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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Strachan v Scottish Boatowners' Mutual Insurance Association [2001] ScotCS 138 (31 May 2001)
URL: http://www.bailii.org/scot/cases/ScotCS/2001/138.html
Cite as: [2001] ScotCS 138
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OUTER HOUSE, COURT OF SESSION |
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A2156/01
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OPINION OF LORD EASSIE in the cause IAIN TAIT STRACHAN Pursuer; against THE SCOTTISH BOATOWNERS' MUTUAL INSURANCE ASSOCIATION Defenders:
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Pursuer: C.M. Campbell, Q.C., Thomson; Shepherd & Wedderburn, W.S.
Defenders: Tyre, Q.C., Brodie; Morton Fraser Commercial
31 May 2001
Introductory
[1] In 1994 the pursuer was the owner of the MFV "Hebron". He had owned the vessel for some years and it was insured under a contract of insurance issued by the defenders. The policy had been renewed annually and was so renewed as to operate from 01 January 1994 to 31 December 1994.
[2] The policy of insurance was subject to the defenders' Rules (6/1 of process). The risks insured against included, in terms of Rule 6, total loss and particular and general average. The contract of insurance is also averred to have covered the total loss of fishing gear along with the loss of the insured vessel (Rule 1). The perils insured against included, among others, perils of the seas. The policy was a valued policy, the insured value of the vessel being £310,000.
[3] It is averred that on 21 February 1994 the vessel left Peterhead on a fishing expedition and fished, without apparent incident, until 1 March 1994, at which point the vessel was to the north-east of Shetland. The weather then deteriorated. In Article 4 of condescendence various detailed averments are made concerning subsequent events, but for present purposes it is unnecessary to say more by way of summary of those averments than that sea water began to enter the vessel; certain difficulties were encountered with certain pumps on the vessel; the water level continued to rise; contact was made with the Coastguard; a helicopter attended and the pursuer and his crew abandoned ship. The vessel was not however lost since two other fishing vessels attended after its abandonment by the pursuer and towed the Hebron to Lerwick, arriving there on 3 March 1994 when the vessel was pumped out. It is averred by the pursuer that in the course of the salvage operation certain minor damage was done to the Hebron. Following the salvage of the Hebron the salvors commenced proceedings for salvage against the pursuer and on the dependence of those proceedings used diligence which included the arrestment of the vessel in rem. The pursuer intimated a claim to the defenders in respect of the particular average sustained on the voyage and in the salvage operation following upon it.
[4] It appears that on 23 April 1994 an inquiry into the incident was conducted in Aberdeen under the chairmanship of Captain Peter H King. Following the inquiry, on 15 June 1994, solicitors acting for the defending insurers wrote to those acting for the pursuer repudiating liability under the policy by reason of certain alleged breaches by the pursuer of the conditions in Rule 13 of the defenders' Rules. Rule 13 is in these terms:
"The insured shall take all reasonable care and precaution to see that the vessel is maintained and kept during the currency of the Policy in a seaworthy condition.
The Association shall not be liable for any claim for loss or damage when the insured making such claim has not used all reasonable endeavours to save his vessel from such loss or damage."
[5] The defenders accept that they rejected the claim but aver that they were entitled to do so because the pursuer was in breach of Rule 13. The pleadings for both parties contain detailed averments respecting the disputed issue whether the pursuer was in breach of Rule 13 but for the purposes of the matters debated before me it is not necessary to examine or summarise them, it being accepted that resolution of that issue would require a proof.
[6] It appears that neither before nor after the repudiation did the pursuer do anything to remedy the effects of the ingress of water or otherwise repair the vessel. In relation to the period after the repudiation the pursuer's position is set out in averment (Art. 10 of Cond: Closed Record 29E ff.) as follows:
"The cost of repairing the said vessel increased after the initial incident because of the defenders' failure to accept liability under the policy, and because of their failure to deal adequately with the salvors' claim. They refused to give security to the salvors in respect of their claim. As a result the vessel remained arrested for over two years, during which time it lay, deteriorating, in Lerwick Harbour. By the time the arrestment was lifted (as a result of the defenders paying the salvors a sum of money) it was uneconomic to repair. In any event, because of the defenders' failures the pursuer could neither repair nor use it. Because of the salvors' arrestment the pursuer was unable to prevent deterioration. He had no access to the vessel. He had no funds to execute repairs. The pursuer was unable to obtain funds from his Bank, the Royal Bank of Scotland, through Caley Fisheries. He was at the limit of his credit. He had no capital to pay the salvors. The Royal Bank would not lend money to pay the salvors. No other commercial lender would have assisted the pursuer in the circumstances. There would have been no point in spending money or effort on a vessel which was arrested by salvors and of which the pursuer had no prospect of recovering possession. After the arrestment was lifted the pursuer still had no resources to repair at (sic) the vessel, nor to stop further deterioration. In 1998 it was sold for £539 by the harbour authorities, who had been seeking to sell it for some time. The purchaser removed the winch and nit drum from the vessel as well as some or all of the engine. The vessel was then towed to Eire, where it is believed that it was disposed of by the purchaser. The pursuer, as a result of the defenders' refusal to indemnify him, and as a result of the said continued arrestment, was unable to carry out any works to the said vessel."
The pursuer goes on to aver that as "a result of the damage sustained during the said voyage, and the deterioration thereafter, the vessel became beyond economic repair. It was a constructive total loss."
[7] In the succeeding article of condescendence the pursuer goes on to aver the suffering of additional loss as follows:
"Between the time of the incident and when the vessel was ultimately disposed of, a large number of articles, parts, tools and equipment were removed from the vessel or damaged in it. Had the defenders not breached their obligations the pursuer would have been on hand to prevent such loss and the vessel would not have been left largely unattended for three years in Lerwick Harbour...".
[8] In Article 12 of condescendence it is further averred that as a result of the defenders' repudiation of his claim the pursuer was prevented from trading "during the period since 2 March 1994". It is averred that, had the defenders honoured their obligation under the contract, the boat would have been repaired and the salvors paid in early course and that the pursuer would have resumed his trade. The article contains further averments concerning the trading losses and the pursuer's loss of income and his exposure to continuing liabilities, which it is not necessary to set out in detail. It is also averred on the pursuer's behalf that "because of the defenders' breach and the fact that it prevented the pursuer from operating the vessel indefinitely, the pursuer required to sell the fishing licence. But for his impecuniosity caused by the defenders' breach the pursuer would not have sold the licence. He received only £26,000 for it. Had he been able to avoid selling it, as he would if he had been able to trade, the licence would currently have been worth considerably in excess of said sum. As at the end of 1998 it would have been worth some £330,000."
The conclusions of the summons
[9] The summons has three conclusions.
[10] The first conclusion seeks payment of the sum of £382,890 and bears to be sought on the basis of a claim for indemnity. The sum is made up of the insured value of the vessel plus certain electrical equipment, fishing gear and the catch.
[11] The second conclusion is for the sum of £12,000 and relates to the averred theft of articles referred to in Article 11 of condescendence, partially quoted above.
[12] The final conclusion, for £850,000, relates to what would broadly be described as the trading losses, continuing liabilities and the loss on the sale of the fishing licence said to have arisen by reason of the defenders' refusal to provide indemnity and referred to in Article 12 of the condescendence.
[13] Although the two grounds of liability put forward are not presented in the pleadings perhaps as clearly and discretely as might ideally have been the case, it is apparent that the pursuer seeks to advance both a claim for payment due under the contract of insurance by way of indemnity and also a claim for damages for the defenders' alleged breach of contract by their wrongful repudiation of liability. As I understood him, senior counsel for the defenders, Mr Tyre, did not in principle challenge the competency of an insured claiming both indemnity and also damages for breach of contract provided each claim was relevantly and discretely pled. The contention for the defenders was that in the present case both branches of the action were not relevantly pled.
The nature of the insurer's primary obligation
[14] Before turning to the issues dividing the parties at the debate it is convenient to mention one chapter of the discussion upon which counsel on both sides were generally agreed, namely, that the manner in which an insurer's obligation of indemnity is characterised differs as between the law of England and the law of Scotland.
[15] It appears from the authorities to which I was referred that in England a claim for indemnity in a contract of insurance is regarded as a claim for unliquidated damages. Thus, in the "Italia Express" (No.2) [1992] 2 Lloyd's Rep. 281, having reviewed the earlier authorities including Firma C-Trade SA v Newcastle P & I Association [1991] 2 A.C. 1, Hirst J. accepted that under English law, also in the case of property insurance, the insurer's undertaking was not to grant indemnity for a loss which had occurred but to prevent the insured from suffering such a loss in the first place. He accordingly accepted the argument that as soon as the loss has occurred the primary obligation is broken, giving rise to the secondary obligation to pay damages. That conception or analysis of the insurer's liability was subsequently accepted by the Court of Appeal in Sprung v Royal Insurance (UK) Ltd [1999] Lloyd's Rep. I.R.111. The matter is also discussed in Clarke on the Law of Insurance Contracts (3rd Ed.), particularly at para.30-2 and 30-7A.
[16] By contrast in Scotland the obligation of the insurer is seen as being a contractual obligation to pay a sum of money equivalent to the loss suffered by the insured. Thus, in Scott Lithgow Ltd v Secretary of State for Defence 1989 S.C. (H.L.) 9, 20 Lord Keith of Kinkell stated:
"It is to be observed in passing that Scots law has not adopted the English view that the right of action in the event of non-payment under a policy of insurance is one for unliquidated damages. Scott Lithgow's [the insured's] right of action is here a contractual one, not one in reparation."
There is little other direct Scottish authority discussing the matter but reference was made to certain cases illustrative of the Scottish approach and practice of treating the insurer's obligation as a contractual obligation to make payment of a pecuniary indemnity, namely Glasgow Provident Investment Society v Westminster Fire Office (1887) 14 R. 947; Carrick Furniture House Ltd v General Accident Fire Life Assurance Corporation Ltd 1977 S.C. 308; and Anderson v Commercial Union Assurance Co. PLC 1998 S.L.T. 826.
Indemnity
[17] It is convenient to consider first the relevancy of the pursuer's pleadings insofar as they are directed towards his claim for indemnity.
[18] It is to be noted that although the claim presented to and rejected by the defenders is averred by the pursuer to have been for particular average - that is to say, for a partial loss - the claim advanced in these proceedings is for a total loss and is alternatively advanced as an actual total loss or a constructive total loss.
[19] The contract of insurance issued by the defenders is one to which the Marine Insurance Act 1906 - "MIA" - applies. Section 56 of MIA provides, inter alia:
"(1) A loss may be either total or partial. Any loss other than a total loss, as hereinafter defined, is a partial loss.
(2) A total loss may be either an actual total loss, or a constructive total loss."
An actual total loss is defined in section 57(1) of MIA thus:
"Where the subject-matter insured is destroyed, or so damaged as to cease to be a thing of the kind insured, or where the assured is irretrievably deprived thereof, there is an actual total loss."
Constructive total loss is defined in section 60. The first sub-section is in relatively general terms and provides:
"... there is a constructive total loss where the subject-matter insured is reasonably abandoned on account of its 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."
Particular instances are given in sub-section (2) of section 60, the second such instance being that of damage to a ship as regards which the provision reads:
"In the case of damage to a ship, where she is so damaged by a peril insured against that the cost of repairing the damage would exceed the value of the ship when repaired...".
The next following section of the MIA goes on to provide:
"Where there is a constructive total loss the assured may either treat the loss as a partial loss, or abandon the subject matter insured to the insurer and treat the loss as if it were an actual total loss."
In relation to abandonment section 62 stipulates:
"(1) Subject to the provisions of this section where the assured elects to abandon the subject matter insured to the insurer he must give notice of abandonment. If he fails to do so the loss can only be treated as a partial loss."
It is accepted by the pursuer that no notice of abandonment was given in the present case. However, reference is made by the pursuer to sub-section (7) of section 62 which states that a notice of abandonment "is unnecessary where, at the time when the assured received information of the loss, there would be no possibility of benefit to the insurer if notice were given to him."
[20] Although it is of course plain that the Hebron was not destroyed or lost through the ingress of sea water since she was indeed returned to Lerwick and pumped dry the pleadings for the pursuer contain the short averment (Closed Record 32A-B):- "separatim the pursuer was irretrievably deprived of the insurance subjects and accordingly there was an actual total loss". Junior counsel for the pursuer explained that averment as meaning that the pursuer was permanently deprived of possession of the vessel by the combination of the incident at sea, the salvors' arrestment and the absence of prospects of regaining possession by reason of the pursuer's impecuniosity.
[21] So far as constructive total loss is concerned, it is not averred in the pursuer's pleadings - and was not suggested by counsel for the pursuer - that in March 1994 on the vessel's return to Lerwick and on her being pumped dry it was uneconomic to repair the damage resulting from the ingress of water and the salvage operation. Although the defenders aver that the cost of repairing such damage would be at most £22,000, no figure respecting repair costs, then or later, is mentioned by the pursuer in his pleadings. The implication of other averments (such as those contained in Article 12) is however that it was economic to repair the vessel following the salvage. The basis upon which it is said that it subsequently became uneconomic to repair the vessel is the deterioration in its condition during the period, in excess of two years, in which she lay in harbour at Lerwick without apparently receiving any attention, other than from thieves and vandals.
[22] In challenging the relevancy of the pursuer's pleadings in relation to the claim for indemnity, the basic proposition advanced by counsel for the defenders was that in order for the claim to be relevantly stated it was necessary for the pursuer to aver the correct measure of indemnity. Counsel pointed out under reference to section 55(1) MIA that an insurer's liability was for losses proximately caused by the peril insured against. Section 69 MIA defined the "measure of indemnity" that is to say the sum recoverable (cf. section 67 MIA) in the case of partial loss. It provides thus:
"Where a ship is damaged, but is not totally lost, the measure of indemnity, subject to any express provision in the policy, is as follows:-
(1) Where the ship has been repaired, the assured is entitled to the reasonable cost of the repairs, less the customary deductions, but not exceeding the sum insured in respect of any one casualty:
(2) Where the ship has been only partially repaired, the assured is entitled to the reasonable cost of such repairs, computed as above, and also to be indemnified for the reasonable depreciation, if any, arising from the unrepaired damage, provided that the aggregate amount shall not exceed the cost of repairing the whole damage, computed as above:
(3) Where the ship has not been repaired, and has not been sold in her damaged state during the risk, the assured is entitled to be indemnified for the reasonable depreciation arising from the unrepaired damage, but not exceeding the reasonable cost of repairing such damage, computed as above."
[23] Counsel for the defenders submitted that the date at which the measure of indemnity fell to be calculated was the date of the expiry of the period of the risk. That had been laid down by Roskill J. in the "Medina Princess" [1965] 1 Lloyd's Rep. 361 and also by Colman J. in the "Catariba" [1997] 2 Lloyd's Rep. 749. A similar rule applied at common law prior to the enactment of the MIA - Lidgett v Secretan (1871) L.R. 6 C.P. 616; Bell's Principles (10th ed. para.489).
[24] Counsel for the defenders pointed out that although the defenders maintained the risk to have expired at an earlier date (when they claim to have exercised a power to determine the policy) it was clear on the pursuer's averments that the policy terminated at the latest on 31 December 1994. That was accordingly the latest date for the calculation of the measure of the indemnity. The pursuer did not contend in his averments that as at that date there was a constructive total loss. No averments were made on behalf of the pursuer relating to the extent of the depreciation in the value of the vessel or the reasonable cost of repairs at the expiry of the risk. Accordingly the proper measure of indemnity had not been addressed in the pursuer's pleadings. Further, the insurer's responsibility was in respect of loss arising proximately from the peril insured against in the policy. Insofar as the pursuer sought to invoke the concept of a constructive total loss (of which no notice of abandonment had been given) the pursuer invoked a second cause of loss, namely his neglect to repair and maintain the vessel during the period after the expiry of the risk. The claim for a constructive total loss was therefore also irrelevant on that ground. Insofar as actual total loss was averred and claimed, it was plain that the pursuer was not permanently deprived of the vessel by the peril insured against, namely the perils of the sea. The vessel was returned to Lerwick and arrestment of the vessel by the salvors in rem did not deprive the owner of the vessel of possession of it.
[25] In response, counsel for the pursuer submitted that the obligation to provide indemnity continued after the expiry of the risk and accordingly if the extent and cost of repairs increased after that date the increase would yet be covered by the indemnity. Counsel invoked the example of a fire breaking out in the insured property an hour before the expiry of the risk. It would be nonsensical to say that the insurer's liability was to be measured by the damage caused during that hour and not embrace the further damage sustained as a result of the fire continuing to burn after the expiry of the risk. The "Medina Princess" and the "Catariba" were different on their particular facts. In particular, neither was dealing with the costs of repair carried out after the expiry of the risk. Lidgett was concerned with the occurrence of a total loss after the expiry of the risk and was not authority for the proposition that the claim had to be valued as at the date of expiry. Senior counsel for the pursuer accepted that the proximate cause of the loss must be the peril against which insurance had been taken. However, he submitted that the causal effect of that peril might continue to operate and that such a continuing effect could yet lead to a constructive total loss. Such an issue of causation was, he suggested, best determined after proof.
[26] In approaching these competing submissions it is convenient to deal first with the contention that the pursuer suffered an actual total loss. In my view, this proposition is plainly misconceived. It is clear that the pursuer was not irretrievably deprived of possession of his vessel by the perils of the seas. The contention that he was deprived of possession of the vessel on its return to Lerwick by the salvors' arrestment in rem is, in my view, wrong. On my understanding of the law such an arrestment does not deprive the shipowner of access to or possession of his vessel. Despite a call being made in the defences upon the pursuer to explain by way of averment how arrestment supposedly deprived him of possession, counsel for the pursuer offered no authority in support of that proposition and ultimately, the point appeared to me to be little pressed. On any view, as counsel for the defenders put it, if the arrestment did deprive of possession, it did not do so irretrievably.
[27] I advert next to the issue of the point in time at which the measure of indemnity is to be determined. In my view counsel for the defenders are correct in their submission that the measure of indemnity falls to be determined at the expiry of the period of the risk (which on the pursuer's own averments cannot be later than 31 December 1994). Even before the enactment of the MIA it appears to have been recognised that the effluxion of the period of risk was the point at which the measure of an insurer's liability fell to be determined. In Lidgett a ship was insured under one policy for a voyage from London to Calcutta. It was insured under a different policy while at Calcutta and on its return voyage. On the outward journey the ship sustained some damage and was taken into dry dock at Calcutta for repair. While in dry dock, and after the expiry of the risk on the first policy, the ship was totally destroyed by fire. The first insurer was held responsible for the depreciation in value caused by reason of the damage sustained on the voyage to Calcutta, notwithstanding the fact that the vessel had subsequently been totally destroyed. Willes J., at 626, stated:
"The period at which the liability of the underwriter on the first policy is to be determined is at the expiration of the first risk. Therefore it is right that he should be held liable for the sum which he ought to have paid at that time, which would be the diminution in the value of the vessel by reason of the damage which she had sustained."
Montague Smith, J. stated, 630:
"No doubt, where both the partial and the total loss occurred during the same voyage, and during the period covered by the same policy, the former is merged in the latter. That is so upon obvious principles of justice. The underwriter insures against accidents happening during the voyage; and the whole voyage must be regarded before it can be ascertained whether and to what extent the assured are damnified - but I am at a loss to see how anything which may occur after the expiration of the risk can alter or affect the rights of the parties."
On the authority of Lidgett, Bell's Principles contains this statement at para.489:
"But in the event of a total loss after the period covered by the policy the underwriters must pay for a previous partial loss because their liability is fixed as at the expiration of the risk insured."
That principle does not appear to me to be altered by the MIA. As at 31 December 1994 the Hebron fell within the terms of section 69(3) being a ship, not totally lost, but not repaired and not sold in her damaged state during the risk. In the "Medina Princess" Roskill J. (as he then was) required to consider the point in time at which the measure of liability for unrepaired damage was to be assessed in terms of that section. Having considered both the terms of the MIA and other authority he concluded, 517:
"The principle, both as a matter of the construction of the section and on authority is I think clear. The underwriter's liability for unrepaired damage cannot be determined until the policy expires, whether that expiry is by the effluxion of time in the case of a time policy, or the completion of or abandonment of the voyage in the case of a voyage policy or by sale in the case of either type of policy or otherwise. That principle is applicable in the present case. The relevant date is Nov. 18, 1962. The question is: What would the cost of repairs have been at that date?"
I recognise that, as pointed out by counsel for the pursuer, on the facts of that case the contention of the assured was for an earlier rather than a later date but that does not in my view affect the principle, which was applied also in the "Catariba".
[28] No authority to the contrary effect was put forward by counsel for the pursuer, although by reference to the "last hour fire example" they questioned, at least tangentially, the principle. For my part, I do not find the fire example to be of any true assistance. On at least one possible view, the subject of the policy being yet ablaze at the relevant point in time, its depreciated value at that point would have to take account of the continuing fire. Or, while recognising that the exercise of identifying and quantifying the damage irrespectively caused before and after the expiry of the risk may be difficult in many instances, it seems to me that there is no reason in principle why the damage sustained by the insured property by reason of fire after the expiration of the risk might not properly be seen as the responsibility of the new insurer whose policy commenced on the expiry of the first policy. The gradual spread of a forest fire provides a "slowed down" version of the example. That apart, I consider counsel for the defenders to be right in saying that the fire example is not a proper analogy in respect that the extension of the claimed loss in the present case is attributed to a failure to repair and maintain the vessel by reason of alleged impecuniosity. The averments for the pursuer cannot be read as being to the effect that the vessel was subject to a continuing attack by perils of the sea while safely tied up, pumped dry, in the harbour at Lerwick. It is also to be noted that the pursuer's averments of "deterioration" are related to the condition of the vessel in general, suggestive of a general neglect and lack of upkeep and not some continuing progressive effect of the ingress of sea water. It is also accepted, as I understand it, that the pursuer's pleadings do not advance any case of constructive total loss prior to 31 December 1994 even on the basis of a creeping likelihood of uneconomic repair.
[29] In these circumstances I conclude that the claim for indemnity has not been relevantly pled, there being of course no attempt at averring the depreciation, as at the expiry of the policy, in the value of the vessel by reason of the damage sustained through her being flooded and subsequently salved.
Breach of contract
[30] Before turning to what became perhaps the principal area of debate in relation to the pursuer's claim for damages for alleged breach of contract, it is convenient to consider first a proposition which appears to be subsumed in certain of the averments relating to the recovery of damages for breach (Closed Record 32D-E) and which was advanced to at least some extent by junior counsel for the pursuer, namely that the claim for damages for wrongful repudiation of liability might embrace, as damages, the sum which the insurers would otherwise be liable contractually to pay by way of indemnity. In other words the proposition, as it appeared to me, was that if a debtor fails or refuses to pay a sum of money contractually due, the creditor then has a choice of suing for performance by means of an action of payment or of seeking damages. Junior counsel for the pursuer at one point submitted that any party faced with a refusal to perform was faced with a breach of contract and on ordinary principles of the law of contract could elect either to sue for performance or claim damages. He sought support for the application of that rule to the case of insurance contracts by reference to Davidson v Guardian Royal Insurance 1979 S.C. 192. However, it is clear that while the insured in that case advanced a claim against the insurers for damages for breach of contract, it was not a claim respecting failure or refusal to indemnify. The defending insurers had elected to repair the insured motor vehicle, as permitted under the policy, and what was sought were damages for breach of the implied term that in the event of that election being made the repair would be completed within a reasonable time.
[31] While it is of course correct that in the case of most non-pecuniary contractual obligations a refusal or failure to perform may open up for the innocent party a choice of remedy, I do not consider that in the case of a contractual obligation to pay a sum of money such a choice truly exists. The remedy is to sue for payment, that is, performance of the primary obligation. Thus, while it is no doubt correct that the purchaser of goods who neglects timeously to pay for them commits a breach of the terms of his contract of purchase, it has never been the practice of the seller to sue for a sum equivalent to the price as being damages for failure to receive the price. In my view there are practical grounds whereon it is appropriate that monetary debts be pursued directly, without the unnecessary complication of categorising a failure to receive the sum as sounding in damages equivalent to that very sum. That is not of course to say that a failure timeously to pay may not give rise to other ancillary claims flowing from that failure. One is, for example, now relatively familiar in the case of building contracts with the advancement of a separate claim for "finance charges" by reason of a failure to make timeous payment of the principal sum. At all events, even if the principal pecuniary obligation were yet indirectly recoverable as damages that would not obviate the need relevantly to set out the principal obligation, that is to say the sum of money in respect of which the defending party is said to be in breach.
[32] The principal area of dispute centred however on the pursuer's claim for financial losses - beyond the measure of indemnity - said to be sustained by reason of the defenders' repudiation of liability. For the purposes of this aspect of the argument, it was not disputed by the defenders that their liability as indemnifiers would include the payment of interest on the sum contractually due under the indemnity.
[33] It was recognised by counsel for the pursuer that, in England, the claim for damages (as opposed to judicial interest) by reason of the assumed wrongful repudiation and the pursuer's (assumably foreseeable) impecuniosity would not be admissible. The reason therefor was explained as stemming from the characterisation in England of the insurer's liability as being that of liability for unliquidated damages. In English law there could not be liability in damages for a failure to pay damages. Thus in Strung v Royal Insurance the defendant insurers delayed, to an extent held at first instance to be excessive, in accepting liability and making payment on a claim for wilful damage to equipment in the insured's factory caused by vandals. The insured lack funds to effect repairs himself and was constrained to shut down the business. His appeal against the refusal of the court of first instance to award compensation for his consequential losses was upheld in the Court of Appeal. Evans L.J., having come to the conclusion that Hirst J. was correct in the "Italia Express" in concluding that a claim for indemnity was a claim for unliquidated damages, took the view that the result which necessarily followed was failure of the claim for consequential losses for late payment since "there is no cause of action in damages for late payment of what may be held due as damages" (116). A further contention to the effect that there was an implied obligation on insurers to accept liability promptly was also rejected on the basis that the insurers having adopted an approach (ultimately given up) of denying liability, the insured was bound to proceed as if he was uninsured. Lord Justice Evans went on to say:
"What has to be said, however hard it may seem to say it, is that in such circumstances the cause of any loss which the plaintiff suffered must be regarded as the consequence of his own decision not to proceed with repair or reinstatement, whether that decision was voluntary or not. In other words, if, unfortunately, through his own financial circumstances he is unable to do so without assistance from the defendants, he cannot allege that the defendants were in breach of contract by failing to accept liability at that stage."
It is apparent that the result in Sprung was not regarded by the members of the court as entirely satisfactory. Evans L.J. reached his conclusions with, in his words, "undisguised reluctance". In his judgment Beldam L.J. observed:
"There will be many who share Mr Sprung's view that in cases such as this such an award is inadequate to compensate him or any other assured who may have had to abandon his business as a result of insurers' failure to pay and that early consideration should be given to reform of the law in similar cases."
[34] Counsel for the pursuer submitted that the English approach to claims for consequential losses arising from the failure or delay on the part of an insurer to make indemnity were heavily influenced by the technical categorisation of the claim for indemnity as one of unliquidated damages. Scots law was not constrained by that technicality. The claim for indemnity was truly a contractual claim for payment of a sum of money, albeit that it required quantification. While in the general case failure timeously to satisfy a claim for payment of money would give rise only to a claim for interest, it was recognised that wider recovery might be open were the pursuing party able to go beyond the first rule of Hadley v Baxendale (1854) 9 Ex 341 by invoking particular, special knowledge of the financial state of the prospective creditor at the time when the contract was concluded, thereby entering into the ambit of the second rule of Hadley v Baxendale. In support of that contention counsel for the pursuer pointed out that the passage in Erskine III.3.86, to which junior counsel for the defender had referred as indicating that consequential damages would not be available for failure to make punctual payment, was truly cast in terms of remoteness of damage and thus broadly consonant with Hadley v Baxendale. However, it was now clear that there was no rule that the only remedy for failure to pay money timeously was the award of judicial interest. The decision in Margrie Holdings Ltd v City of Edinburgh District Council 1994 S.L.T. 971 made clear that the ultimate test for recovery of consequential losses arising from a breach of contract consisting in the failure timeously to pay a money debt was reasonable foreseeability within the general rules as set out in Hadley v Baxendale. Reference was also made to Plews v Plaistaed 1997 S.L.T. 804. It had also been recognised in the State of Michigan in Salamey v Aetna Casualty and Surety Company 741 F. 2d 874 that the law of the State of Michigan followed the rules of Hadley v Baxendale in respect of insurance contracts with the result that, subject to the tests required by those rules, consequential losses might be recovered in respect of an insurers' wrongful failure to afford indemnity.
[35] Senior counsel for the pursuer stressed that the breach of contract constituted by a wrongful denial of indemnity would not normally result in an insurer whose refusal was shown to be unjustified paying more than judicial interest. Particular circumstances of special knowledge of the financial state of the prospective insured at the time of contracting would require to be averred and proved. In the present case the pursuer made averments (Closed Record 39D-41D) not just of the defenders' general knowledge of trading conditions and practices in the fishing industry in the north-east of Scotland and the need for most fishermen to obtain finance by way of loans, but particular knowledge of the present pursuer's financial position before and at the time of renewing the insurance cover at the end of 1993. Whether those particular averments properly justified the conclusion that the losses claimed were foreseeable in the event of the insurers wrongfully repudiating liability was a matter which ought properly to await a proof before answer.
[36] For his part, Mr Tyre for the defenders did not contend - as I understood him - that a breach of an obligation to pay money could only give rise to a consequent obligation to pay judicial interest. Indeed, in the unreported decision in Alonvale Ltd v J M Ing and Others (Lord Penrose 14 October 1993) to which Mr Tyre referred on a different point, but in which damages, including loss of profits, were sought for breach of an alleged implied term to deal promptly with claims for indemnity and to grant indemnity, the Lord Ordinary, having reviewed certain authorities put before him, observed:
"In any event, Margrie indicates clearly that with adequate averments a pursuer may be entitled to proof of loss beyond interest on the basis of either branch of Hadley v Baxendale."
Rather, the contention advanced by Mr Tyre was that the pursuer had not averred any relevant breach of contract on the part of the insurers. It was necessary, he said, for the pursuer to set forth at least a time at which it could be said that the insurer was in breach of contract by having failed to make payment of the indemnity. The contract contained no express terms regarding payment, so one was at best dealing with an implied term as to the moment at which payment could be said to be due. It was clear under Scots law that that point in time could not be said to be the moment of the casualty. Before an obligation to pay could crystallise there had to be first the making of a claim. The insurer then had to have an opportunity to investigate its soundness, the insurer's obligation being only to pay upon a valid claim. Investigation might result in the insurers calling for further proof. It would be wrong to hold an insurer in breach of contract if he had acted reasonably in declining to pay on the claim. Counsel referred to Insurance Corporation of the Channel Islands Ltd v McHugh, [1997] Lloyd's Reinsurance L.R. 94 - "ICCI" - in which Mance J. had not been prepared to hold as implied in a contract of insurance any term regarding the negotiation of the assessment of payment of a claim. Counsel placed further reliance on what was said in the judgments in Sprung. In Alonvale the claim had been advanced on the basis of a breach of an implied term that claims would be dealt with reasonably and without delay, and that indemnification would be granted promptly. No attempt had been made in the present case to formulate matters in that way. The defenders had, said counsel, acted properly all along and were entitled to have their defence tested without being put "in terrorem" of paying damages should their defence to this action prove unsound.
[37] In my consideration of these submissions, I observe at the outset that in the present case one is not concerned with an instance of delay or inactivity on the part of the insurer which the insurer seeks to justify by the need to make further investigations or the absence of an appropriate supply of information from the insured or the like. In such a case issues might well arise as to the reasonableness of the delay and what terms might be implied in a contract of insurance as to the time at which payment of indemnity might be made. No such issue arises in this case because the defending insurers concluded with relative speed, and possibly after consideration of what emerged at the inquiry under the chairmanship of Captain King, that they were not going to make any payment and they communicated that categorical refusal of indemnity on 15 June 1994.
[38] Accordingly, it seems to me that on the assumption that it is eventually established that there was no breach of Rule 13, the refusal of the defenders to honour their promise of indemnity was wrong and thus a breach of their contract. For present purposes, which involve the examination of the relevancy of the pursuer's pleadings, one must proceed on the assumption that the pursuer will succeed in his contention that the allegations of the breach of Rule 13 are unfounded and the refusal of indemnity thus equally unjustified. Although both counsel made pleas touching on the general equity of their positions, I am not moved by the suggestion from counsel for the defenders that an insurer, having decided to repudiate liability, should nonetheless be entitled to have that repudiation tested to the end in litigation and only at that point be held in breach. It seems to me that, were that proposition sound, it would have to apply generally and so the purchaser of goods, declining payment of the price on grounds bona fide held but in due course found unjustified, would be entitled to maintain that he was not in breach of contract and therefore not liable even for interest. As senior counsel for the pursuer put it, in my view correctly, "honest belief" is not a defence to liability on such contractual claims.
[39] Counsel for the defenders prayed in aid ICCI but, in agreement with counsel for the pursuer, it is not clear to me that it is truly in point. The report of the case is lengthy; the case was complicated on its facts and involved two policies as respects one of which (the "business interruption" policy) the insurer came successfully to dispute liability on the basis that the insured had used a fraudulent means in the presentation of their claim. No such defence was available respecting the claim under the other policy (the "material damage" policy) and the question of implied terms arose (136) respecting the delay in payment of the indemnity under the latter. It was argued that there was an implied term requiring the insurer to assess and negotiate the claim and make payment with reasonable speed and efficiency. Mance J. (as he then was) found himself unable to imply such a term on what might be described as the business efficacy test. But additionally he proceeded on the English categorisation of the nature of the obligation of indemnity and concluded that the implied term would -
"constitute an implied contractual obligation to assess, negotiate and pay damages for which the insurers were, subject to the express conditions precedent, liable already. This would be an usual obligation - which would appear to be a further reason why it cannot be regarded as either necessary or obvious."
[40] In the absence of proper grounds, duly and subsequently established, for refusing performance I would have thought that an express intimation of a refusal to perform the obligation of providing indemnity amounts, at least, to an anticipatory breach of contract. No doubt sharing that approach, counsel for the pursuer stated that he did not suggest any breach of any implied term regarding time for negotiation or payment in the present case for the very reason that he had no need to do so, the defenders having expressly and (for present purposes assumedly wrongly) repudiated liability to make indemnity. It respectfully appears to me that on repudiating any liability the defenders must (for present purposes) be assumed to have committed a breach of contract at the date of repudiation on 15 June 1994 and I do not find the suggestion that the pursuer requires to identify a particular point at which payment ought to have been made to be well founded.
[41] No doubt in view of the approach adopted by counsel for the defenders, the issue of the foreseeability of the particular losses claimed by reason of the defenders' alleged breach of contract was not greatly discussed. It was suggested that there was a problem for the pursuer in that there was no obligation on an insurer to put the insured in funds to carry out repairs (cf. Sprung and Anderson) but I am not persuaded that in the particular averred circumstances of this case the absence of an obligation on an insurer to make advance payment would necessarily be decisive.
[42] No substantial argument was advanced to me to the effect that, as a matter of simple relevancy, the claim advanced on behalf of the pursuer for damages could now be disposed of on the assumption that the pursuer was correct in his contention that the refusal of indemnity was a breach of contract. It is, I think, evident that, as senior counsel for the pursuer appeared to recognise, there are important questions whether, faced with the insurer's repudiation and his financial state, the pursuer was in breach of a duty to minimise his loss, all of which may inter-relate with the foreseeability of the consequences of a refusal of indemnity in the light of the special knowledge alleged to have been held by the defenders. In these circumstances I do not consider that it would be appropriate to refuse inquiry into the averments touching on the pursuer's claim for consequential loss stemming from the alleged breach of contract. It will be appreciated that the admissibility and the substantial merits of that claim remain for future consideration after the hearing of evidence.
Specification points
[43] In their note of arguments the defenders listed four matters upon which they claimed the pursuer to have given inadequate specification in his pleadings. The first of these points was not insisted upon. In the course of the Procedure Roll discussion it became evident that the second point was not truly material and upon it nothing more may be said. Point (iii) is in these terms:
"... the pursuer fails to specify why the arrestment of the said vessel prevented him from carrying out any works to the vessel."
This is more a matter of fact than law and I have already dealt with the point in the course of this opinion.
[44] Point (iv) related to the absence of any specification on the part of the pursuer as to the date at which he sold the fishing licence, in respect of which a rather substantial sum is claimed.
[45] The Procedure Roll discussion was divided over two diets, the time initially allocated having been insufficient to include the speeches by senior counsel for both sides. Having in the course of the initial discussion indicated my prima facie view that there was possible merit in this particular matter, in the interval between the initial uncompleted diet of debate and its continuation there was produced certain documentation dealing with this matter and a minute of amendment reflecting that documentation was lodged on behalf of the defenders at the resumed diet. The broad effect of the minute of amendment is to aver that the fishing licence was sold by the pursuer on 8 March 1994, which, it will obviously be observed, was in advance of any repudiation of liability by the insurers.
[46] It was agreed that procedurally the minute of amendment should be allowed to be received and, if necessary, answered after delivery of my opinion on the substantive issues.
Future procedure
[47] In part summary of the foregoing I have held that the claim, so far as advanced in terms of indemnity, is not properly stated. Counsel for the pursuer invited me to put the case out By Order were I not to accede to his submissions in relation to the indemnity claim in order that he might consider amendment to advance a claim for partial loss, the existence of which was plain. I did not understand that invitation to be opposed to any real extent. I am also conscious that there is an outstanding minute of amendment.
[48] In these circumstances I shall put the case out By Order for discussion of future procedure.