Clothing Management Technology Ltd v Beazley Solutions Ltd (t/a Beazley Marine UK)

This is a claim by a British clothing manufacturer against Insurers for the invoice value of garments which were being manufactured at a factory in Morocco. The owners of the Moroccan manufacturing company disappeared leaving its workers unpaid. The workers occupied the factory and refused to finish the garments. In time the garments seemed irretrievable and the Claimant claimed against Insurers for their loss. The situation is unusual but the problems it presents have been complicated because the policy between the Claimant and the Defendant is one of marine insurance and numerous defences have been raised including questions of actual (“ATL”) and constructive (“CTL”) total loss and of valuation.

The Claimant (“CMT”) is a clothing manufacturer and supplier owned by Mr George Shread, who has been in the business for some 40 years, and his wife Carol. CMT was set up in 1989 and is based in Kirkby-in-Ashfield Nottinghamshire. CMT makes sample garments, shows them to customers including Debenhams, BHS and Sainsbury’s who then place orders. Sample garments are then sent to overseas factories with the necessary raw materials to be mass produced and sent back to the UK.

The Defendant (“Insurers”) is an underwriter at Lloyd’s of London sued on its own behalf and on behalf of the members of two syndicates.

CMT has suppliers in Romania and in Morocco. The largest supplier in Morocco, Beltrame, was owned by Mr Aziz Ibin Ghazala and managed by his brother Ahmed who is known as “Hamada”. CMT found Beltrame to be a good supplier from 2003 until the summer of 2008. In July 2008 Hamada visited CMT and, according to the evidence of Mr Shread which, for reasons I give later, I accept, Hamada referred to the substantial amount of work which Beltrame would be doing after the summer holidays and asked for a stage payment on account. CMT made a payment of £51,000. There was no sign of coming trouble and in the third week of August 2008 fabrics and trimmings were shipped from Kirkby to Beltrame to be processed when the workforce returned from holiday.

On 3 September Hamada sent an email to Mr Shread saying that he needed medical treatment and might take a flight to Montreal. The email added that he was “worried how to pay people the week they come back” and ended “I don’t think people will continue working after all promises we didn’t respect”. For Mr Shread this was the first sign of trouble and the reference to “promises” was news both to him and to his Factory Liaison Manager Mr Pettit. Mr Shread called Hamada’s personal assistant Amal, an experienced lady with good English whom CMT had encouraged Beltrame to employ. Amal said that Aziz had not been seen at the factory since the holidays but production had started and was proceeding satisfactorily. On 15 September Mr Shread made a previously arranged visit to Beltrame. Aziz had still not been seen at the factory and Hamada had apparently left for Canada. The factory was working satisfactorily otherwise and on 19 September Mr Shread left. On 23 September Ms Leigh Davies went to the factory to prepare for an ethical audit to be conducted by Asda. She was asked by workers if she knew where Aziz was and she noticed that production levels were slipping. She contacted Mr Pettit who was at another factory in Morocco and he joined her the following day.

On 24 September workers complained to Ms Davies and Mr Pettit about their unpaid wages and threatened to stop work. Mr Shread was on holiday in nearby Spain and he returned to the factory on 25 September to find that the workers had stopped work because they had still not received any wages since August. They said that they would neither resume work nor release finished garments unless they were paid their overdue wages and those they had earned for September. Mr Shread and Mr Pettit found the behaviour of some of the workers excitable and demanding but on 26 September a deal was done. CMT would pay to the workers direct money due for finished goods leaving the factory. Garments with an invoice value of some £95,000 left the factory during the period after 10 September. On 29 September Mr Shread and his colleagues received through Amal’s email a message as follows:-

“Please accept our oppologie; we have found no word to express how much we are sorry for what happened on last Friday. We all thank you for giving us the opportunity to communicate with you & for your undersanding to what happened to the workers which makes some of them react in a bad way. Please accepte our oppologie againe about what happened. We wiche you all the best. Regards. The representatives of the workers.”

On about 25 September Mr Shread had asked for copies of the relevant insurance paperwork to be sent to him. Late on 7 October Mr Shread called Mr Patrick Oddie of Oddie Dalton, CMT’s insurance brokers. Mr Oddie’s note records “Owners have disappeared! Factory locked and people? And selling goods. Forcible/violent entry etc. Stock work funds 180,000 in warehouse insured sent over £20,000 but this has been taken and is lost.” On 8 October Mr Oddie notified insurers of the situation and sought assistance. An email from Mr Peter Philpott a Director of PCL Claims Ltd reflects some of Mr Oddies’ note adding “the insured MD was intending to go over to the warehouse, but has been told not to due to fear of violence and making the matters worse.” Another email, apparently from representatives of the workers was sent to Mr Shread on 8 October in which they denied that they would behave badly against him and stated that he was welcome to come to the house of any of them. It seems that there were difficulties in giving effect to the plan agreed on 26 September. After further discussions Mr Shread repeated in writing CMT’s pledge to make payment in return for the goods being finished. Mr Shread left informing the workers that Mr Pettit would return to oversee matters.

Mr Pettit came back on 14 October and remained until the 24^th. When he arrived no-one was at work but production resumed and on 18 October Beltrame shipped a substantial quantity of garments, with an invoice value of £61,000, and CMT responded by paying the workers £19,500. CMT also shipped a substantial amount of further fabric to BMS Clothing in Morocco on 18 and 19 October, to be forwarded to the factory. Mr Pettit considered that things were working satisfactorily when he left. On 27 October Ms Davies went to the factory and remained until 31 October. She considered that while the workers seemed demotivated they were still producing some garments each day which were being shipped back to the UK. Mr Pettit returned to the factory on 3 November and noticed a deterioration in the workers’ mood and that production levels had dropped. All further cooperation broke down after 5 November when the workers representatives demanded an immediate payment equivalent to some £80,000 in return for resumed work. Mr Pettit, having consulted Mr Shread, refused that demand. Mr Pettit spoke to another factory owner who warned him that it was likely that the workers would now take the remaining stock to set off against their substantial arrears of pay. On 10 November CMT’s brokers emailed Mr Philpott of Insurers confirming that negotiations had broken down and that Mr Shread understood that the workers would be stripping the factory of all its machinery and fabric. They asked what the insured should be doing and who at Insurers was going to be appointed for the claim. Insurers showed understandable frustration at the turn of events but the lack of clarity seems to me to have been the result of the unexpected and fast turn of events. Mr Pettit retained a local lawyer Mr Ennouari who apparently made an application to the court on 28 November for recovery of CMT’s machines which were still at the factory (but are not the subject of this insurance claim). At some point in 2009 CMT dropped the claim following advice from Mr Ennouari that it could take years to reach a final conclusion and that the court would naturally have some sympathies with the workers. Mr Ennouari apparently also advised that CMT had no right to install a security guard at the factory.

In September 2009 Mr Pettit returned to the factory with Mr Richard Grassick, the surveyor appointed by Insurers. They found that while much of the stock remained in the factory some goods, in particular a computer, may have been taken by the unpaid workers.

Insurers agreed to underwrite the risk following the receipt of a presentation document compiled by CMT’s brokers dated 27 May 2008. In this document, the business of the assured is described in the following way:

“The insureds are clothing manufacturers who have been in business for twenty plus years. Basically what the in sureds to is to make up sample garments at their premises in Nottingham. Garment designs are agreed with customers and then orders are placed – at which point, the sample garments are sent to manufacturers abroad, who make up the garments from raw materials as per the agreed design. Finished garments are then brought back to the uk and supplied to the customer”

In response to this presentation, Insurers issued a quotation on 2 June 2008. On that day CMT agreed to be bound and the Policy incepted the following day. The Policy, which was subsequently issued, is in materially the same terms as the quotation except that it additionally includes a “Storage Questionnaire Condition”. As many provisions are being relied upon I must set them out. The key terms are as follows:

“RISKS COVERED

Subject Matter Insured: Clothing, fabric, finished and semi finished garments and / or similar suitably and sufficiently packed and / or protected for transit.

Voyages: ...

Storage: Whilst in store at named locations detailed within the schedule herein.

...

Basis of Valuation: Imports / Exports: Invoice Value, plus 0%, plus duty if incurred

Intercompany movements: Invoice Value, plus 0%, plus duty if incurred

Inland Transits: Invoice Value

Intercompany movements: Invoice Value

Storage: Invoice Value

Storage Limits: GBP 500,000.00 Whilst in store at Beltrame ...

Storage: GBP 250.00 Each and every excess

PREMIUM AND RATES

Rate vs Turnover

A Minimum and Earned Deposit Premium of GBP 7,650.00 plus Insurance Premium Tax of GBP 72.50 is payable, based upon estimated annual sales turnover of GBP 6,000,000, adjustable upon expiry at 0.1280%

...

CLAUSES

Institute Clauses:

Institute Cargo Clauses (A) Cl. 252 1/1/82

...

Institute Strikes Clauses (Cargo) Cl. 256 1/1/82

...

Consequential Loss / Delay Exclusion Clause

This Policy does not cover loss of market and / or loss or damage arising from delay or consequential loss of any description

...

GENERAL CONDITIONS

...

Alteration of Risk

Any material change in circumstances or nature of the risk covered by this insurance must be notified to Underwriters immediately. If the Assured fail to comply, then no claim arising after the change will be payable, unless Underwriters have otherwise agreed in writing.

...

Marine Insurance Clause

Notwithstanding the fact that some or all of the movements covered by this Policy of insurance are not subject to the Marine Insurance Act 1906 it is expressly agreed and declared that all the terms, conditions, warranties and other matters contained with the Marine Insurance Act 1906 shall be applicable hereto.

CLAIMS

...

Claims Procedure

It is a condition precedent to Underwriters liability that the Assured adheres to the following Claims Procedures at all times.

(N.b. The Assured must act prudently and as if uninsured, at all times, to minimise loss and / or damage to the Subject Matter insured and to protect any recovery rights that are available. Failure by the Assured to act in accordance with these conditions may prejudice the claim being made under the Policy.)

In the event of any happening or event likely to give rise to a claim under this insurance, immediate notice must be given, in writing, with full particulars to the broker named herein or the above named individuals ...

The Assured must then take the following steps:

•

Ensure that Underwriters are informed about the event as soon as possible but in any event within seven (7) working days from discovery.

•

Submit as soon as possible all written particulars, supporting documentation and correspondence regarding the event including invoices, statements or other documents evidencing the amount being claimed

•

Take reasonable measures to avoid or minimise any loss, damage or expense. Underwriters will pay the costs of such measures provided that they are both reasonable and necessary.

...

Storage Risks Extension Clause

This insurance extends to include the Subject Matter insured whilst in store ... subject to Policy terms and Conditions plus the following additional clauses:

...

Storage at Third Party Premises

Where declared to Underwriters that the Assured use Third Party Service Provider(s) for storage facilities of the Subject Matter Insured, it is a condition precedent to Underwriters’ liability that the Assured

...

b)

Notify Underwriters, as soon as practicable, of any material change in risk

...

Exclusions

This insurance does not cover:

a)

Damage occasioned by riot or civil commotion

...

e)

Loss or damage due to theft or attempt thereat unless following forcible and / or violent entry and / or exit.

...

Storage Questionnaire Condition

The Assured shall provide to the Underwriters a Storage Questionnaire, in the format provided to the Assured by Underwriters, on the following locations:

•

Beltrame ...

...

Such Storage Questionnaire(s) are to be completed by the Assured (“the Storage Questionnaire”). The Storage Questionnaire shall be so provided by 09.00 am Local Standard Time at the address of the Assured on 1^st December 2008 (“the Storage Questionnaire Deadline”).

Between inception and the Storage Questionnaire Deadline, cover is provided by the Underwriters on the terms and conditions specified in the Policy to which this condition is attached (“the Policy Terms”). Where the Storage Questionnaire is not submitted to the Underwriters by the Storage Questionnaire Deadline, cover shall terminate at the Storage Questionnaire Deadline. Where the Storage Questionnaire is submitted to the Underwriters by the Storage Questionnaire Deadline, cover shall continue from the Storage Questionnaire Deadline on the Policy Terms until expiry of the period of the Policy unless and until terminated in accordance with the following paragraph.

In the event that the Storage Questionnaire is unsatisfactory to the Underwriters, the Underwriters shall have the right, within 14 days of its receipt, to terminate the Policy by serving not less than 14 days’ notice in writing to the Assured at its address shown in the Policy, such notice expiring no earlier than the Storage Questionnaire Deadline.

In the event of termination under this Storage Questionnaire condition, the Assured shall be entitled to pro rata return of premium for the unexpired period of the Policy unless a loss has arisen for which the Assured seeks indemnity under this Policy in which case the Underwriters shall remain entitled to the premium specified in the Policy Terms.

...”

The Policy thus incorporated Institute Cargo Clauses (A) (1/1/82) and “Institute Strike Clauses (1/1/82).

The Institute Cargo Clauses (A) (“ICC(A)“) provide in material parts:-

“Risks Clause

1.

This insurance covers all risks of loss of or damage to the subject-matter insured except as provided in Clauses 4, 5, 6 and 7 below.

...

Strikes Exclusion Clause

7.

In no case shall this insurance cover loss damage or expense

7.1

caused by strikers, locked out workmen, or persons taking part in labour disturbances, riots or civil commotions

7.2

resulting from strikes, lock-outs, labour disturbances, riots or civil commotions

Duty of Assured Clause

16.

It is the duty of the Assured and their servants and agents in respect of loss recoverable hereunder

16.1

to take such measures as may be reasonable for the purposes of averting or minimising such loss,

16.2

to ensure that all rights against carriers, bailees or other third parties are properly preserved and exercised.

and the Underwriters will, in addition to any loss recoverable hereunder, reimburse the Assured for any charges properly and reasonably incurred in pursuance of these duties.

...”

This insurance covers ... loss of or damage to the subject-matter insured caused by

In no case shall this insurance cover

It is the duty of the Assured and their servants and agents in respect of any loss recoverable hereunder

What is the maximum value of stock sum insured at this location

Is this value based on cost or retail price?”

CMT made a claim against insurance for £180,527.60 being the price which CMT would have charged its customers for the garments to be manufactured from the clothing fabrics and trimmings not recovered from Beltrame. CMT, through its brokers, claimed that there had been a loss after the factory managers disappeared, collaboration with the workers broke down and the goods could not be recovered. CMT claims that it has suffered loss of the subject matter of the Policy “caused by strikers”. There has been either an ATL or a CTL. “Invoice value” under the Policy means retail price.

On 24 December 2009 Mr Philpott, on behalf of Insurers, wrote to Oddie Dalton declining cover on a variety of grounds. In this action Insurers rely on no less than ten separate grounds. Insurers have a right to take all these defences. As I see it however Insurers acted inappropriately at first by accusing a reputable British company of “wilful misconduct” without any justification. That allegation was not persisted with.

Insurers plead the following defences on liability in the amended defence:

Four witnesses gave evidence for CMT. From CMT itself, I heard evidence from Mr Shread, the Managing Director, Mr Pettit, the Factory Sourcing and Liaison Manager and Ms Leigh Davies the Technical Manager. All three seemed to me to be admirable witnesses, clear and precise about what they could remember and properly cautious about what they could not. Most of the points put to them in cross-examination sought clarification of what was unclear from the statements and disclosed material and there was little direct challenge to what they said. Insurers were not of course present during most of the events about which the witnesses gave evidence. Occasional documents, such as the draft, but not the actual, payment instructions for the £51,000 payment to Hamada were available to question the account being given in statements but these did not undermine the credibility of the witnesses. The judgment of the witnesses over some matters was questioned and I will refer to that below.

Mr Oddie, CMT’s insurance broker, gave evidence about market practice to respond to similar evidence from Insurers about what is claimed by them to be an understanding in the market about the meaning and effect of the expression “Invoice Value”. Mr Oddie seemed defensive about his company’s role in the events giving rise to this case. His experience of marine insurance did not seem to be very extensive. Nonetheless I had no reason to doubt the truth and accuracy of the experience and understanding to which he referred in his statement.

Insurers called two witnesses and relied on the witness statement of a third who was unfortunately too ill to give evidence. Mr Richard Grassick, Consultant Surveyor to Marine Management Surveys Ltd, who has had over 30 years’ experience as a marine surveyor. Mr Grassick was clearly a very experienced witness giving truthful and accurate evidence about his skilful investigations. He was challenged about the accuracy of some of his notes. I am quite sure that his notes were accurately prepared from what he was told when coming fresh to a new claim. However I prefer Mr Shread’s direct evidence of events and the surrounding contemporaneous records, where there is any inconsistency between this and Mr Grassick’s typed versions of his initial manuscript notes of conversations.

Mr Stephen Smyth is a UK cargo underwriter employed by Insurers with seventeen years’ experience. Mr Smyth’s evidence was generally fair and accurate. However when challenged on points about “Invoice Value” and standard bases of valuation set out in paragraph 21 of his witness statement and shown reasons for this he readily and commendably accepted that he had made a mistake. The Court is grateful to Mr Smyth for his integrity in this respect.

Mr Peter Philpott was too ill to give evidence. He is a Marine Claims Adjuster employed by Beazley having left PCL Claims in April 2011. His evidence was uncontroversial except about what happened at a meeting between the parties in March 2010. There was dispute between the parties about the admissibility of what was said at the meeting but as I see it that matter is irrelevant to the issues I have to decide.

As I accept the evidence of CMT’s witnesses about the events giving rise to the claim and am not directly concerned with the views of either side about the custom and practice of the insurance market or the garment trade, this case is more about the application of issues of marine insurance law to facts which are reasonably clear and to decisions made by CMT. I therefore turn to consider in more detail the competing submissions of the parties as they stood by the end of the trial. As there are a number of issues I will take these one by one rather than simply summarise the case for the Claimant and that of the Defendant.

Mr Sarll for CMT says that the peril insured against is “loss of damage to the subject-matter insured caused by ….strikers” within the meaning of c1.1 of ISC. The loss was either “caused by strikers” or, if it is not, it is an all risk peril and covered under ICC(A). Mr Marland contends that if there was a loss it was due to the shortage absence or withholding of labour and is excluded under the Policy. I will come to that alleged defence.

Mr Sarll says the first basis upon which loss is claimed is as an ATL under Section 57 of the Marine Insurance Act 1906 (“the Act”) which provides in effect that where the subject-matter insured is destroyed “or where the Assured is irretrievably deprived thereof, there is an actual total loss”. He says that this is a question of fact as Rix LJ pointed out in The Bunga Malati Dua [2011]Lloyd’s Rep 338, at 350. Mr Marland points out that in the Bunga Mulati DuaRix LJ emphasised that the test for an ATL has been applied with the utmost rigour (see paragraph 16) a proposition which he illustrates with a number of examples between paragraphs 19 and 25 concluding that an Assured is not irretrievably deprived of property unless it is physically and legally impossible to recover it, even if such recovery can only be achieved by disproportionate effort and expense. He also (at 17) quotes the following from the introduction by Sir Mackenzie Chalmers to the Marine Insurance Act 1906:-

“In the majority of cases the distinction between Actual Total Loss and Constructive Total Loss corresponds with the distinction which has been drawn between physical impossibility and mercantile impossibility. A merchant trades for profit, not for pleasure, and the law will not compel him to carry on business at a loss. A commercial operation is regarded as impracticable, from the mercantile point of view, when the cost of performing it is prohibitive.”

Mr Sarl argues that there was no ATL in September since the goods were still in the factory and there was a chance that they might be recovered. But whatever the position as the situation is examined day by day there was certainly an ATL by the time the proceedings started in November 2010 and there is one now. Three years have passed since the incident and the whereabouts of the goods are unknown. The landlord controls the factory and it is reasonable to infer that the goods have either been disposed of or sold.

Mr Marland argues that there is no ATL. He points out that the goods might possibly have been recovered if the legal action had been pursued (albeit that related to the machines not the subject-matter of this insurance). Furthermore it would not have been impossible to pay over the £80,000 and obtain the return of the assured items.

As I see it this was not an ATL. While the question is one of fact the test is applied with the “utmost rigour”. The goods had not been destroyed they were in the factory but it proved very difficult to get them out. The goods may still exist. Legal action which may have obtained a result was either not taken or abandoned, in either case for good business reasons. The £80,000 was not paid partly no doubt because there was no guarantee that even if it was the goods would be delivered given the situation as it had deteriorated by early November. A comparison between the facts of this case and those illustrated in the Bunga Malati Dua shows some distance between the requirements of an ATL and what happened here. It follows that I reject that aspect of the claim.

Section 60(1) provides that “subject to any express provision in the Policy, there is a Constructive Total Loss where the subject-matter insured is reasonably abandoned on account of its Actual Total Loss appearing to be unavoidable, or because it could not be preserved from Actual Total Loss without an expenditure which would exceed its value when the expenditure had been incurred.” Section 60(2) provides that “In particular, there is a constructive total loss (i) where the Assured is deprived of the possession of his ship or goods by a peril insured against and (a) it is unlikely that he can recover the ship or goods, as the case may be….”. As Rix LJ put it in the Bunga Malati Dua at 15 “the essential learning of CTL is that an insured does not have to prove an ATL if he is able to show that the cost of recovering ship or cargo, or of repairing a damaged ship, would exceed its value when recovered or repaired, or where he is deprived of possession of ship or cargo, if he can show that recovery is ‘unlikely’”.

Mr Sarll claims, as his primary case that there was a CTL , as it was unlikely that CMT could recover possession of the garments. He points out that it is only necessary to show that it is unlikely that the assured will recover its property within a reasonable time- The Bamburi [1982] 1 Lloyd’s Rep 312, 320-1. In that case it was held that a reasonable time for the loss of a ship was twelve months. The test is to be applied objectively by reference to the time of service of the notice of abandonmentand the time, if later, when the assured commences proceedings. He cites the authors ofArnould’s Law of Marine Insurance and Average put it at para. 29-04:

“there are two main questions to be considered in every case of constructive total loss: (1) Was the state of things such as, prima facie, to entitle the Assured, on receiving intelligence thereof, to give notice of abandonment? (2) Did it continue such, down to the time of action brought, as to entitle him to follow up such notice and recover as for a total loss?”

Where, as in this case, no notice of abandonment was given the appropriate point in time for question (1) is as at the date that information is received. CMT says that is 5 November.

In a supplementary skeleton argument Mr Sarll argued at the start of trial that there was a CTL on 5 November 2008. Mr Marland responded with a similar document and this led Mr Sarll in his closing submissions to rely upon an argument that all the necessary requirements for a CTL were satisfied at least by late 2009 or by the time this action was commenced. His first position was that a CTL arose on 5 November 2008 when the workers refused to let CMT have its goods after Mr Pettit had refused to pay the £80,000. At that point CMT was wholly deprived of the possession, control or free use and disposal of the insured product. It was also established that it was unlikely that the goods could be recovered within a reasonable time. Mr Sarll says that the period would be much shorter than twelve months for garments whose sale value depends upon their style and season. The legal advice of Mr Ennouari was to the effect that the available legal procedures were longwinded and the chances poor. Indeed, by a date ‘later in 2009’ there was still no outcome and Mr Ennouari again advised of these matters. As at the time when proceedings had commenced, those facts were no different.

Mr Marland argues that CMT was no less “in control” of the goods on 5 November than it had been from September when the workers first held the goods to ransom. He says that the only difference was that in September CMT had paid the ransom whereas in November it was refusing to do so because of the inflated nature of the demands. If CMT’s claims of that valuation are correct it had the opportunity to pay £80,000 to obtain the release of goods and to avoid a £180,000 loss and an insurance claim.

I consider that there was a CTL from about 5 November 2008 onwards. After that point it was unlikely that CMT could recover possession of the goods within a reasonable time. A reasonable time would have been relatively short period given CMT’s commitments to customers and the fact that fashion garments have a short commercial life. But, as I see it, there would still be a CTL, if one took a longer period. While it is true in one sense that the difference between September and November was that in September CMT paid the workers and the goods but in November they would not pay so received nothing that is a superficial view. Productivity and morale in the factory was deteriorating steadily from early September onwards. What had been demanded and paid had reflected the value of the goods being obtained from the factory. By November things were different, the workers had become more aggressive in their approach. Those involved at CMT were convinced that this was the end of the road, a conviction that was informed by close involvement in events by three executives of the company, detailed and careful study of the situation, the taking of advice and the drawing of reasonable conclusions in an unusual situation. The evidence shows that a payment of £80,000 would have been the equivalent of £350,000 for orders processed at the factory and there was no guarantee that CMT could get the goods out. There was no prospect of resumed commercial activity on that scale. Legal steps were ineffective and there was plausible advice that they would remain so. The fact that CMT was, following the advice of Mr Grassick, seeking to act as a prudent insured and not simply giving up and leaving is not as I see it evidence that it was not unlikely that the goods could be recovered. In the middle of a commercial crisis CMT cannot, be criticised for taking steps which might have been considered necessary to comply with its duty under Section 78(4) to take such measures as were reasonable to avert or minimise a loss.

Most of the cases giving guidance about CTL concern ships rather than cargo but there are some parallels with the Bayview v Mitsui Marine [2002] 1 Lloyd’sRep 652 and [2003] 1 Lloyd’s Rep 131 where the Court of Appeal implicitly approved the decision of David Steel J that a CTL had occurred where a consignment of Toyota cars had been in effect stolen by those connected with the Dominican customs authorities. While it is not helpful to enumerate the precise respects in which the facts of that case resembled and differed from those arising here there are some parallels. The vehicles had not disappeared but had fallen into the hands of those who, in the real world, would not be returning them. The garments in this case similarly were not going to come out of the factory within a reasonable time, and they had a limited life as finished goods capable of being sold at or approaching Invoice Value, a conclusion which is the same whether events are viewed as at 5 November or when the action was brought. This was not physical impossibility but it was mercantile impossibility.

I have referred to the wording of Section 60(2) of the Act which provides for where “in particular” there is a Constructive Total Loss. It is Section 60(1), not (2) which gives rise to an observation made by David Steel J at first instance in the Bunga Melatai Dua reported at [2010] 1 Lloyds Rep 509. The judge stated at paragraphs 55 and 56:-

“…the claimant must satisfy the criteria contained in section 60 of the Marine Insurance Act 1906:

i)

The subject matter must be abandoned;

ii)

Because an ATL is unavoidable

In my judgment these criteria are not met. In the first place the vessel and its cargo were not abandoned in the relevant sense. What is required is not a notice of abandonment in the sense of sections 61, 62 and 63 of the Marine Insurance Act but the abandonment of any hope of recovery… no such abandonment had occurred. To the contrary the shipowners and the cargo owners had every intention of recovering their property and were fully hopeful of doing so.”

Mr Marland points out that after 5 November Mr Pettit stayed in Morocco for over a week to monitor the situation, lawyers were instructed and CMT were keen to ensure that the insurance remained in place. He contends therefore that there was no abandonment of any hope of recovery at that stage.

I do not accept that submission because David Steel J was addressing a case under 60 (1) not one such as this under Section 60(2). I notice that in the Bamburi(page 314 right hand column) Staughton J identifies as being established by authority and not in dispute that sub-section (2) supplements sub-section (1) and does not merely illustrate it. The judge identifies that consideration as being important in that case because Bamburiwas not a CTL under (1) but proved to be under (2). Further imposing such a criterion is stricter than ‘unlikely’ and would oblige CMT to show something more than Section 60(2) requires.

Section 62(2) of the Act requires that before CTL can arise an effective notice of abandonment must be given expressing an unconditional abandonment of the assured’s’ interest. No such notice was given. CMT relies upon Section 62(7) which provides:-

“Notice of abandonment is unnecessary where, at the time when the Assured receives information of the loss, there would be no possibility of benefit to the insurer if notice were given to him.”

Mr Sarll argues that no possibility of benefit would have arisen to the insurer if notice had been given. He points to the fact that Mr Philpott gives evidence that even if he had interpreted an email from CMT as a notice of abandonment he would certainly not have accepted that notice. Further the Insurers stood no better chance of obtaining the release of the goods than CMT. Moreover such a notice was implicit in a request that Insurers come and see the factory for themselves. There was nothing at that point to suggest that CMT still wanted the goods for themselves. Mr Marland points out that the burden lies on CMT to satisfy what is a heavy burden-‘no possibility of benefit’- which it has failed to discharge.

The starting point for considering the question of benefit is the purpose for which the notice is required to be given. as appears from a decision of the then Tomlinson J cited by Mr Sarll for a different purpose. -Kastor Navigation v AGF Mat & Others [2003] 1 Lloyd’s Rep 296 (Tomlinson, J.); [2004] 2 Lloyd’s Rep 119 (CA)

“In Kaltenbach v. Mackenzie [1878] 3 CPD 467 at 471-475, Brett L.J. described the origin of the necessity of giving a notice of abandonment and explained its function. I make no apology for citing a very long passage from his judgment since it is in my view essential to look behind the formalities and to enquire precisely why notice is required to be given and what should be the consequences of either a failure or an inability to do so. Brett L.J. began his judgment as follows” [ In the interests of brevity I set out only part of what follows]

“This case raises the questions of abandonment and notice of abandonment on a policy of marine insurance. Before I enter upon the merits of the present case I think it desirable to state my view of the law.I agree that there is a distinction between abandonment and notice of abandonment, and I concur in what has been said by Lord Blackburn, that abandonment is not peculiar to policies of marine insurance; abandonment is part of every contract of indemnity. Whenever, therefore, there is a contract of indemnity and a claim under it for an absolute indemnity, there must be an abandonment on the part of the person claiming indemnity of all his right in respect of that for which he receives indemnity…. How, then, did it arise that a notice of abandonment was imported into a contract of marine insurance? …The reason why it was introduced by the shipowner and underwriter is on account of the peculiarity of marine losses .  These losses do not occur under the immediate notice of all the parties concerned. A loss may occur in any part of the world. It may occur under such circumstances that the underwriter can have no opportunity of ascertaining whether the information he received from the assured is correct or incorrect. The assured, if not present, would receive notice of the disaster from his agent, the master of the ship. The underwriter in general can receive no notice of what has occurred, unless from the assured, who is the owner of the ship or the owner of the goods, and there would therefore be great danger if the owner of a ship or of goods - that is the assured - might take any time that he pleased to consider whether he would claim as for a constructive total loss or not - there would be great danger that he would be taking time to consider what the state of the market might be, or many other circumstances, and would throw upon the underwriter a loss if the market were unfavourable, or take to himself the advantage if the market were favourable. These are the reasons why I think the assured and the underwriters came to the conclusion that it should be a part of the contract and a condition precedent that, where the claim is for a constructive total loss, there must be notice of abandonment, unless there were circumstances which excused it.”

In a case like the present allowing the assured to recover for a CTL does not involve that the assured is unilaterally throwing onto underwriters the risk of market fluctuation, or taking to himself the advantage of a favourable market. None of the reasons which Brett L.J. thought had informed agreement of the condition precedent would lead to the conclusion that an insured in such circumstances ought not to be permitted to recover for a CTL, at any rate not simply on account of failure to serve notice of abandonment before the vessel becomes an actual total loss by operation of a peril other than that which has caused the CTL.”

The situation at the factory had been disclosed to the Insurers who were well aware of it and could take informed decisions. The position adopted by CMT was clear and openly disclosed. This was not a ‘marine’ situation with the risks that would go with that. None of the risks identified by Brett LJ as showing the need for notice of abandonment applied. There was no realistic possibility of Insurers being able to exercise effective control over salvage. Insurers knew what was going on and could have intervened, with consent which CMT would readily have given, should they have wished to do so In the context of this type of case and essentially for the reasons put forward by Mr Sarll I conclude that there was no possibility of benefit to the Insurers if notice had been given to them, even recognising as I do that that the hurdle for CMT is a high one.

The clause requires immediate notification of any happening or event likely to give rise to a claim. It is common ground that whether or not happenings or events are likely to give rise to a claim (ie that there is at least at 50% chance of such a claim) is an objective test. Submissions have been made by each side about the possible inconsistencies between the provisions requiring “immediate notice be given in writing” and “ensure that Underwriters are informed about the event as soon as possible but in any event within seven (7) working days” from discovery. Applying principles of construction to a Policy drawn up by Insurers the overall effect as I see it is that notice must be given “immediately” and in any event within seven working days.

Insurers contend that notice should have been given in September when workers were refusing to permit the removal of material. Insurers rely upon the fact that Mr Shread on 25 September sought details of relevant insurances. Insurers contend that Mr Shread knew that there was a likelihood that the workers would take CMT’s property from Beltrame as he knew that this is what had happened at Courtaulds’ base in Morocco. However I accept Mr Shread’s evidence that he did not know about the problem at Courtaulds until after the key events in this case. In short Insurers say the ingredients requiring notification were in place on 25 September and that CMT failed to give notice within seven working days of that. Further Insurers say that what was passed on them on 8 October was not the full picture, as it should have been.

CMT emphasises that the claim under the Policy is for loss of goods and it would be immaterial that events were occurring which might merely diminish their value. The question is when the loss of goods became likely. CMT argues that up until the end of September issues had been contained, a deal had been done by which the company would receive finished goods and the workers would have had a lifeline for their pay. Mr Sarll points to the friendly overtures in the email, apparently from the workers, of 29 September. At that point it was not likely that events would give rise to a claim. The workers were expected to wish to keep their employment, not lose it. The workers were without management but this had been the case throughout September. Aziz or Hamada could have been expected to come back or another manager put in place in a concern with which CMT had had satisfactory dealings by then for five years. CMT had experience of unexpected situations in foreign countries and Ms Davies said that she had dealt with such challenges. In addition substantial quantities of goods were leaving the factory.

In my judgment this defence fails. Although the tests are different there is a tension in arguing simultaneously that notice should have been given sooner because a loss of the goods was likely but that recovery did not become unlikely even in November. Written notice was given on Wednesday 8 October 2008. The situation was fluid and fast moving. The general gist of what was happening, as far as CMT was aware, was passed on in sufficient detail to enable insurers to make their own investigations. Allowing seven working days the question is whether on or before Monday 29 September Mr Shread or CMT knew of any happening or event likely to give rise to a claim. A perception of the situation at that time should not be coloured by hindsight. Given the undisputed facts which I set out earlier in this judgment I conclude that CMT did not know of any happening or event likely to give rise to a claim before 29 September. As late as 19 and 20 October the workers sent out finished goods, CMT made payment and also sent fabric into the factory.

Counsel drew attention to authorities on this aspect of the case but the position seems to me clear cut. It is for Insurers to prove that there was theft. It is common ground that when Mr Pettit and Mr Grassick returned to the factory in September 2009 most materials were still in place and that, apart from a computer, neither witness could be sure that anything was missing. The Insurers have no proof- who took what and when? A further difficulty for Insurers which, on other facts, might have led to an interesting discussion was whether, if the workers did take goods it would have been contended that this was not theft. Leaving aside the debate whether theft for this purpose has a broad definition or that set out in the Theft Act, Insurers would have to show that the workers had acted dishonestly. It may well be that workers who had received no pay for a protracted period and had taken garments in retaliation, would be seen by the community not to be acting dishonestly.

This potential defence arises from clause 3.7 of the Institutes Strikes Clauses Insurers contend that there was certainly on 12 November a state of affairs at the Beltrame factory which satisfied the statutory definition of “riot”. It is contended that on a balance of probability any stock which was taken by the workers went on that day. There is no evidence to support that contention and the matters relied upon, an email of 29 September, a notification from Mr Oddie that it would appear that “the staff had become violent” and what Mr Pettit is said to have told Mr Grassick were all set in context by Mr Shread and Mr Pettit in evidence. There was nothing remotely resembling a riot or civil commotion.

So far as withholding of labour and the comparable provisions in ICC(A) clause 7.1 and 7.2 Insurers argue that the losses of which CMT complains are its inability to complete orders to customers and hence the cancellation of the relevant contract. Insurers contend that this inability to complete orders and thus the loss of the orders was due to the absence of labour, the sporadic nature of the labour provided while the factory was occupied.

CMT asserts that the peril it had insured against and was claiming for was loss of possession not damage to the subject matter caused by strikers. The exclusions address damage not loss. Mr Sarll contends that other clauses invoked by Insurers are irrelevant because they are concerned not with loss of the goods but with consequential losses. Mr Sarll relies on an extract from “Marine Cargo Insurance” by Mr Dunt at paragraph 10.36 which reads as follows:-

“…the exclusion of ‘withholding of labour’ serves to make it clear that insurers do not wish to indemnify the assured for cost or expense arising as a result of a strike. Cargo underwriters are content to pay claims for physical loss of or damage to cargo caused by strikers, but no more. So, for example, if strikers set fire to a warehouse and the cargo is damaged as a result of that fire this is covered being damage to the cargo caused by strikers. However, if strikers withhold labour and the cargo is exposed to the elements because of their failure to care for it, that is not covered. This exclusion further appears to be aimed at reinforcing the exclusion of losses from delay which are already excluded under the general exclusion clause relating to delay…”

As I see it this answers the apparent puzzle of the Policy granting explicit cover under the ISC while then seeming to take it away by exclusion. The exclusion addresses consequential loss not claimed in this case

Mr Marland contends that the loss is excluded by arrest restraint or detainment because it would appear from the evidence of Mr Grassick and Mr Pettit that the “say so” as to who could enter the factory or not rested with the local governor. Mr Marland said that CMT has not produced a court order which would indicate that the goods remaining in the factory were or are detained as a result of formal judicial process. He therefore contends that it would “appear” that the goods remaining in the factory were detained as a result of the exercise of political or executive rather than of other power. There is an alternative claim that the taking of the goods by the workers amounted to seizure i.e. forcible dispossession by lawful authority or by overpowering force.

Mr Sarll’s response is that Insurers cannot prove that there was a seizure within the meaning of the exclusion. I agree. Furthermore what information there is about what the workers did on 12 November does not suggest a forcible dispossession by an overpowering force. The undisputed evidence of Mr Pettit was that when he met the governor in 2009, shortly before visiting the site with Mr Grassick, the gentleman said that he did not have jurisdiction and that the security guard at the factory was employed not by the authorities but by the landlord.

Section 78(4) provides; “It is the duty of the Assured and his agents, in all cases, to take such measures as may be reasonable for the purpose of averting or minimising a loss.”

Mr Marland argues that the loss in this case was proximately caused by CMT’s failure to take reasonable steps to avert or minimise. Mr Shread gave evidence that CMT had sent further fabric out to BMS in Morocco intended for the factory over the weekend of 18 and 19 October in order to complete a style (which in the event the customer cancelled). Insurers contend that it was not appropriate for CMT to continue to ship goods in given the volatile and unpredictable nature of the workers at the factory at the time. Insurers say that far from taking reasonable steps to avert or minimise, CMT was adding to the loss. The pleaded allegation is that CMT failed to take any or any adequate steps to remove the insured goods from the factory, put security in place or start legal proceedings to safeguard the goods.

Mr Sarll responded by citing authorities dealing with the effect of Section 78(4), notably State of Netherlands v Youell[1998] 1 Lloyd’s Rep 236, 245 where the then Philips LJ said that the sub-section will only have significance “in the rare case where breach of that duty is so significant as to be held to displace the prior ensured peril as the proximate cause of the loss”.

The pleaded defence was not developed. On the face of things it may well seem unwise to send more fabric into a factory as part of a strategy whose purpose was to get fabric out of it. But the considered view of CMT was that it was worth sending in this material as part of that overall strategy and because it was needed to finish particular garments. This was in a context where CMT had successfully persuaded the workers to finish garments and had retrieved substantial quantities of finished product from the factory. With the benefit of hindsight this step was a mistake but at the time that it was taken it was the result of a reasonable and informed judgment by CMT which was trying to deal with unusual circumstances. Insurers did not criticise the step at the time and would have been wrong to do so. This was not a routine insurance event where the Assured failed to take the conventional and recognised steps to minimise loss. This defence fails.

Mr Marland points out that the completion of a Storage Questionnaire was a condition precedent for cover. Cover terminated if the deadline for submission was missed. He submits that the goods remaining in the factory in December were not irretrievably lost to CMT. What it lost was its orders as a result of the delays and labour shortages. If the goods became irretrievably lost to the Claimant after that this was after termination of the cover.

The questionnaire was only provided on 23 December 2008.

Mr Sarll responds by contending first that any non-compliance was waived on 19 January 2009 when Mr Chris Mason of Beazley stated that “cover will continue”. As I see it that was unsurprising given that while the questionnaire had not been lodged on time it had been provided on 23 December 2008. It is clear from the terms of the Storage Questionnaire Condition which I have set out above that cover was in place from inception until 1 December. As I see it there was a waiver by Insurers but even if there had not been this condition would only have bitten to the extent that loss occurred after 1 December. For reasons I have given the loss occurred before that date.

Insurers contend that a material alteration in risk occurred when, as they see it, CMT agreed to take over management of the factory, following their discovery that Beltrame’s owners could not pay wages and were not on the scene. Whilst, at the outset, there may have been grounds for putting forward such a defence I did not understand it to be much pressed, if at all following the hearing of evidence. As appears from the narrative I have set out above CMT is right to claim that it was managing the situation, or perhaps the problem, not the business. Mr Pettit’s role at the factory was to try to persuade the workers to keep things going and generally to look after the interests of his company. On the facts as found at the trial there is nothing in this point so I do not find it necessary to deal with the differing constructions of the material alteration of risk condition put forward by Mr Sarll and Mr Marland.

Section. 27of the Act provides:-

“(1)

A policy may be either valued or unvalued.

(2)

A valued policy is a policy which specifies the agreed value of the subject-matter insured.

(3)

Subject to the provisions of this Act, and in the absence of fraud, the value fixed by the policy is, as between the insurer and assured, conclusive of the insurable value of the subject intended to be insured, whether the loss be total or partial”

The principles are well established. It is for C to prove that the policy is a valued policy, otherwise it is an unvalued policy. The distinction lies in the fact that, in the case of a valued policy, it is not necessary for the assured to establish his loss. In the absence of fraud, the value fixed in the policy is conclusive. An agreed value dispenses with any need to prove the true market value of the insured property – Lidgett v Secretan (No. 2) (1871) LR 6 CP 616, 627 – 628. It is rare for a marine insurance policy to be unvalued.

CMT claims for the “Invoice Value” which it says is the full value of what were, or would have been, the invoices for the finished goods to its customers. The express basis for valuation means that this is a valued policy.

CMT claims, that as a matter of construction, selling price is what “Invoice Value” means. It argues that also as a matter of commonsense that is what “Invoice Value” must mean, that impression being confirmed when the factual matrix is examined. In June 2008 Roddie Dalton sought amendments to the projected sendings under the contract so that these became “UK/North Africa sendings £6 million, North Africa sendings £6 million”. If invoice value did not have the meaning claimed by CMT the figures would not be the same, as Mr Smyth of Insurers agreed when also accepting that the contract of insurance was written on the basis of the information provided. Mr Smyth also appeared to agree that the reference in the same email in June 2008 referring to the maximum storage value at any one location in Morocco needing increasing from £350,000 to £500,000 must also have been a reference to CMT’s perception of invoice value. Mr Smyth also accepted that the reference in the Policy to Storage limits of £500,000 while in store at Beltrame was consistent with that.

Insurers say that “Invoice Value” cannot mean that CMT is entitled to the full onward projected face value of the finished garments to its customers. Mr Marland points out that the subject matter of the insurance is not projected deliveries to customers or even garments it is “clothing, fabric, finished and semi-finished garments and/or similar interests suitably and sufficiently packed for transit”. The loss of a roll of fabric is not the same as a loss of finished garments. The loss of a roll of fabric may lead to the loss of an end sale for the customer but that is consequential loss not covered by the Policy. Mr Marland contends that the only invoices of relevance are those for raw and/or semi-finished materials being the suppliers’ invoices to CMT and those from CMT to Beltrame recording the value for customs purposes.

Insurers also point to Section 16(3) of the Act which provides that “the insurable value is the prime cost of the property insured, plus the expenses of and incidental to shipping and the charges of insurance upon the whole”. Mr Marland also relies on the discussion of this sub-section by Scrutton LJ in Williams v Atlantic Assurance Company Ltd[1933] 1 KB 81. After extensive discussion about what the measure of value is to be he concludes by approaching the case from the point of view of underwriters “who are concerned to determine the cost to the Assured, or the invoice or market value at or near the time of the shipment”. I accept that that indicates that the approach to valuing a loss under Section 16(3) is not that contended for by CMT. I also accept that CMT’s position is not supported by the approach to loss in Williams as the court held that the prime cost of the goods was their invoice or market value at or near the time of shipment or the time when the goods were first at risk. But Williams is concerned with an unvalued policy.

Mr Marland also puts forward an argument based on what the “risks covered” part of the Policy says is the Basis of Valuation:-

He submits that while for storage the wording is simply “Invoice Value” because that would not involve additional cost other items include the words “plus 0%”. He points out that “insured value plus x%” is a longstanding and common usage in marine cargo insurance as is illustrated by its appearance in Anderson v Morice(1874-75) LR10CP609. In that case Blackburn J suggested the possibility that invoice value could be construed as “another expression for the ordinary shipping value …” as opposed to merely the, base cost price. He submits that there is no case where “invoice value” has been accepted or argued as being the ultimate sale price that the consignee would achieve in the sale to an end user. The accepted method of making provision for that type of loss in marine cargo insurance is to add “x% to whatever is insured”. In short, Invoice Value means shipping value. If profit was to be included it would have been added as a percentage.

As I see it it does not matter there are no earlier decided cases valuing cargo on the basis of the invoice price sought by CMT. I am concerned not with value generally but with the expression chosen by the parties in current commercial conditions. Section 16 begins “Subject to any express provision or valuation in the policy.” Section 16(3) cannot be read in isolation from the rest of the Section. Mr Marland’s ingenious and skilful argument based on close examination of the definition of the goods falls away when one takes, as in my judgment one should, a broad commonsense approach to identifying the goods insured and what if any loss occurred in the context of the type of commercial operation the parties knew was being insured. It is to be expected that CMT would have wanted to insure against the loss which they would suffer if the garments or items did not come out of storage at the factory and proceed to customers. For CMT the price that customers were going to pay was the value to them of the goods, it was what CMT would lose if they went astray. It is clear from the factors identified by Mr Sarll that that is what CMT were seeking and that, given what the documents record and Mr Smyth accepts, Insurers knew they were seeking. If Insurers saw retail price as being out of the question why does question 5 in the Storage Questionnaire ask “Is this value based on cost or retail price”? The evidence to suggest that CMT’s approach was unprecedented or otherwise unthinkable fell away in cross- examination. The approach is also consistent with what one would expect in a policy covering an operation such as CMT’s as one sees from the practical textbook cited by Mr Sarl. Mr Marland’s argument on plus 0% has some force ( although, while I recognise that there may a reason for it, there is no such reference after “Invoice Value”) and this may be a conventional way of including the profit element. But that is no reason why the parties should not arrive at it in another way. It follows that “Invoice Value” means retail price in the sense used by CMT.

CMT contends that it follows that the Policy is a “valued policy” within Section 27 of the Act. So it is not necessary for CMT, in the absence of fraud, to establish its loss since that is the value fixed in the Policy. Mr Sarll submits that the volume of invoices needed to prove loss in detail would be immense in this case as is clear from what is said in Mr Pettit’s second witness statement. The facts of this case are a good illustration of the good sense of the approach of the law to a valued Policy. He submits that unvalued policies are extremely rare and that this is not one of them.

Mr Marland submits, relying on Berger and Light Diffusers Pty v Pollock[1973] 2 Lloyd’s Rep 442 at 459, that where there are no actual relevant invoices or conflicting invoices what would otherwise be a valued Policy becomes an unvalued one. It follows, Insurers say, that CMT cannot demonstrate what in fact was lost because the relevant invoices produced are the purchase invoices and if the value of the goods is to be determined it should be by reference to the cost to the insured. However as I read Berger the policy was held to be unvalued because none of the invoices in that case could be regarded as commercial invoices giving an indication of the values of the goods in an arms-length transaction. Insurers’ submission also falls away if, as I have concluded subject to one exception I shall come to, the relevant invoices are those between CMT and its customers.

Having reached the conclusions that I have about the meaning of Invoice Value it follows, as I see it, that this is a valued Policy and that it is not necessary for CMT to prove the loss in detail. The meaning of Invoice Value and the question of whether the policy is valued travel together. In principle the assured in this area of commerce, where loss of the goods would generally mean loss of the end contract with customers, would need a value that exceeded the basis for an unvalued policy (generally the market price at the commencement of the risk). The Insured would welcome premiums which reflected that. When one turns to see what the parties agreed in this case it is not a surprise to conclude that they achieved that result.

CMT claims the value of the following purchase orders for goods which, on its case, were lost:-

There are purchase orders for most of the items which are not criticised except over the apparent tolerances. The Debenhams items do not form part of a negotiated sale at arms-length to a customer. The fabric was sent out in good faith for sound reasons. But it was not given a price that could fairly be described as Invoice Value. The argument of Mr Sarl that the insurance must have been intended to cover speculative orders is persuasive as to the existence of cover but does not assist on the question of valuation. I will hear argument about these items if they cannot be agreed.

This claim succeeds as a Constructive Total Loss and the defences fail. The policy is valued not unvalued.“Invoice Value” means retail price in the sense used by CMT.

I shall be grateful if Counsel will, not less than 72 hours before the hand down of this judgment, let me have a note of corrections of the usual kind and a draft order, both preferably agreed, together with details of any other issues which they will seek to raise at the hearing.

I am grateful to Counsel and to the solicitors for the admirable way in which this case was prepared and presented.