None

This is the trial of preliminary issues in an action in which the Claimant claims under its war risks insurance for the constructive total loss of the vessel “B Atlantic” ("the Vessel"). Between 7 and 12 August 2007 the Vessel loaded a cargo of coal at Maracaibo, Venezuela, for carriage to Italy in the course of routine trading. The following day, 13 August 2007, a pre-departure inspection by the Venezuelan authorities discovered 3 bags of cocaine strapped to her hull below the waterline. The Vessel has been detained in Venezuela ever since then.

The Defendant Underwriters (“Underwriters”) do not dispute that the Vessel is a CTL, but deny that the Vessel’s loss was caused by a peril insured against. They rely principally on the “customs regulations” exclusion contained in clause 4.1.5 of the Institute War Clauses. In the alternative, they contend that the loss was caused by the Claimant’s failure to put up security for the Vessel’s release.

The preliminary issues were ordered to be tried by H.H.J. Chambers Q.C., sitting as a Deputy Judge of the High Court, on 16 December 2012. The issues were ordered to be tried on the basis that they are pure issues of construction of clause 4.1.5 of the Institute War Clauses, and that no disclosure or evidence would be required.

The preliminary issues are:

Whether, in order for Underwriters to be able to rely on the exclusion in clause 4.1.5, they must show that there was privity or complicity on the part of the insured in any infringement of customs regulations.

If not, whether Underwriters must show that there was privity or complicity on the part of the servants or agents of the insured in any infringement of customs regulations.

Whether the exclusion in clause 4.1.5 is only capable of applying to exclude claims for loss or damage to a vessel which would otherwise fall within insuring clause 1.2 or 1.6, and not the other perils insured against under clause 1 and/or Section A of the Conditions.

Whether the exclusion in clause 4.1.5 is capable of applying if an infringement of customs regulations is found not to be, or not reasonably arguably to be, a ground for the arrest, restraint, detainment, confiscation or expropriation of the vessel in question as a matter of the relevant local law.

The war risks policy (“the War Policy”) incorporates the Institute War and Strikes Clauses 1.10.83 (“the Institute War Clauses”).

The Institute War Clauses list 6 groups of insured perils within clause 1. Clause 1 provides:

Exclusions are listed in clause 4. These include loss, damage, liability or expense arising from:

The Institute War Clauses are commonly used in conjunction with the Institute Time Clauses (Hulls). The two sets of standard terms form part of the well-known, London market marine insurance background and fall to be construed together.

Thus, exclusion 4.2 of the Institute War Clauses excludes “loss damage liability or expense covered by the Institute Time Clauses – Hulls 1/10/83…”

The Institute Time Clauses – Hulls 1/10/83 (“the Institute Hull Clauses”) contain an express ‘war’ exclusion in respect of loss, damage, liability or expense caused by “capture seizure arrest restraint or detainment (barratry and piracy excepted), and the consequences thereof or any attempt thereat” (clause 23.2). They also contain exclusions for loss, damage, liability or expense arising from “any terrorist or any person acting from a political motive” (clause 24.2) or from ‘Malicious Acts’ (clause 25).

Accordingly, the effect of the Institute War Clauses and Institute Hull Clauses, read together, is that:

an assured’s hull cover does not respond to the detention of a vessel unless caused by barratry or piracy (clause 23.2 of the hull cover);

with those exceptions, detention is prima facie covered under the war risks cover (clause 1.2 of the war risks cover) but subject to certain exceptions set out in clause 4; and

loss caused by malicious acts is insured under the war risks cover (clause 1.5), but not under the hull cover (clauses 24.2 and 25).

In addition to the standard form cover, section A of the Slip broadened the cover for the consequences of malicious acts by the words: " Including ... Malicious damage and Vandalism, Piracy and/or Sabotage and/or Terrorism and/or Malicious Mischief and/or Malicious Damage".

Although I am not concerned with any issue of fact it is relevant to set out the factual background against which the present dispute arises.

It is common ground that the owners of the Vessel knew nothing about the drugs and had no involvement in any attempted drug trafficking.

It is the Claimant’s case that the crew had no involvement with the drugs either. Although charges were brought against the Master and 2 ^nd Officer and they were ultimately convicted of liability for drug-trafficking offences, it is the Claimant’s case that (i) there was no factual or legal basis for any such conviction; and (ii) the proceedings against the master and crew were politically motivated. The Underwriters rely on the fact that charges were brought against the Master and 2 ^nd Officer and were convicted but do not advance any positive case that the Master and/or 2nd Officer (or any other officer or crew) participated in or were privy to the attempted drug-trafficking.

The Claimant contends, therefore, that the Vessel has been detained/confiscated in Venezuela pursuant to the actions and orders of the Venezuelan authorities, as a result of the fortuitous intervention of unknown third parties who decided to affix narcotics to the Vessel’s hull for their own drug-trafficking purposes.

Further, the Claimant’s factual case is that that the continued detention of the Vessel has had nothing to do with any conduct on its part or that of its master, officers or crew; and indeed, had nothing to do with the fact that some unknown third party had fixed the drugs to the hull. After the drugs were discovered, Venezuelan law permitted a limited initial investigation period during which (the Claimant accepts) the Vessel was lawfully detained. After that, however, Venezuelan law required the Courts to release the Vessel from arrest because there was no evidence of the owners’ involvement and no charges were brought against them. Under Venezuelan law, the Claimant will say, the Vessel should have been released from arrest on 31 October 2007, when a “preliminary hearing” took place. Thereafter, the continued detention was contrary to the local law and was not the consequence of local customs regulations or their lawful effect.

Moreover, as well as saying that the continued detention of the Vessel was contrary to Venezuelan law, the Claimant also advances the positive case that the Vessel was detained as a result of political interference and/or improperly motivated political acts and/or malicious acts. To use Lord Denning’s phrase in The “Anita ” [1971] 1 WLR 882 at 888 the continued detention was ‘a put-up job.’

Accordingly, and however the preliminary issues are resolved, it remains to be determined whether any customs ‘infringement’ was actually the proximate cause of the detention on the facts.

Only a handful of cases have considered the exclusion contained in clause 4.1.5 of the present clauses and their similarly-worded predecessors – all at Court of Appeal level. They are The “Anita” (generally cited as the leading case), The “Wondrous” [1992] 2 Lloyd’s Rep. 566, The “Kleovoulos of Rhodes” [2003] 1 Lloyd’s Rep. 138 and The “Aliza Glacial” [2002] 2 Lloyd’s Rep. 421. The last of these is concerned with an alleged infringement of trading regulations (though in fact the regulations in question were held not to be so characterised, with the result that the exclusion did not apply). The remainder involved an alleged infringement of customs regulations, as does the present case.

As was largely common ground, a number of general principles can be derived from those cases.

First, the exclusions contained in clause 4.1.5 must be given a “businesslike interpretation in the context in which they appear”: see The “Aliza Glacial ” at para. 24, referring to the judgments in The “Anita”, and The “Kleovoulos of Rhodes ” at para. 39.

This means, secondly, that questions of construction need to be answered in the light of the fact that the Clauses are to be used worldwide. So they must be given a wide meaning to the extent that they are intended to cover laws in force anywhere in the world. They cannot turn on niceties of local law: The “Kleovoulos of Rhodes” at paras. 12, 38.

Thirdly, the draughtsmen are to be taken to have had in mind decisions of the courts on earlier editions of the clause which have given the wording a settled meaning: The “Kleovoulos of Rhodes” at para. 28.

Fourthly, the burden is on Underwriters to bring themselves within the exclusion: see The “Aliza Glacial” at para. 24 and The “Anita” at page 492.

A fifth principle was a matter of some dispute between the parties, namely whether the exclusions fall to be construed against Underwriters by reason of the contra proferentem canon of construction . The “Aliza Glacial” at para. 27 suggests that they may not because “if the task of the Court is to ascertain the extent of the risk in the light of the defined perils read together with the relevant exclusion, there is no room for the operation of that rule”. On the other hand, in The Silva [2011] 2 Lloyd’s Rep. 141 at para. 46 the rule was applied when considering the construction of the “any financial cause” exclusion. It is not necessary to resolve that issue in the present case, although there is force in the Claimant’s point that if, as is accepted, the burden is on Underwriters to bring themselves within the exclusion as a matter of fact one would logically expect the burden to be on them to do likewise as a matter of construction.

The Claimant did not pursue this contention, save in tandem with preliminary issue 2, to the extent that privity or complicity on the part of the insured or its servants or agents must be established.

I accordingly answer this issue in the negative.

Subject to refinements introduced during oral argument, the Claimant's case was that the exclusion in clause 4.1.5 must be construed as limited to an infringement of customs regulations committed by the insured itself or by its servants or agents.

In support of that case, the Claimant advanced the following principal submissions:

The language of clause 4.1.5 does not identify by whom the relevant “infringement” must be committed. It does not say “any infringement” (in contrast to the words “any financial cause” in clause 4.1.6.).

The Court must give clause 4.1.5 a businesslike interpretation in the context in which it appears. It is not a businesslike interpretation, and not consistent with the presumed intention of the War Policy, to deprive an owner of cover for a detainment arising from an infraction of customs regulations over which it has absolutely no control, and for which neither the owner nor its servants or agents were responsible. Such a result would be capricious in effect, negating the cover provided by the War Policy in the very circumstances where one might have thought cover would have been engaged, namely where detainment by executive order arose through the hostile conduct of third parties outside the assured’s control.

It would be perverse to deprive an owner of cover in relation to the consequences of deliberate acts of smuggling by third parties in circumstances where acts of smuggling by the crew giving rise to detainment by executive order would usually be insured, under the hull cover. This would create a significant gap in coverage that is most unlikely to have been intended.

In relation to the last point, the Claimant emphasised that:

Smuggling by the Master, officers or crew amounts to barratry.

Barratry, and detainment arising from barratry, are covered under the hull cover, subject only to the proviso that there has been no personal want of due diligence by assured, owners or managers.

Barratry, and detainment arising from barratry, are therefore excluded from the War Policy by exclusion 4.2.

Accordingly, if the Master and 2 ^nd officer had been deliberately engaged in drug trafficking, the Claimant would have been insured for the resulting detainment, albeit under the hull cover.

The Claimant accordingly submitted that the consequence of Underwriters’ arguments in this case would be that the Claimant is worse off, in terms of its insurance coverage, if the narcotics were planted by complete strangers. The barratry proviso to exclusion 23.2 in the hull cover does not apply so any claim must fall under the War Policy. However, and although the hostile acts of strangers are even more of a fortuity so far as the innocent owner is concerned, the insured is to recover nothing under the War Policy because there has been an ‘infringement’ of a customs regulation, by persons unknown but unrelated to the owners or the Vessel. The Claimant submitted that this construction of the exclusion cannot be right and that it would create a “black hole” in the coverage.

The Underwriters disputed that the exclusion was subject to the Claimant’s proposed limitation and advanced the following principal submissions:

That is not what the clause says.

The authorities support Underwriters’ construction.

The Claimant’s construction would give rise to real practical problems.

Underwriters’ proposed construction is not unbusinesslike or unreasonable.

I agree with Underwriters that clause 4.1.5 is not subject to the proposed limitation or pre-condition, largely for the reasons given by them.

First, the starting point must be the words of the exclusion. As Underwriters submit they are general and unqualified. One does not have to refer to “any” infringement for that to be so.

Clause 4.1.5 does not say that the “ infringement of... customs... regulations ” is one to which owners, their servants or agents must be privy, or in which they must be complicit.

Had the draughtsmen of the Institute War Clauses intended that clause 4.1.5 should apply only to infringements of customs regulations (or trading regulations, or quarantine regulations) by particular persons, they could easily have said so, but they did not. In seeking to “construe” the clause as imposing such a requirement, the Claimant is in effect seeking to read or write into it words that are not there.

Although the Claimant put its case as a matter of construction rather than implication, the limitation proposed is not necessary for the exception to be workable nor is it so obvious that it must have been intended by the parties. Whether or not there has been an infringement of customs regulations is a relatively straightforward factual issue. To have to go behind the fact of infringement and establish privity or complicity may well involve difficult factual issues, both as a matter of investigation and proof. One can well see why Underwriters would not intend the application of the exception to be subject to potential complications of this kind. Further, the ambit of the limitation is far from clear. For example, as the Claimant acknowledged, there may be issues as to who are to be regarded as the owners’ agents for these purposes. Are, for example, charterers or shippers or receivers to be included and, if so, in what circumstances?

The Claimant contended that it is recognised that there must be some limitations to these exceptions, even if not expressed. In this connection it relied in particular on The “Aliza Glacial” in which the exception of “trading regulations” was held not to apply to regulations preventing fishing for purposes of conservation. The Court stated at para. 35 that: “..to interpret the expression “trading regulations” without the imposition of any generic limitation would be unreasonably to emasculate the breadth of cl. 1.2”.

However, the preliminary issue is not whether the application of the exception is subject to any limitations, but whether it is subject to the specific limitation contended for by the Claimant in its pleadings. Further, not least for the reasons set out in paragraphs 44 and 45 below, I do not accept that the cover would be unreasonably emasculated if there was no such limitation.

Secondly , The “Kleovoulos of Rhodes” does provide support for Underwriters’ case. There, the crew were charged with drug smuggling offences, but were acquitted, and it was accepted by underwriters that “ the infringement was not the responsibility of the crew ” : see para. 65 of the judgment. That is a case which therefore ought to have been decided in favour of the vessel’s owners if the Claimant’s arguments are correct. Whilst it is correct that the point now taken by the Claimant was not taken in that case, the fact that it did not occur to those representing the owners (or, if it did, was thought not to be worth running), nor, it would appear, to the Court, is of some significance.

Further, if the market had considered that the decision in The “Kleovoulos of Rhodes” was one which gave rise to concerns on the ground that the smuggling was by a person or persons unknown, one would might have expected there to be evidence of dissatisfaction in the market, or an attempt to have clause 4.1.5 altered, or comment to be made in the textbooks. But there is none.

Thirdly, the limitation could give rise to real practical difficulties, as set out in paragraph 38 above. Further, how, for example, would the clause be applied in factual circumstances such as happened in The “Kleovoulos of Rhodes” in which the crew members are charged with drug smuggling, but later acquitted. That acquittal might occur at a time after the vessel has become a CTL. What are underwriters to do, if the Claimant’s construction is right: are they to run the clause 4.1.5 defence and wait for the local court’s verdict? Is it proper for them to do so? Or must they, separately, carry out their own investigations – even though this may be difficult whilst the authorities in the jurisdiction concerned are still investigating the matter?

Fourthly, it is by no means clear that the coverage would be subject to the “black hole” identified by the Claimant. It is the Claimant’s own case that where the vessel is the subject of deliberate smuggling by third parties that person is “acting maliciously” within clause 1.5 and the Underwriters are liable for all loss and damage caused thereby. Even if that act was to lead to detention for infringement of a customs regulation the proximate cause of the loss is still the malicious act. If that is correct, then such third party acts are potentially within the cover regardless of the exception.

Conversely, if such acts are not within clause 1.5, being the coverage clause specifically concerned with deliberate third party acts, then the premise of the Claimant’s argument, namely that one would expect the act of third party smuggling to be covered, is at the very least open to question.

In recognition of the potential significance of clause 1.5, the Claimant suggested a refinement of the preliminary issue during the course of oral argument. It was suggested that the real question in the present case is whether as a matter of construction of the Perils and Exclusions taken together “infringement” in clause 4.1.5 does not cover infringement caused by a “terrorist or any person acting maliciously or from a political motive” (within clause 1.5; or the like wording in section A of the Slip). I shall return to that question in relation to Issue (3), but it is not the subject of Issue (2), nor is it determined by the answer to Issue (2).

For the reasons outlined above, I answer Issue (2) in the negative.

The Claimant submitted that the language of the exclusion is clear: it applies to exclude liability for loss, damage, liability or expense arising from “ arrest restraint detainment confiscation or expropriation under quarantine regulations or by reason of infringement of any customs or trading regulations” (emphasis added). By its express language therefore, exclusion 4.1.5 does not purport to exclude liability for loss of or damage to the Vessel caused by other insured perils, most notably the insured perils in clause 1.5 and/or section A of persons acting maliciously or from a political motive.

The Claimant further submitted that the editors of Arnould on Marine Insurance (17 ^th ed) support the Claimant’s case that clause 4.1.5 is confined to the perils insured against by clauses 1.2 and 1.6 in that they state at paragraph 24-35 at p.1131: “This exclusion, like the home government exclusion, is confined to the perils in cll.1.2 and 1.6 of the Perils Clause”.

It was submitted that this is also consistent with The "Wondrous " per Lloyd LJ at 572, in which he held that clauses 4.1.5 and 4.1.6 should be regarded as part of the definition of the peril insured against by clause 1.2.

The Underwriters’ case was that that the exclusion in clause 4.1.5 is capable of applying to exclude claims under insuring clauses other than clause 1.2 or 1.6, even if in practice it is not wholly easy to identify circumstances in which it would so apply.

They again stressed the unqualified wording used. They submitted that there is nothing in the wording of clause 4 to suggest that particular exclusions are to be applied to particular perils only – except where it is expressly so stated. For example, the piracy exception (clause 4.1.7) is expressed in terms not to apply to cover under clause 1.4 (strikes etc.). Had the draughtsmen intended that clause 4.1.5 should not apply to cover under clauses other than clause 1.2 and 1.6, it would have said so, in the same way.

Underwriters accepted that Arnould states, in para. 24-35, that clause 4.1.5 is confined to the perils in clauses 1.2 and 1.6 but submitted that this was something of a throwaway remark, and pointed out that no authority is cited for the proposition.

I agree with Underwriters that the words of clause 4.1.5 are general and apply to any “loss damage liability expense arising” from the stated cause. On the face of the clause, if Underwriters prove, for example, that as a matter of fact the proximate cause of the loss is detainment by reason of infringement of a customs regulation they should be able to rely on the exception regardless of how the insured chooses to frame its claim.

If, for example, there is loss as a result of a detainment which is alleged to be politically motivated the insured cannot prevent underwriters from relying on clause 4.1.5 by advancing its claim under clause 1.5 rather than clause 1.2.

Further, as Underwriters point out, Arnould suggests that “political” may have as wide a meaning as “pertaining to policy or government”. If that is right (which Underwriters do not accept), then it is possible to envisage an infringement of customs regulations that resulted in a “politically” motivated detention, in the sense that the Judge ordering the detention had a motive pertaining to a governmental policy – as enshrined in the local law – of cracking down on smuggling. If that were the case, I agree with Underwriters that it should at least be open to them to argue that the exception applies.

Nevertheless, for most practical purposes it will be the perils in clauses 1.2 and 1.6 to which clause 4.1.5 applies. Clause 4.1.5 is, on its terms, directed at loss involving some form of detainment of the vessel. It therefore applies most naturally to insuring clauses 1.2 and 1.6, which are specifically directed at detainment, and is not likely to be apposite to apply to the majority of the perils referred to in the other clauses either at all or as a matter of causation. But, that does not mean that as a matter of law it is not capable of applying to other perils where loss by some form of detainment results.

That does not, however, answer the Claimant’s specific argument that infringement” in clause 4.1.5 does not cover infringement caused by a “terrorist or any person acting maliciously or from a political motive” (within clause 1.5 or the like wording in Section A of the Slip). I am not going to seek to answer that question. It is not the preliminary issue ordered. Moreover, it is closely tied up with the proper construction of clause 1.5 and the proximate cause issue, both of which will in any event have to be addressed at trial, and it is more appropriately to be considered at that stage.

Subject to the caveat set out in paragraph 58 above I answer Issue 3 in the negative.

On the basis that the Underwriters’ case is and remains that the exclusion applies because the detention was justified or at least arguably justified it was ultimately agreed that this issue did not need to be decided and that the fact sensitive nature of the issue meant that it would be preferable not to do so.

In relation to the issue of arguability, the Claimants submitted that if the infringement afforded no reasonably arguable justification in local law for the continued detention, then it must follow that the orders for the continued detention of the Vessel were (i) not bona fide and/or were politically motivated; or (ii) at the very least, were perverse, such lack of bona fides or motivation or perversity breaking the chain of causation.

The Underwriters acknowledged that if the detention was not even arguably justified then it would be difficult for it to be said that the detention was by reason of the infringement and they did not contend that it would be. Their case, however, was that the causal requirement would be satisfied provided that the detention was arguably justified pursuant to the relevant local legislation.

It was therefore effectively common ground that the exclusion in clause 4.1.5 does not apply if an infringement of customs regulations is not reasonably arguably a ground for the arrest, restraint, detainment, confiscation or expropriation of the vessel in question as a matter of the relevant local law.

That common ground finds support in the judgments of the Court of Appeal in The “Anita” and the analysis of that decision in Arnould at para. 24-35.

Aside from recording that common ground, its legal basis, and my agreement that the exception is unlikely to apply in such circumstances (without prejudice to the wider limitation argued for by the Claimant), I do not propose to answer Issue (4) in the light of the agreement reached between the parties.

For the reasons set out above I answer the preliminary issues as follows:

NO, underwriters need not show that there was privity or complicity on the part of the insured in any infringement of customs regulations in order for underwriters to be able to rely on the exclusion in clause 4.1.5;

NO, underwriters need not show that there was privity or complicity on the part of either the insured or the servants or agents of the insured in any infringement of customs regulations in order to be able to rely on the exclusion in clause 4.1.5;

NO, clause 4.1.5 is not only capable of applying to exclude claims for loss or damage to a vessel which would otherwise fall within insuring clause 1.2 or 1.6, and not the other perils insured against under clause 1 and/or Section A of the Conditions.