PT Buana Samudra Pratama v Maritime Mutual Insurance Association (NZ) Ltd

This is an application by the Claimant for summary judgment against the Defendant on a claim under a marine insurance policy.

The Claimant was the owner of the tug BUANA DUA. The tug was insured under a policy of marine insurance no. BO507/MO51H01240 by three underwriters of whom the lead underwriter was Axa. The other two underwriters were the Defendant and Aegis. The insured value of the tug was US$1,400,000 with an increased value insurance of US$350,000. The Defendant’s liability under the policy was 50% and so the claim against it is for the sum of US$875,000. Axa and Aegis have paid the claims against them under the policy.

On 30 September 2005 the tanker DURGANDINI ran aground while approaching Pertamina Oil Terminal. She was refloated by 3 harbour tugs and secured to a discharge berth. The tanker required to be towed to Tanjung Priok for tank cleaning before being repaired.

The tanker was owned by a subsidiary of PT Arpeni Pratama Ocean Line Tbk (“APOL”) and the Claimant was also a subsidiary of APOL. Initially APOL decided to use tug BUANA DUA and a chartered tug, ABACO, to tow the tanker to Tanjung Priok. But on 22 October ABACO was substituted by the tug BUANA SATU.

On 26 October both BUANA DUA and BUANA SATU proceeded independently to Cilicap. En route BUANA DUA ran aground off the coast of Tanjung Gede and was subsequently declared to be a constructive total loss.

On 31 October BUANA DUA was replaced by ENA EMPEROR.

On 9 November the Claimant tendered notice of abandonment to the “concerned underwriters” and on 10 November Axa declined to accept the notice but agreed “to put the Assured in the same position as if the writ had been issued this day”.

On 15 May 2006 Axa agreed to pay their 40% share of the claim.

On 22 May 2006 Holman Fenwick and Willan, the solicitors acting for the Defendant, informed Axa that the Defendant was rejecting any liability because, in breach of warranty, BUANA DUA had been engaged to provide towage and/or salvage services to the tanker and requested Axa to confirm that any payment by Axa would be on a without prejudice basis. On 23 May Axa informed the Defendant that “we have agreed to the CTL of the vessel and this settlement was not made on a “without prejudice” basis pending further investigation on the circumstances of the incident.” On 25 May Axa paid their share of the claim. On 31 May the Defendant reserved its position, alleging a breach of warranty. On 22 June Aegis paid its share of the claim.

On this application for summary judgment the Claimant has said that the Defendant is obliged to follow the settlement of the claim by the leader, Axa, and that in any event there was no breach of warranty. The Defendant has said that it is not obliged to follow the settlement by the leader in circumstances where there has been a breach of warranty. The Defendant has further said that in any event it is discharged from liability because on 13 July 2006 and on 20 April 2007 fraudulent misrepresentations were made on behalf of the Claimant to the Defendant that it was never intended that BUANA DUA should undertake the towage of the tanker and that it had always been intended that towage of the tanker should be undertaken by ENA EMPEROR. The Claimant denies any fraudulent misrepresentation but accepts that on this application it must be assumed that the Defendant has raised an arguable case to that effect. The Claimant submits that in circumstances where the leader, Axa, had agreed to pay the claim before the alleged fraudulent misrepresentations were made such alleged misrepresentations do not provide the Defendant with a defence to the claim.

The policy applied to the tug SURALAYA and other vessels in a schedule which listed other tugs, floating cranes and flat top barges. BUANA DUA was included in the list. The policy expressly provided:

“It is agreed that vessel may be employed in operations which entail cargo loading or discharging at sea from or into another vessel.”

There was a “follow Axa” clause in the following terms:

“It is agreed to follow Axa HK in respect of all decisions, surveys and settlements regarding claims within the terms of the policy, unless these settlements are to be made on an ex gratia or without prejudice basis. ”

The Institute Times Clauses – Hulls (with certain exclusions) were incorporated and the policy stated that the Additional Perils Clause (Hulls) was only to apply to tug vessels.

Clause 1.1 of the Institute Time Clauses – Hulls provided:

“The Vessel is covered subject to the provisions of this insurance at all times and has leave to sail or navigate with or without pilots, to go on trial trips and to assist and tow vessels in distress, but it is warranted that the Vessel shall not …………undertake towage or salvage services under a contract previously arranged by the Assured ……….This Clause 1.1 shall not exclude customary towage in connection with loading and discharging. ”

Clause 3 provided:

“Held covered in case of any breach of warranty as to …..towage….provided notice be given to the Underwriters immediately after receipt of advices and any amended terms of cover and any additional premium required by them be agreed.”

The Additional Perils Clause provided:

“1.

In consideration of an additional premium this insurance is extended to cover”

…..

1.2

loss of or damage to the Vessel caused by any accident or by negligence, incompetence or error of judgement of any person whatsoever.

….

3.

The cover provided in Clause 1 is subject to all other terms, conditions and exclusions contained in this insurance ……… ”

On behalf of the Claimant Mr. Jacobs QC submitted that the decision of Axa to settle the claim was a decision or settlement “regarding claims within the terms of the policy” and so the Defendant was obliged to follow that decision whether or not there had been a breach of warranty.

On behalf of the Defendant Mr. Templeman QC submitted that where there had been a breach of warranty the claim was not “within the terms of the policy” and so there was no obligation on the part of the Defendant to follow the decision of Axa.

Mr. Jacobs relied on what Mance J., as he then was, said in Roar Marine Ltd. v Bimeh Iran Insurance Co. [1998] 1 Lloyd’s Law Reports 423 were the commercial reasons for a provision which obliges underwriters to follow the decision of the lead underwriter. At p.427, rhc, Mance J. said, of the clause in that case:

“The commercial reasons why both the assured and the following market should find advantage in such an arrangement are obvious. From insurers’ viewpoint, it is bound not only to save time and cost, but must also make such a co-insurance more marketable and attractive to those seeking insurance.”

At p. 430, lhc, Mance J said:

“The only matrix of real relevance in the material before me is the obvious commercial purpose of the clause in simplifying administration and claims settlement.”

Mr. Jacobs said that to construe the clause in the manner suggested by the Defendant would drive a coach and horses through the clear commercial purpose of the clause. For it would enable the Defendant, by saying that the claim was outside the terms of the policy, to render the leader’s settlement irrelevant and to require litigation with the Defendant before it could be compelled to pay.

Mr. Templeman said that the comments of Mance J. as to the commercial purpose of the clause in that case must be understood in the context of the wording of that clause which did not contain words equivalent to “claims within the terms of the policy”. Mance J. had observed that the wording of the clause before him was “of notable breadth compared with some other wordings.” By contrast the wording of the clause in the present case obliged the following market to follow a settlement where a claim fell within the terms of the policy (ie to follow as to quantum) but not where liability for the claim is disputed. This was not a commercial nonsense but involved striking a balance between the interest of the assured in not having the same claim investigated and adjusted more than once and the interest of the following market in ensuring that any claim adjusted and settled by the leader is properly settled and represents a risk that the following market agreed to bear.

The “follow Axa” clause should be given that meaning which it would be reasonably understood to have. In deciding what that meaning is it is necessary to bear in mind the commercial purpose of “follow” clauses in marine insurance policies. That is part of the background of which the assured and underwriters would be aware.

Whilst regard must always be had to the particular words used there does not seem to me to be any reason to doubt that Mance J. correctly identified the obvious commercial purpose of “follow” clauses in Roar Marine. The real question in the present case is whether or not the words used in the policy indicate an intention by the parties to restrict the ambit of the follow clause in the manner suggested by the Defendant, namely, to limit its ambit to an obligation to follow as to the quantum of claims within the terms of the policy but not as to whether or not the claim in question was within the terms of the policy.

Both counsel commented that the wording used did not explicitly support the other’s construction. Thus Mr. Templeman observed that the Claimant’s construction involved reading the clause as follows: “it is agreed to follow ……settlements as to whether claims are within the policy…” For his part, Mr. Jacobs observed that, contrary to the Defendant’s construction, the clause made no reference to an obligation to follow only with regard to quantum.

The following considerations have led me to prefer the Claimant’s construction of the clause:

Mr. Templeman argued that even if the Claimant’s construction were correct it would not avail the Claimant because a breach of warranty discharges the insurer from the date of breach. In the present case it was said that the breach occurred on or before 26 October 2005 and therefore from that date the Defendant was discharged from liability. Thus by the time of Axa’s settlement of the claim in May 2006 the Defendant was no longer bound to follow Axa’s decision and settlement.

I do not accept this argument. In my judgment a decision or settlement regarding claims within the policy, which for the reasons I have given, encompasses decisions or settlements as to whether claims are within the policy, must include decisions or settlements as to whether a claim is to be rejected on the grounds of an alleged breach of warranty occurring before the date of the decision or settlement. Were it otherwise the efficacy of the follow clause would be greatly reduced and its commercial purpose frustrated. I do not consider that the follow clause is reasonably to be understood as being inapplicable where a breach of warranty has occurred before the date of the decision or settlement.

I have reached this decision as a matter of construction of the follow clause. I note that Richard Siberry QC, sitting as a deputy judge of this court, saw considerable force in a similar argument in American International Marine Agency of New York Inc. v Dandridge [2005] Lloyd’s Insurance and Reinsurance Reports 643 at para.54, but I do not base my decision on that expression of view.

In the light of my construction of the follow clause it is unnecessary to decide whether the Defendant has a real prospect of establishing a breach of warranty by the Claimant. However, in case this matter goes further I shall express my views on the matter as briefly as I can and to the extent that is possible on this application.

The Defendant’s case is simple. Clause 1.1 of the Institute Time Clauses - Hulls contains a warranty that the tug shall not undertake towage or salvage under a contract previously arranged by the Assured. On 26 October 2005, when the tug ran aground, she was on her way to assist in the towage of the tanker and was therefore, in breach of that warranty, undertaking towage under a contract previously arranged by the Assured.

This case was resisted on a number of grounds:

The Institute Additional Perils Clauses – Hulls provides, by clause 1.2, that the insurance is extended to cover “loss of or damage to the Vessel caused by any accident or by negligence, incompetence or error of judgment of any person whatsoever.” By the express terms of the policy the extension only applies to “tug vessels” ie only to those vessels listed in the schedule as “tug boats” as opposed to floating cranes and flat top barges.

Mr. Jacobs submitted that the contract must be construed as a whole and accordingly clause 1.1 cannot have been intended to apply to tugs because it is inconsistent with the Additional Perils clause.

I do not accept this submission. The Additional Perils clause provides, by clause 3, that “the cover provided in Clause 1 is subject to all other terms, conditions and exclusions contained in this insurance.” One of those other terms is clause 1.1 of the Institute Times Clauses – Hulls. That contains a warranty which does not deprive clause 1.2 of the Additional Perils of effect. The vessels covered by the policy, which include tugs, flat top barges and floating cranes, may, by the express terms of the policy, be employed in operations which entail cargo loading or discharging at sea from or into another vessel. This is an appropriate provision in circumstances where, according to the statement of the Fleet Director of APOL, the tugs, barges and cranes were primarily employed in the domestic carriage of coal from coal terminals in the Kalimantan area of Indonesia to power stations in Indonesia. Thus, despite the warranty, there is still scope for the policy, and in particular clause 1.2 of the Additional Perils Clauses, to apply to the activities of tugs when towing flat top barges or floating cranes as part of a cargo loading or discharge process. In addition Clause 1.1 does not exclude customary towage in connection with loading and discharging and permits towage of vessels in distress. I am therefore unable to accept that clause 1.1 is inconsistent with the Additional Perils clause and does not apply to tugs.

Mr. Jacobs submitted that the warranty in clause 1.1 is to be regarded as a proviso to the liberty to assist and tow vessels in distress. Since it is not alleged that the tanker was not in distress the warranty was not engaged.

I do not accept this submission. In my judgment the true construction of clause 1.1 is that it provides a warranty that the tug shall not undertake towage under a contract previously arranged but also provides that the tug may (i) assist and tow vessels or craft in distress and (ii) may perform customary towage in connection with loading and discharging. Thus there is no requirement that the tanker be in distress before the warranty may be engaged. Rather, if the tanker is in distress assistance and towage to it (which may be provided under contract such as Lloyd’s Open Form of Salvage Agreement) are not a breach of the warranty.

Mr. Jacobs submitted that because the tug grounded before she had been hooked up to the tanker there had been no breach of the warranty. No towage had been undertaken. The purpose of the warranty was to exclude the risks associated with towage and salvage. An intention to commit a breach of warranty does not itself constitute a breach; see Simpson Steamship v Premier Underwriting Association (1905) Commercial Cases 198 at p. 201 per Bigham J. Any ambiguity in the policy must be construed against the underwriters; see The Resolute [2009] 1 Lloyd’s Reports 225 para.14 per Sir Anthony Clarke MR.

Mr. Templeman submitted that BUANA DUA undertook towage services when she agreed to provide them on or about 17 or 18 October 2005 but in any event was actually undertaking towage services at the time of her loss. She had been surveyed by the Salvage Association to tow the tanker and had been loaded with towing gear and equipment. She was on her approach voyage to the tanker.

I do not accept that the tug was in breach of warranty when it undertook to perform a towage service on or about 17 or 18 October 2005. The warranty is to ensure that the risks associated with towage or salvage services are not borne by the underwriters. Those risks are not run merely by agreeing to perform a towage or salvage service.

Precisely when a tug commences to perform or undertake a towage or salvage service for the purposes of clause 1.1 is a more difficult question. I do not consider that such a service is only commenced when the tug is “hooked up” to the tanker as suggested by Mr. Jacobs. When a tug is manoeuvring to approach a disabled ship and hook up to her such manoeuvre may be fraught with risk and such risks may well be regarded as so closely associated with the risks of towage that it is not realistic to say that the tug is not undertaking the towage service. Conversely, I do not consider that the mere fact that the tug has set off to the disabled ship with the intention of towing her on arrival leads to the conclusion that she is, having just set off, undertaking a towage service. The navigation on which she is then engaged may be entirely unaffected by the risks associated with towage. Thus it seems to me that without knowing all the circumstances in which the tug grounded I am unable to determine whether the tug was at that time undertaking towage within the meaning of the warranty. All that is presently in evidence is that the tug grounded “at Tanung Gedeh (between Cipatujah and Pamueungpeuk) on 27 October 2005 while en route to Cilicap to tow mv DURGANDANI.” That is insufficient to enable me to decide whether the tug had, by the time of the grounding, commenced the towage service for the purposes of clause 1.1. The determination of that question must await further evidence at trial.

I need not say anything about this argument because Mr. Jacobs accepted that it must await consideration of the evidence at trial.

Mr. Jacobs submitted that the Claimant was entitled to be held covered in case of any breach of warranty as to towage pursuant to clause 3 of the Institute Time Clauses – Hulls. Mr. Templeman submitted that this protection was not available to the Claimant because such protection is dependent upon the Claimant providing notice to the underwriters “immediately after receipt of advices” and such notice was not given at any time prior to the casualty. It ought to have been given on or after 17 and 18 October when the Claimant knew that the tug was to be used to tow the tanker. It is irrelevant that the Claimant may not have appreciated that the towage was a breach of warranty; see Greenock SS v Maritime Insurance [1903] 1 KB 367, Hewitt v London General Insurance (1925) 23 Lloyd’s List Reports 243, Thames & Mersey v Van Laun [1917] 2 KB 48n and Liberian Insurance v Mosse [1977] 2 Lloyd’s Reports 560 at p.568 rhc per Donaldson J.

I accept Mr. Templeman’s submission that the obligation is to give notice of facts which amount to a breach of a warranty and that it is irrelevant that the assured does not appreciate that the facts amount to a breach of warranty. However, whether there was a failure to give notice “immediately after receipt of advices” on the facts of this case may well be affected by the time when the breach of warranty occurred, which is to be determined at trial. I therefore consider that this issue also cannot be determined until trial.

Although I have been unable to determine the issues as to “undertaking towage”, “under a contract” and the “held covered” clause I would have held, had it been necessary to do so, that the Defendant had, for the purposes of this application, established a real, as opposed to a fanciful, prospect of success at trial on the question of breach of warranty.

There is no dispute that the Defendant has an arguable case that the Claimant made two fraudulent misrepresentations on 13 July 2006 and 20 April 2007 to the effect that it was never contemplated that BUANA DUA would undertake any towage of the tanker and that the ENA EMPEROR had been initially engaged to perform the tow.

However, Mr. Jacobs submitted that these alleged fraudulent misrepresentations did not give rise to any real prospect of success because they were made after Axa had settled the claim and so the Defendant was already obliged to follow that settlement. The alleged misrepresentations were thus made at a time when the Claimant and the Defendant were no longer in a relationship which attracted the duty of good faith in the presentation of the claim and instead the Defendant was bound to follow the Axa settlement. This argument was said to be supported by the reasoning of the House of Lords in The Star Sea [2003] 1 AC 469. Further, the alleged misrepresentations were immaterial or irrelevant because they could not lead to an objective improvement in the Claimant’s prospects of success in circumstances where the Defendant was already obliged to follow Axa’s settlement and where, it was said, the Defendant was already fully aware of the deployment of BUANA DUA in the operation. In any event, on 10 November 2005 Axa agreed to put the Claimant in the same position as if a writ had been issued and so there was no longer any duty of good faith in the presentation of the claim for the reasons stated in The Star Sea.

Mr. Templeman submitted that the duty not to use a fraudulent device was independent of the duty of good faith and did not come to an end once Axa decided to settle the claim. The alleged misrepresentations were material and relevant because, if believed, would yield a not insignificant improvement in the assured’s prospects of settlement. It was not accepted that the Defendant was “fully aware” of the deployment of BUANA DUA in the operation. The putting of the assured in the same position as if a writ had been issued was to preclude the doctrine of ademption without the formality of issuing a writ and was no justification for concluding that the duty not to use a fraudulent device had come to an end.

In my judgment the Defendant has real prospects of succeeding on its defence that the Claimant deployed a fraudulent device and that its claim is accordingly forfeit. That defence is supported by dicta in the Court of Appeal in Agapitos v Agnew [2002] 2 Lloyd’s Reports 42 at para. 45 and by the decision of the Privy Council in Stemson v AMP General Insurance (NZ) Ltd. [2006] Lloyd’s Reports IR 852 at paragraphs 35-36. The Defendant’s response to the argument that the Claimant’s duty not to use a fraudulent device came to an end when the underwriters agreed to put the Claimant in the same position as if a writ had been issued is supported (i) by the circumstance that the agreement does not give rise to the normal incidents of litigation which flow from the issue of a writ and (ii) by the suggestion in Good Faith and Insurance Contracts by Macdonald Eggers and others 3^rd ed. at para. 11.102 that such an agreement would not lead to the ending of the duty of good faith.

Mr. Jacobs, in a detailed and elaborate argument, has asked the court to determine now, before trial, that the Defence based on the alleged fraudulent misrepresentations will fail. But this is an area of the law which is in a process of elucidation and development. Mr. Jacobs seeks to apply dicta in The Star Sea, which concerned the duty of good faith after litigation had commenced and where there was no use of a fraudulent device, to the present case where there is an alleged use of a fraudulent device before litigation was commenced. I do not consider that it is appropriate or sensible to seek to determine the merits of the opposing arguments on the basis of assumed facts, notwithstanding that they have been pleaded in some detail. The precise facts should first be found before seeking to determine the novel and interesting argument raised by Mr. Jacobs; cf the approach of this court in Interpart Commerciao e Gestao SA v Lexington Insurance Co. [2004] Lloyd’s Reports IR 690 and Marc Rich Agriculture Trading SA v Fortis Corporate Insurance NV [2005] Lloyd’s Reports IR 396 where the court was asked to determine arguments in this area of the law before trial.

Although I have determined the construction issue as to the meaning of the “follow Axa” clause in favour of the Claimant I have decided not to order summary judgment on the Claimant’s claim. The defence based upon the alleged fraudulent misrepresentation must be determined at trial.