)

Claims made against the Insured arising out of the ownership or bareboat charter of any watercraft, it being understood and agreed that this exclusion shall not apply to the liability of the Named Insured for personal injury to their employees, unless such liability is more specifically excluded under this policy.

For the purpose of this policy the following shall not be deemed to be watercraft except whilst in transit:-

An installation of any kind fixed or mobile which is used for the purpose of exploring for, producing, treating, storing or transporting oil or gas from the seabed or its subsoil, excluding any tank vessel used for storage of oil or gas commencing at the loading manifold thereof and excluding absolutely any self-propelled tank or Supply Vessel.

ENDORSEMENT NO. 2

SEEPAGE, POLLUTION AND CONTAMINATION COVERAGE ENDORSEMENT

Notwithstanding anything contained in Article I, paragraph 1, of this Policy, all other terms and conditions of this policy remaining unchanged and in the consideration of premium included, Insurers agree to indemnify the Insured or pay on behalf of the Insured:

(a)

All sums which the Insured shall be legally liable to pay as damages for personal injury (fatal or non-fatal) and/or loss of damage to or loss of use of tangible property caused by or alleged to have been caused directly or indirectly by seepage, pollution or contamination arising out of the operations of the Insured.

(b)

The cost of removing, containing, neutralising or cleaning up seeping, polluting or contaminating substances emanating from the operations of the Insured: but not to cover repairing, replacing, redesigning or modifying the offending facility.

Mr Edelman submitted as follows. “[A]ll transportation activities” were quite general words. That they included marine activities was shown by the exclusions carved out under article VI(f). Those exclusions only concerned the insured qua shipowner or bareboat charterer, not qua cargo owner; and even in the former capacity, there was no exclusion in respect of personal injury to employees. The width of the transportation activities was emphasised by the inclusion of reference to aircraft: which could involve a company jet on a flight which had nothing to do with industrial operations. Moreover reference to drilling, production, terminal, and pipeline operations demonstrated the all-inclusive nature of the transportation activities concerned. Thus the transport of crude oil from rig to refinery would typically involve a pipeline journey to some port, where the oil would be loaded on a tanker and carried by it to another port at or near a refinery, where it would enter another pipeline; and then the refined product would be carried through pipe, or by road or rail or again by sea to its ultimate destination. It did not make sense to carve out of this journey the carriage by ocean tanker alone. In any event, it was only the shipowner, not the cargo owner, that was engaged in marine transportation; the cargo owner was conducting a transportation activity.

So much for the primary cover under Section IIIB itself. Endorsement no 2, paragraph (a) however, Mr Edelman continued, extended cover quite generally to the “operations of the Insured”. The words, he submitted, were quite general. It may be true, as the judge held, that paragraph (b) of the endorsement was more narrowly confined to substances “emanating” from operations at a particular site, as indicated by reference to “the offending facility”. But the distinction between paragraphs (a) and (b) had to be observed: the former was dealing with third party loss and was quite general, whereas the latter was dealing with the insured’s own, first party, loss and therefore the contaminating substances had to come from somewhere, viz the insured’s own facilities. Endorsement no 2A (see Appendix B), headed “Onshore Seepage, Pollution and Contamination Exclusion”, begins “In respect of onshore seepage, pollution and contamination only”, thereby emphasising that endorsement no 2 deals with both offshore as well as onshore pollution; while its function is to cut down the broad scope of endorsement no 2.

Mr Butcher, however, submitted that the judge was right to limit the meaning of “transportation activities” in article I.1 and of “operations” in endorsement no 2. The non-marine context of Section IIIB showed that both expressions had to take their meaning from their surroundings and context, namely Exxon’s exploration and industrial operations. Thus “operations” in both paragraphs of endorsement 2 had to mean the same, and had to be related to some identified location and facility. And Mr Butcher went one step further and submitted that the judge had been wrong to reject his submission below that, even if these provisions did extend to Exxon’s position as an owner of cargo at sea, the liability for the expenses in question only arose because of the intervening fault of ESC as shipowner and not because of Exxon’s activities or operations.

The judge accepted that the scope of cover under Section IIIB was very wide and that the language of “all transportation activities” was obviously capable of being read as extending to ocean carriage of oil cargo. However, he concluded that a construction which confined the meaning of those words “to carriage specifically associated with drilling, production or exploration” accorded more closely with the structure of the cover as a whole. He considered that the detailed provisions of article VI(f) “strongly points towards a mutual purpose of excluding all liability cover in relation to marine transportation in self-propelled vessels”. As for endorsement no 2, he concluded that the word “operations” had elsewhere been used with reference to drilling, production and exploration, that this was consistent with its use in paragraph (b) with its reference to the offending facility, and that it ought to bear the same meaning in both paragraphs of the endorsement.

So much for the judge’s construction under English law (at paras 220/230). However, he briefly came to the opposite conclusion under New York law (at paras 260/261). On that basis he concluded that the language of article I.1 (but not that of endorsement no 2) would be construed as wide enough to cover mere consignment on board an ocean tanker. He reasoned that the words would, in their context, be considered ambiguous and would thus let in the extrinsic evidence to which we have referred above. However, he then immediately went on to consider “whether the absence of any ambiguity” would preclude consideration of the overall matrix or setting of Section IIIB as part of a composite insurance package alongside Sections I and IIIA; and whether, if that consideration were not precluded a New York court would accord to such factors the same weight as a judge in England would do. Ultimately he decided that it would not, but would give the overall structure of the GCE relatively less weight than an English judge. He therefore concluded “on balance” that Section IIIB would be construed as encompassing marine transportation.

In our judgment, Colman J was right about the position under English law, but wrong to think that the position was different under New York law.

We have already concluded that under Section I, whether under English or New York law, Exxon’s claim would have failed but that it would have succeeded under Section IIIA. Moreover, on the judge’s acceptance of ambiguity under New York law, the extrinsic evidence would once again have been admissible under New York law. For the reasons which we have given above (at paras 68 and 116) for thinking that New York and English law would come to the same conclusion about the role of the Notwithstanding clauses for the purpose of the Section I claim, we are not persuaded of the judge’s decision for finding that English and New York law would have differed about Section IIIB. We think that the judge’s construction of article I.1 and endorsement no 2 as a matter of English law is ultimately persuasive and we can see no sufficient reason for thinking that a New York court would have come to a different conclusion, a fortiori as that court would have had available to it not only the legitimate contractual matrix of the GCE but also the extrinsic evidence in question to the extent that it went further than matrix material.

As for the point of construction, we acknowledge, as the judge did, that the language of article I.1 is in one sense wide enough to encompass Mr Edelman’s submissions: but we are impressed by the contextual argument both as a matter of the overall structure of the GCE and its separate covers and as a matter of the language of Section IIIB itself. We agree with the judge’s analysis and would emphasise the following considerations.

It is not only the nature of the separate covers under Sections IIIA and IIIB (as well as under Section I) that underlies the question of construction. There is express reference in the opening “General Insuring Conditions” of Section IIIA to emphasise the distinction between the two sections. Thus condition 4 describes Section IIIA cover as “Protection and Indemnity Risks and Charterer’s Liability and other Marine Liabilities etc., and etc” and condition 6, dealing with limits, expressly refers to Section IIIB as covering “Non-Marine Liabilities (Section IIIB)”. Exxon’s cover as a mere cargo owner or charterer (ie not owner nor bareboat charterer) for seepage, pollution and contamination liability is expressly covered under Section IIIA, but, as one would expect, is nowhere referred to expressly under Section IIIB.

If it were to be found anywhere, one would expect it to be made clear in Section IIIB’s endorsement no 2 (“Seepage, Pollution and Contamination Coverage Endorsement”), whose express purpose it appears to be (“Notwithstanding anything contained in Article I, paragraph 1, of this Policy”) to extend cover to take in seepage, pollution and contamination. It is true that endorsement no 2 clearly covers offshore as well as onshore pollution, because the closely allied endorsement no 2A (“Onshore Seepage, Pollution and Contamination Exclusion”) is limited to the onshore. There is, however, nothing in either endorsement no 2 nor endorsement no 2A which expressly gives any comfort to the concept that marine carriage falls within the cover. The only expression which is relied on as covering marine carriage is the word “operations” in paragraph (a): but (1) transportation itself has never previously been referred to as “operations” as distinct from “activities”; and (2) it is common ground that the word “operations” in paragraph (b) refers to operations conducted from an “offending facility”. Although Mr Edelman asks us to note the differences in cover between paragraphs (a) and (b), these do not in our judgment justify giving to the concept of “operations” within the endorsement an entirely different and extended flavour. If the present case does not come within endorsement no 2, it would seem strange to think that it would come within the more general cover of article I.

Turning then to article I, paragraph 1, we find that the primary focus of it is “Drilling, Production, Exploration operations”, wherever they take place, offshore, inshore or onshore, and in this context “all transportation activities”, and then there is a further inclusion of “all Terminal and pipeline operations”. The focus of all of this is the named operations, which plainly take place from a facility of some kind. Transportation, however, is an activity: and although there could be much debate about the nature of operations and activities, the linguistic distinction is carried through into the reference to automobiles and aircraft, which are described as activities. It may be noted that, despite the reference to automobiles and aircraft, there is no reference to the important subject of marine transport activities within those provisions.

That subject matter however is picked up in the article VI(f) exclusion. This is a complex provision which both excludes and includes. One of the things we are told by it is that Section IIIB is not concerned with claims arising out of the ownership (or bareboat charter) of any watercraft. That is of course consistent with the idea that “transportation activities” do not include the marine carriage of oil, but by itself the exclusion is both wider and narrower than answers the issue with which we are concerned: it is wider in that it relates so far to any form of watercraft, and it is narrower in that it does not relate to any claims which arise out of mere ownership of oil in transit on a watercraft. The other matter which is made quite explicit is that “For the purpose of this policy” i.e. Section IIIB, there is an “excluding absolutely any self-propelled tank or Supply Vessel”. That absolute exclusion is said to be for the purpose of the policy as a whole and not merely for the purpose of the opening lines of article VI(f). We recognise the argument that it could be limited to the former, but that is not what is said, and it would not make sense of the overall structure of Sections IIIA and IIIB. It makes no sense that Exxon’s liability for pollution arising out of marine transport as a shipowner is limited to Section IIIA, whereas its liability for pollution arsing out of marine transport as a mere cargo owner is not. Thus an installation in transit is a watercraft within the policy, but not if it is not in transit. However, a self-propelled tank or supply vessel is absolutely excluded and “shall not be deemed to be watercraft”.

We recognise that there is specific inclusion of liability for personal injury to employees arising out of the ownership of watercraft: but that is a special case; and we are not concerned with the issue which might arise as to whether that would apply even in the case of self-propelled tank or supply vessels.

We therefore conclude, as did the judge, that there is no cover under the generic reference to “all transportation activities” for liability arising out of the ownership of oil being carried in marine transport. We consider that the transportation activities being referred to are those incidental to drilling, production, exploration, terminal and pipeline operations: and that marine transport, even if, as Mr Edelman cogently submits, it forms part of a chain of transportation between rig or well and terminal, or between terminal and end-user, nevertheless is considered for the purposes of Sections IIIA and IIIB as a matter of marine, and not non-marine, liabilities and as being something separate and apart and not incidental to those physically located operations expressly mentioned in article I of Section IIIB.

For these purposes, however, we see no sufficient reason to distinguish, as the judge did, between English and New York law. We say this for the same reasons as we have adopted above in relation to the issue of “removal of debris” under Section I. We are confident that if the judge had concluded as we did about that issue under New York law, he would not have decided the Section IIIB issue as he did under New York law. In any event, it is not clear to us whether in doing so he gave proper weight to the extrinsic evidence which he accepted would have been admissible in a New York court. That evidence from the point of view of the interface between Sections I and Section IIIA has already been referred to above (at para 105). So far as it specifically relates to the interface between Sections IIIA and IIIB, the matter was summarised (without challenge) in Mr Butcher’s skeleton at para 237 as follows:

“Thus:

(i)

there was evidence from the underwriters that the parties did not intend Section IIIB to cover tanker pollution liability: Compton-Rickett at B2/292-299; Youell at B3/720-728;

(ii)

there was evidence from the brokers that they did not believe that Section IIIB covered contingent cargo pollution liability: Delach at B2/p.327 line 17 to 328 line 11;

(iii)

there was evidence from Mr Jueds of Exxon Insurance Services that the parties did not intend Section IIIB to cover tanker operations: Jueds at B3/533 line 20 – 535 line 8;

(iv)

there is no extrinsic evidence that the parties intended Section IIIB to cover tanker pollution liabilities.”

We therefore conclude that the claimants’ appeal under Section IIIB fails.

The Seepage and Pollution Exclusion

We now turn to an issue which arises under the retrocession policies, except certain of the Lloyd’s policies, rather than under Exxon’s GCE itself. It is common ground therefore that it arises only as a matter of English law. It is only relevant, however, to exclude liability under Sections I or IIIB. Since we have concluded that there is no relevant liability, the point is moot. We will therefore deal with it briefly.

The exclusion provides:

“This contract excludes any loss arising from seepage, pollution or contamination on land unless such risks are insured solely on a sudden and accidental basis. This contract also excludes liability in respect of disposal or dumping of any waste materials or substances.

These exclusions shall not apply to coverage provided in respect of:

(a)

control of well policies where such seepage, pollution or contamination follows a well out of control above the surface of the ground or waterbottom;

(b)

liability under:

1.

Offshore Pollution Liability Agreement

2.

Outer Continental Shelf Lands Act, Federal Water Quality Improvement Act, Arctic Waters Pollution Protection Act,

3.

Seepage, pollution or contamination covered by Protection and Indemnity policies,

4.

Aviation policies subject to clauses no less restrictive than Aviation Seepage and Pollution Exclusion Clause (1988) amendment).”

We have emphasised the words “on land”, because that is what the issue under this exclusion is about. The defendants say that “on land” describes where the effect of the seepage, pollution or contamination is located. The claimants say that the expression describes where the seepage, pollution or contamination originates from. The defendants say that since almost the whole of the clean-up costs were directed to contamination of the land and not the sea, its potential liability, if any, did not even reach the deductible. The claimants say that since the contamination came from the sea and not the land, the exclusion is wholly inapplicable.

In Commercial Union plc v. NRG Victory Reinsurance Ltd [1998] 1 Lloyd’s Rep 80 at 89, Clarke J held that the exclusion referred only to a case where the source is on land. He was therefore in favour of the claimants’ construction. He regarded the defendants’ construction as unarguable. He said no more about it.

Colman J said he would have agreed, but for the argument arising from the disapplication of the exclusion in respect of liability under the Offshore Pollution Liability Agreement (“OPOL”) which can only arise out of an escape or discharge into the sea from an “offshore facility” as there defined. A similar point arose from the disapplication in respect of liability under P and I policies. The judge remarked on the fact that there is no sign that such an argument was presented to Clarke J, else he would have been bound to have mentioned and dealt with it, a fortiori in a judgment concerned with summary disposal. The judge was persuaded that the disapplications favoured the defendants’ construction, for otherwise they would have been entirely redundant.

The claimants riposte that the argument from redundancy is an unsafe basis for a decision on construction: since such redundancy is common in insurance policies (and other commercial documents) to drive home a point. Mr Edelman gave as an example an exclusion for dishonesty in a liability policy where the insuring clause could only ever apply to negligence.

We are inclined to agree that the argument from redundancy is often of doubtful cogency. However, unlike Clarke J and Colman J, we find the defendants’ most basic submission, as to the meaning of “seepage, pollution or contamination on land” irrespective of the argument from redundancy, to be less obvious than they appear to have done. There is nothing express in that phrase to determine whether what is being looked to is the source, as distinct from the physical presence, of the seepage, pollution or contamination. The question, therefore, is where does the seepage, pollution or contamination occur, on land or at sea? Two of us (Lord Justice Waller and Sir Martin Nourse) think that there are two linguistic indications inherent in that question, which derives from the wording of the exclusion, which point in this case to the answer “at sea”; with the result that the exclusion does not apply. One is the concept of seepage, which is suggestive of a source as well as a location of seeping material. The other is the preposition “on” in the expression “on land”, which to our mind is to be contrasted with the alternative which might have been found “of land”. “On land” suggests to us the place where the active process of contamination is taking place, which in the case of seaborne pollution does not occur on land but at sea. The third of us, however, Lord Justice Rix, is doubtful about this, thinking that if you have a source of seepage, pollution or contamination offshore, it is likely to wash ashore and show up on land: and that if, therefore, you are anxious to differentiate between the source of seepage, pollution and contamination, leaving offshore sources within the cover and only excluding onshore sources, then the draftsman would concentrate in his language on distinguishing the source of loss, which this draftsman, he thinks, has failed to do.

Mr Edelman, however, has a second point, to which the judge did not allude in his judgment. This second point concentrates on the primary proviso “unless such risks are insured solely on a sudden or accidental basis”. His submission is that the risks in question were insured solely on a sudden or accidental basis. As for Section I, for there to be cover for removal of debris, there has to be causative event, viz something sudden (and accidental). As for Section IIIB, endorsement no 2A itself excluded “onshore seepage, pollution and contamination” unless inter alia (a) the event could be described as “not being part of a continuous situation” and (b) “the event was accidental”. Therefore, he submitted, for onshore seepage, pollution and contamination to be covered, it had to be both sudden and accidental.

Mr Butcher, on the other hand, pointed out that the “loss occurrence” definition in Section I included the language: “an event or a continuous or repeated exposure to conditions”. Whereas an “event” may be sudden, the same could not be said of the alternative “continuous or repeated exposure”. Therefore, Section I liability was not insured “solely” on a sudden basis. As for Section IIIB, Mr Butcher submitted that the reliance on endorsement no 2A was inconsistent with the claimants’ basic position that Section IIIB cover was to be found under article I.

The concept of insurance on a “sudden or accidental basis” appears to derive ultimately from United States jurisprudence where the issue has been well-litigated in connection with the clear-up of waste sites. We have not investigated this jurisprudence. On what is in any event a moot point, we would be reluctant to decide this issue on the relatively brief submissions which have been addressed to us on it, especially where the judge did not deal with it; and also because its consideration would we think involve a further exercise, not conducted by the parties, into how the expression “onshore” is used in the context of Section IIIB as a whole. We would merely say that we would remain to be persuaded that Sections I and IIIB, if, contrary to our decisions, they did cover the claims herein, insured those claims “only” on a sudden and accidental basis.

In the circumstances, while indicating above our opinion as to the meaning of “on land” in the Seepage, Pollution and Contamination Exclusion, we would prefer to leave the matter there.

ESC

This was the last claim addressed by Mr Edelman in his skeleton argument, and we have therefore left it to last. ESC, as shipowner, as distinct from Exxon, never made a claim against the Underwriters in any of the American proceedings. It is also common ground that ESC never had any possible claim under either Section IIIA or Section IIIB. Nevertheless, it was submitted to the judge that ESC did have a potential claim under Section I for the costs of removal of debris, that such a claim could not have been excluded by the Notwithstanding clauses for the very reason that it had no cover under the other sections, and that such a claim was included in Exxon’s March 1996 settlement agreement with the Underwriters, thus feeding into recovery under the retrocession policies.

The judge of course held that under English law there was no cover in any event for ESC’s or Exxon’s clean-up expenses under Section I, but he also held that if the matter had to be judged under New York law there was cover, and thus at least a potential claim. He also held that although an English law claim would have been time barred by the time of the March 1996 settlement agreement, it had not been proved that a New York law claim would also have been barred. He therefore went on to consider, as an obiter part of his judgment, whether it could be said that an ESC claim had figured as part of the settlement agreement and could be passed on to the defendants under the loss payable clauses of the retrocession policies. On these points he decided comprehensively against the claimants. He held, first, as a matter of fact that the March 1996 settlement was not made to settle any claim by ESC. He held, secondly, as a matter of law, by reference to the loss payable clauses in the retrocession policies, that payment under a judgment, award or agreement in respect of liability to ESC was a condition precedent to the defendants’ liability. There had been neither.

On this appeal, Mr Edelman, on the basis that there was liability to ESC (even if it had never made a claim) under Section I as a matter of New York law, submitted that the judge had been wrong in these conclusions. Mr Butcher submitted that the judge was right, and also that it could be shown that the time bar limit had been reached under New York law as well as English law. We do not think it necessary to lengthen this judgment by exploring these issues. We are agreed that whether under English or New York law ESC never had a claim under Section I for removal of debris. In these circumstances the ESC issue is moot. As it is, it was not ESC which made the settlement, but Exxon, nor had ESC advanced any claim at that time either directly or through Exxon, nor was it made by the Underwriters in payment of any claim advanced or that might be advanced by ESC.

Summary of our conclusions

ORDER: Appeal dismissed; the costs of the appeal to be paid by the appellants to the respondents on the standard basis, to be assessed if not agreed.

(Order does not form part of approved Judgment)