The Red Sapphire is a yacht which the claimant yard, Heesens Yacht Builders BV (the “yard”), started to construct in October 1997 and delivered to her purchasers on 1 August 1999. On 11 October 1999 her purchasers advised the yard of a claim under the guarantee clause contained in the shipbuilding contract.

At the time of her delivery in August 1999 the yard was insured by the (first) defendant underwriters under a Builders Risk Insurance policy. However, the yard was not insured by them at the time when her construction commenced in October 1997. The issue in this appeal is whether the policy covered only vessels whose construction had commenced during the period of the insurance or also vessels whose delivery occurred during that period. Mr Nigel Teare QC, sitting as a deputy High Court Judge in the commercial court, held in favour of the latter answer. He therefore held that the underwriters were on risk to indemnify the yard against their liability under their guarantee clause and gave a declaration to that effect. The underwriters appeal.

The earliest relevant policy commenced on 1 July 1998, that is to say after the construction of the yacht had commenced, and was for a period of twelve months. At that time the policy only covered construction risks. It provided as follows:

On 22 September 1998 an endorsement to the policy was agreed whereby the policy was extended to cover guarantee risks as well as construction risks. The endorsement said:

The attached wording provided as follows:

On or about 8 February 1999 a further extension was agreed in respect of the yard’s liability to pay interest to their purchasers in the event of the total loss of a new building.

In June 1999 the insurance was renewed for a period of 18 months from 1 July 1999 to the end of 2000. There was otherwise no relevantly substantive change to the detailed wording of the policy (there was a minor amendment in the “DESCRIPTION” clause so as to refer to “delivery voyages within the Netherlands and Northern Europe or held covered”), but its form was reformatted so that: (i) the three risks, construction risks, guarantee risks, and loss of interest payments, were expressed as three separate sections of the policy, A, B and C; (ii) “Section A Construction Risks” began only with the term set out above called “CONDITIONS” (ie the term referring to the Dutch Bourse Policy for Construction Risks”; (iii) therefore, the terms from “TYPE” down to “PERIOD” appeared at the beginning of the policy as applying to the policy as a whole rather than within and as part of Construction Risks only: in the judgment below these terms were referred to as the “opening clauses” and I shall adopt that expression; (iv) “Section B Guarantee Risks” merely said “Wording as attached”, and that attached wording was the same as set out above save that its “Premium” clause was deleted; (v) “Section C Loss of Interest Payments” (see below) followed immediately after the reference to Guarantee Risks and to the attached wording; (vi) following section C there was a further set of clauses which were headed “Applying to all Interests”; (vii) one of those clauses was a reformulated “MINIMUM DEPOSIT PREMIUM” clause which grouped the three premium provisions relating to each section, thus:

Section C provided:

Further policies were entered into for the twelve months from 1 January 2001 and from 1 January 2002 respectively, in identical terms, save that the “LIMIT HEREON” clause cited a higher figure of NLG 60,000,000 in the case of the 2001 policy and a figure of Euro 27,500,000 each vessel each building number in respect of the 2002 policy; and there were adjustments to the premium figures. However, the policy with which this appeal is concerned is the 18 months policy from 1 July 1999 (the “1999 policy”), for it was within the period of that policy that the Red Sapphire was delivered and, says the yard, was therefore covered for guarantee risks. That cover is disputed by the underwriters. Although I have described how the insurance cover was built up in its first year, and have done so in order to do justice to the underwriters’ concern to emphasise that Section B Guarantee Risks started life as a mere extension to a policy which was concerned only with Construction Risks, nevertheless it is to be recalled that the only policy which the yard relies on is the 1999 policy and that the 1999 policy starts life as a policy covering three risks, with general clauses both preceding and following the description of the three risks.

The judge held that the Red Sapphire fell within the 1999 policy for guarantee risks even though, as a vessel whose construction had begun before that or any relevant policy, it did not qualify for cover by the underwriters for construction or loss of interest risks.

He did so on the basis that the guarantee risks wording had its own clause defining the moment of risk attachment in its clause headed “Period” providing “Twelve months, risk attaching as per guarantee clause”. The guarantee clause said that the twelve months period began with the delivery of the vessel. Because Section B Guarantee Risks had its own risk attachment clause, therefore the risk attachment provisions in the “PERIOD” clause among the opening clauses of the policy did not apply (see in particular para (2) of that clause and the provision that “Risk in respect of each vessel/yacht…attaches on the moment they have started with the works…provided that the moment of attachment is within the insured period”).

Before the judge the parties had submitted as follows. The yard submitted that, as Section B had its own risk attachment clause, therefore the “PERIOD” clause in the opening clauses did not apply at all to guarantee risks – other than for it’s para (1). The underwriters submitted, however, that both risk attachment clauses operated: the opening “PERIOD” clause told the parties what vessels the policy attached to, and the Section B “Period” clause told the parties how and when the guarantee risks cover attached to such vessels.

The judge, while ultimately favouring the yard’s construction, nevertheless took his own path to get there. He rejected the yard’s submission that the opening “PERIOD” clause did not apply at all to Section B: he accepted that parts of it did, such as its paras (1), (3), (4). But its para (2) could not live together with the inconsistent risk attachment provisions of Section B’s own risk attachment “Period” clause.

As for the underwriters’ reliance on Section B’s “Per” clause (“Vessels, yachts as per building risks policy”) to support their submission that the whole policy applied only to vessels whose construction had begun during the policy period, he rejected it, again on the ground that Section B had its own risk attachment clause.

The judge accepted that the underwriters’ submission was workable, but he preferred his own solution.

On behalf of the underwriters Miss Jo Cunningham made essentially the same argument as she had presented to the judge below. The essence of her argument was perhaps contained in the following extract from her written skeleton:

Miss Cunningham sought to support the kernel of her submissions by reference to (a) general principles of construction to be derived from recent cases; and (b) certain extracts from the evidence given at trial by those who had respectively negotiated the policy and its extensions.

As for general principles, Miss Cunningham emphasised the need to look at a contract in its totality, in its factual matrix, and with concern to derive from it business common sense. She submitted that the judge had erred because he had focussed too narrowly on the Section B “Period” clause all by itself.

As for evidence, Miss Cunningham referred the court to certain passages in the oral evidence of a Mr Dolby, the broker who had presented the risk to underwriters on behalf of the yard, and a Mr Norton, who had scratched the relevant documents. Perhaps unusually, such evidence was available because the underwriters had had an alternative argument in rectification, which the judge had, however, rejected. The claim was to rectify the “Per” and “Period” clauses of Section B so that they read -

The principal matter which, upon analysis, remained as a potential candidate for factual matrix and was not otherwise simply part of the essential exercise of construction, was evidence from both witnesses that it was very difficult to obtain guarantee risk cover separate from construction risk cover.

On behalf of the yard, on the other hand, Mr Nicholas Craig submitted that the judge was correct for the reasons he had given. He no longer contended that the Section B “Period” clause ousted the opening “PERIOD” clause in its entirety. He accepted that the latter governed the contract as a whole, but said that those parts of it, in particular its para (2), which were inconsistent with Section B’s own risk attachment clause had to make way for the more precise and targeted provisions of the relevant provisions. In this connection, neither general provisions nor any relevant matrix evidence was of any real assistance.

It is convenient, despite repetition, to put together the most important of the clauses under consideration. In doing so, I overlook neither the importance of taking account of the contract as a whole, nor the narrative of the 1999 policy’s gestation.

It is possible and sensible to begin with the last clause, since that is the risk attachment clause of the cover in question, namely Section B’s Guarantee Risks. What does the “Period” clause appear to say? In my judgment, that the period in question is twelve months and that risk attaches in accordance with the guarantee clause. What twelve months are these? Not the period of the policy, for that is an 18 month period (see the opening “PERIOD” clause, para (1)). This is plainly a reference to the guarantee clause’s twelve month period. The reference to twelve months in the guarantee clause is to a “period of twelve (12) months from the date of delivery” during which a defect due to bad workmanship or defective materials “becomes apparent”.

What does this mean? In one sense, the risk covered is the risk of a relevant defect becoming apparent within twelve months of the delivery of a vessel. In another sense, the risk covered is “all damages and/or losses and/or costs and/or expenses arising under the following guarantee clause” (see the opening words of the Section B “Conditions” clause). Plainly, the intention is that, if the yard becomes responsible under its guarantee clause to deal with a relevant defect which becomes apparent within twelve months of the delivery of the vessel in question, the underwriters are to be liable to indemnify the yard. Of course, the defect may become apparent towards the very end of the twelve month guarantee period. There is then another month, after its discovery, for the defect to be notified. After that, the defect will have to be remedied. Therefore the damages, losses, costs and expenses covered may be incurred over a period subsequent to the period of twelve months from delivery. That, however, will not matter provided the defect becomes apparent within twelve months from delivery.

None of this is, I think, in any way controversial. Two further questions arise: (i) how does this apply to the period of the policy? (ii) In respect to what vessels does it apply?

The judge appears to have thought that question (i) was to be answered by saying that the policy was engaged if the delivery of the vessel fell within the policy period. However, there is no express language which states that in terms. The policy language “risk attaching as per guarantee clause” is a condensed way of saying that the risk is that described in the guarantee clause and attaches from delivery in the way described in the guarantee clause. But that does not tell you in terms that the delivery of the vessel must have occurred during the policy period; as distinct from the defect having become apparent during the policy period; or the incurring of liability, or expense, having occurred during the policy period.

It may be that, if the policy had been otherwise silent on these matters, it would be possible to extract from the terms of the “Period” clause that the intention was that the financial risk was to be covered provided only that the delivery of the vessel fell within the policy period: but that would be a matter of interpretation. As it was, the judge thought that the question was only answered by para (4) of the opening “PERIOD” clause, for he said (at para 43 of his judgment) –

Mr Craig agreed with this analysis. Of course, it takes as its premise that the twelve months of the guarantee clause has to commence within the policy period. That, however, is the issue in the case.

However, the judge never addressed the second question (ii), as to which vessels the policy attached for the purposes of Section B. One answer might be, any vessels built by the yard and which are delivered within the policy period. That is the yard’s submission and the result of the judge’s conclusion. But how does one get to that answer? The underwriters’ submission is that Section B only attaches to vessels whose construction is covered under the policy. Both answers are possible, but which is right?

In my judgment, there are a number of pointers in the policy which support the underwriters’ submission. The first and most important is that Section B itself contains the clause “Per: Vessels, yachts as per building risks policy.” I am not sure what “Per” here signifies, but I would suggest that it means something like “On” or “In respect of”, ie it defines the subject matter of the insurance (Latin, per, among other meanings “as far as concerns”, viz per me). Thus the subject matter of the Section B insurance are vessels covered by the building risks policy itself. Originally, as we know, the only risks covered by the policy were construction, ie building, risks: which explains the inelegant wording. The judge referred to the “Per” clause but gave as his reason for effectively ignoring it merely that (at para 36) –

However, the question is not so much whether the opening clauses’ risk attachment clause (ie para (2) of the “PERIOD” clause) is incorporated by the “Per” clause. On any view, the opening clauses prima facie apply to the whole policy, to each of Sections A, B and C. The question is: what vessels are covered by Section B? To which the answer given, and expressly given, by Section B’s own “Per” clause is – the vessels covered by the policy with respect to construction risks.

What vessels are covered by the policy for construction risks? The answer is: those whose construction commence during the policy period. It is those vessels which are covered during construction, during their delivery voyage (see the opening “DESCRIPTION” clause), and, by reason of Section B, for the purposes of the yard’s guarantee clause liability risk.

Thus the opening “VESSELS” clause reads: “Yachts/objects under construction and/or repair”; and the opening “DESCRIPTION” clause begins “Whilst under construction…”. Mr Craig accepted that these clauses apply to Section B. They emphasise that the vessels which are covered under Section B are vessels which the policy covers under Section A. Of course, when the vessels are finished and delivered, they are no longer under construction: but that is equally true of the delivery voyage itself. The point is, however, that the whole policy is geared to vessels under construction. That of course raises the further issues: does the policy apply to all vessels under construction, or only those whose construction begins in the policy period; and what happens if the construction continues beyond the policy period? These questions are answered by paras (2) and (4) of the opening “PERIOD” clause; and those answers are as relevant to Section B as they are to Sections A and C.

The judge said, and Mr Craig submitted, that para (4) applied to Section B even though para (2) did not. However, there is no reason to distinguish between them. The reason proffered for doing so was that para (2) was inconsistent with the “Period” risk attachment clause of Section B and therefore had to make way for it. However, there is no inconsistency if para (2) helps to tell you, as it does, what vessels the policy applies to, whereas Section B’s “Period” clause tells you when and how the guarantee risk applies to such vessels. Prima facie, all clauses in a contract should, if possible, be read together so as to be consistent with one another. The judge’s and yard’s construction depends on finding an unnecessary inconsistency.

The fact is, that it is impossible without reading the opening clauses together to understand, even in relation to construction risks alone, exactly what vessels are covered and how such cover relates to a policy period which is not necessarily coterminous with and may well be considerably shorter than the construction period.

Mr Craig was asked to explain the function of the “Per” clause. His answer was to say that “as per the building risks policy” simply meant “as described in” the policy, ie in the opening clauses. His answer was geared to the suggestion that such description was linked to the opening “VESSELS” and “DESCRIPTION” clauses alone, without any temporal restriction. However, for the reasons which I have sought to explain above, this explanation lacks cogency: first, because those clauses themselves contain the words “under construction”, and secondly because the “PERIOD” clause continues to define and refine the question of which vessels are covered as well as for how long they remain covered.

Mr Craig submitted that all parts of the opening “PERIOD” clause applied to Section B risks apart from paras (2) and (6) (he had no submission as to para (7), possibly because it was not clear that any maximum building period had been agreed). As for para (4), however, while accepting that it applied to Section B risks, he said that it had to be manipulated, for it only applied in relation to vessels which had been delivered during the policy period and then for only 12 months. In my judgment, however, these are attempts to rewrite the contract. It seems to me that there is no reason why every paragraph of the opening “PERIOD” clause cannot apply. Para (1) applies because it provides the basic policy period. Para (2) applies because it helps to define what vessels are covered by the policy. Para (3) applies on either construction, but, on the construction which I prefer, there is a need to advise the attachment date only once, rather than twice. Para (4) applies and, once Section B is incorporated, provides in effect that a new vessel, once it comes on risk, remains on risk until the expiry and discharge of the guarantee clause. Para (5) will apply to any vessel which has come on risk during the policy period and remains on risk at the end of the policy period. Para (6), as it seems to me, can apply equally to the calculation of both Section A and Section B premia, each of which are set in terms of a rating percentage applied to turnover, subject to a minimum lumpsum, and each of which can, in terms of para (6), be recalculated in terms of the “contract price of the building numbers of which the risk has been attached before the expiry date of the insurance”. Para (7), had a maximum building period been agreed, would operate across risks A, B and C. The matter was not discussed by counsel, but I hazard, without deciding, the opinion that the effect of agreeing a maximum building period would be to place a limit in terms of such a period to the extent to which a vessel could remain on risk, with ramifications for any Section of the policy.

In these circumstances, it would anomalous if only para (2) of the “PERIOD” clause could not be applied to vessels for the purposes of Section B.

Finally, the fact that Section B comes between Sections A and B in circumstances where there was no dispute that the “PERIOD” clause applied in full to Section C would again produce anomalies if that clause had to be manipulated for the sake of Section B alone.

In these circumstances, the matrix evidence on which Miss Cunningham sought to rely, namely that it was very difficult to obtain guarantee risk cover separate from construction risk cover (see para 20 above), would be entirely consistent with the construction of the policy which I prefer. It seems to me that such evidence is admissible, but I am content to decide this appeal on a consideration of the language of the policy alone.

I would therefore hold that only vessels whose construction (or repair) commenced during the policy period were within the policy, whether for the purposes of construction risks or guarantee risks. It follows that this appeal must be allowed. The yard’s guarantee clause liability in respect of the Red Sapphire was not covered by the underwriters’ 1999 policy, for her construction had not commenced during its policy period.

I agree.

I have read with admiration Rix LJ’s elegant and exemplary analysis of the contracts of insurance in this case. I am in complete agreement with him that this appeal must be allowed for the reasons he gives. I add a short judgment (1) out of courtesy to the deputy judge, whose decision we are reversing, but whose knowledge and experience in this field are infinitely greater than my own; and (2) to explain how, in my sublunary and doubtless prosaic fashion I reach the same result as my Lord.

I approach the case with a series of elementary propositions and questions. Firstly, the question which underlies the construction of the contract can, I think, be legitimately expressed as follows: - was the yacht Red Sapphire covered under the Guarantee Risks section of the contract of insurance? To answer that question, it is common ground that all we need to know about the yacht herself is that her construction was commenced before the relevant contract of insurance was operative, but she was delivered during the subsistence of that contract.

The next logical question is: which yachts are covered by the Guarantee Risks section of the policy? To answer this, we must plainly go to the policy. The answer provided by the contract is: “Per” (in the left hand column) and “Vessels, yachts as per building risks policy” (in the right hand column). This, it seems to me, is the crucial phrase in the contract. What does it mean?

I have to say, in passing, that to one who has never practised in this area of the law, it strikes me as remarkable that very substantial sums of money should turn on such an inelegant and ungrammatical phrase. With all possible respect to those who draft such contracts, one would have expected that any contract of insurance would make crystal clear, in plain and grammatical English, which ships were covered, and for what risks.

That said, it seems to me that the phrase “Vessels, yachts as per building risks policy” can only sensibly have one meaning, namely that the yachts which are covered by Section B of the policy (the Guarantee Risks section) are those covered by the Builders Risk Insurance. An alternative way of putting it would be to say that in order to identify the vessels covered under the Guarantee Risks part of the policy, the reader must go the Building Risks insurance section of the policy: the vessels insured under that section must be identified, and it is those vessels which will also be covered under the Guarantee Risks insurance.

When one looks at the terms of the Builders Risk insurance, what does one find? In the left hand column is the word “Vessels”: in the right hand column are the words: “Yachts / objects under construction and / or repair”. These words, in my judgment, can only mean one of two things, namely that the vessels which are covered under the Builders Risks section of the contact are either (1) those which were under construction and / or repair at the date the contract commenced; or (2) those the construction or repair of which commenced during the period of the contract. That it is the latter is made clear by the opening “Period” clause in the contract, which Rix LJ has identified and analysed in paragraph 32 and the following paragraphs of his judgment, which I respectfully adopt and which I need not repeat.

As the judge himself neatly put it in paragraph 36 of his judgment: “Guarantee Risks are covered in relation to vessels or yachts within the scope of the building risks policy”. In my judgment, therefore, the vessels covered by the Guarantee Risks section of the policy are those vessels the construction or repair of which commenced during the period of the contract.

It follows, in my judgment, that since the construction of the yacht in question commenced before the contract came into existence, she is not covered by the Guarantee Risks insurance. The fact that they were delivered during the subsistence of the contract is immaterial.

As a matter of drafting it would, have been quite simple (had it been the parties’ intention) to provide Guarantee Risks insurance for vessels the construction of which began outside the period of the contract of insurance, but which were delivered within it. But the contracts do not do so.

The reason they do not do so is demonstrated by the answer to my next question, namely: does the construction of the contract which I favour make commercial sense? The answer to this question is, in my judgment, plainly “yes” because the evidence from both witnesses called in the case (one on each side), of which we had a transcript, was that it was very difficult to obtain free-standing Guarantee Risks insurance in the shipping insurance market. Such insurance was nearly always tied to builder’s insurance. That obviously make sense. Insurers do not want to insure an unknown quantity, and whilst they may be willing to include Guarantee Risk insurance in an overall package, they would be unlikely to be willing to insure a ship which they had not insured during the course of its construction and / or repair.

As I have already stated, I do not see anything in the policy about ships being insured on the basis that they were begun before but completed within the time-scale of the policy. In my judgment, therefore, the natural construction of the contact, commercial reality and (if it is allowed) common sense all point in the same direction.

Why did the deputy judge reach a different view? What he said was this:

The first sentence of this paragraph seems to me to be plainly correct. But with great respect to the deputy judge, the second sentence prompts the question: why not? In my judgment, this sentence contains an assertion but no reasoning. He is plainly right to say that Guarantee Risks are covered “in relation to vessels or yachts within the scope of the building risks policy” but I simply do not understand why (ignoring the redundant “of”) the fact that Section B “contains its own risk attachment clause” makes it inappropriate to read the phrase “vessels, yachts as per building risk policy” as incorporating the risk attachment clause in the Building Risk Insurance. One surely has to look at what the phrase means: one cannot simply ignore it.

Nor do I achieve any enlightenment in the following paragraph of the deputy judge’s judgment in which he says: -

With great respect to the deputy judge, I simply do not understand this reasoning. The relevant clause is plainly not “redundant with regard to construction risks”: it identifies which vessels are covered by Guarantee Risks insurance. In any event, I do not see how it is legitimate either simply to ignore the words “vessels, yachts as per building policy” or to decline to give them any meaning when, as I have endeavoured to explain, their meaning is both plain and consistent with commercial reality.

On this aspect of the case, Mr. Nicholas Craig, for the Respondents to the appeal had plainly decided in his skeleton argument that attack was the best form of defence. He thus asserted that the judge was “plainly correct” in paragraph 36 of his judgment to hold that the phrase “Per: Vessels, yachts as per building risks policy” “did not incorporate and was not subject to the risk attachment clause appearing in the opening clauses of the policy” (his emphasis). Not content with the emphasis already supplied, Mr. Craig went on: -

With great respect to Mr. Craig he is here, in my view, falling into precisely the same error as the judge. To repeat the same assertion with greater volume and emphasis does not improve the assertion itself. The two risk-attaching clauses are manifestly not (my emphasis) self-contradictory. To the contrary, when read together, as I have already stated, they both define the vessels covered by Guarantee Risks insurance, and make commercial sense. Like the judge, Mr. Craig does not explain his assertion that any other construction apart from that favoured by the judge would be “linguistically absurd”.

In my judgment, the point of construction in this case is, at base, a very simple one. “As per” should be given the natural construction which I have given it earlier in this judgment. The Red Sapphire was not under construction under the relevant contract, and is not covered by Guarantee Risks insurance. The fact that she was delivered during the subsistence of the contact is irrelevant. The appeal, accordingly, should be allowed.