A217/05
JUDGMENT OF SHERIFF PRINCIPAL JAMES A TAYLOR
in the cause
FORFAR WEAVERS LIMITED
PURSUERS
against
MSF PRITCHARD SYNDICATE
DEFENDER
GLASGOW, 26
April 2006.
The Sheriff Principal
having resumed consideration of the cause, Assigns 11 May 2006 at 9.30
am as a case management conference; Reserves meantime the expenses
of the appeal.
NOTE:
[1] The pursuers had entered into a contract
of insurance with the defenders. During
the currency of the contract. There was
a flood. This was an insured peril. As a consequence the pursuers sustained loss. The pursuers are jute merchants. Loss was said to arise because jute and other
materials were damaged by virtue of the flood.
The contract of insurance provided:-
"It is warranted that all stock is stored on racks, pallets or
stillages at least 10cm above floor level."
During the
appeal this was referred to by both parties as the stillage warranty. General Condition 4 was in the following
terms:-
"4. Every warranty shall from
the time that the warranty attaches apply and continue to be in force during
the whole currency of this Insurance and non-compliance with any such warranty
whether it increased the risk or not shall be a bar to any claim, provided that
whenever this Insurance is renewed a claim occurring during the renewal period
shall not be barred by reason of a warranty not having been complied with at
any time before the commencement of such period.
[2] The purpose of the debate and the
subsequent appeal was to determine whether the defenders were obliged to
indemnify the pursuers in terms of the contract. The defenders offered to prove that at the
time of the flood the pursuers' jute and other materials were not stored on
racks, pallets or stillages at least 10cm above floor level. Although this averment was not formally
admitted by the pursuers the debate and the appeal proceeded on the basis that
it was taken pro veritate. The learned sheriff came to the view that the
stillage warranty did amount to a warranty but related to "present fact
only". It was not a warranty that
during the currency of the policy the pursuers would store all stock on racks,
pallets or stillages at least 10cm above floor level. All that the pursuers undertook was that at
the time the policy was renewed the stock was so stored.
[3] The defenders in their submissions drew
my attention to the language which was used in the policy. It was submitted that the language was that
of a warranty. There was a menu of
warranties provided in the policy at pages 22 and 23. They were all expressed in the present
tense. However if one was to make
business sense of say the waste warranty (Warranty B) one would have to expect
that all waste would be removed at night.
It would not avail the insurers to any extent if the warranty related
only to the practice at the time when the contract was entered into. Mr Ellis acknowledged that Warranty J posed a
potential problem for him in that the warranty was expressed in the present
tense and then it was provided that it would apply "throughout the
currency of this insurance". He
anticipated a submission that if such a provision was contained in one warranty
but not in others the implication might be that the others were not to apply
throughout the currency of the insurance.
He referred me to the case of Beaufort
Developments (N.I.) Ltd v Gilbert-Ash (N.I.) Ltd [1999] 1 AC 266 and in
particular at pages 273 to 274. He
submitted that the use of the expression "throughout the currency of this
insurance" was simply superfluous verbiage. If one looked at the warranties as a whole
the only way in which to interpret them in a manner which would make any form
of business common sense was to interpret them as a continuing obligation on
the insured. If one then read the
warranties in conjunction with General Condition 4 it was in Mr Ellis'
submission impossible to interpret the warranty as a present fact warranty
only. If one was to give any content to
General Condition 4 one required to interpret the warranty as a continuing
obligation upon the insured. There was
no ambiguity when one read the two provisions together.
[4] Mr Ellis' fallback position was that if
the stillage warranty was not properly characterised as a warranty then it was
nonetheless a suspensive condition.
Reference was made to the case of Kler
Knitwear Ltd v Lombard General Insurance
Company Ltd [2000] Lloyds Rep. 47.
The general condition in the Kler
case was in almost identical terms to the general condition in the instant
case. Mr Ellis pointed out that there
was no suggestion made by the court that the general condition in Kler did not introduce an element of
futurity. He submitted that if I was
against him in holding that the stillage warranty was truly a warranty I should
deem it to be a suspensive condition.
This was the approach adopted by Mr Justice Morland in Kler.
Mr Ellis then took me through a number of cases which had been referred
to at first instance. In particular he
referred to Hussain v Brown [1996] 1
Lloyds Rep. at 627; Hales v Reliance Fire
& Accident Insurance Corporation Ltd [1960] Lloyds Rep. 391; de Maurier (Jewels), Ltd v Bastion Insurance Company Ltd [1967]
Lloyds Rep. 550; Provincial Insurance
Company Ltd v Morgan [1933] AC 240; Palatine
Insurance Company Ltd v Gregory [1926] AC 90; Roberts v Anglo Saxon Insurance Association Ltd [1927] 27 Ll.L.
Rep. 313 and [1926] 26 Ll.L. Rep. 154 and Weber
& Berger v Employers' Liability Assurance Corporation [1926] 24 Ll.L.
Rep. 321. A proper interpretation of
these cases in Mr Ellis' submission indicated that the learned sheriff was
correct in characterising the stillage warranty as a warranty but wrong in
considering that it was not a warranty with future content. There was nothing in any of the cases
inconsistent with Mr Ellis' primary submission.
If however the stillage warranty was held to be other than a warranty it
was a suspensive condition. In either
case the interlocutor fell to be recalled.
[5] In reply Mr Wade drew my attention to
the fact that in the submissions before the sheriff there had been no
suggestion that the stillage warranty was other than a warranty. The possibility that it was a suspensive
condition had never been raised. He
submitted that a warranty could apply to past actings as well as to the
future. He reminded the court of the
draconian effect should a warranty be breached.
It required to be strictly complied with. Even if the insured did something better than
provided for in the warranty there would still be a breach of the
warranty. If there was a loss and a
warranty was breached there need be no connection between the breach and the
loss to enable the insurers to avoid their contractual obligations. He pointed out the commercial absurdity of
treating the stillage warranty as having a future component. The insured might store their stock in a
cupboard six feet off the ground but since the stillage warranty had not been
strictly complied with the defenders would still be able to avoid liability
under the policy. There was no
commercial justification for treating the warranty as having continuing
effect. The courts had constantly
disapproved of insurers who sought to interpret contracts of insurance in such
a way. Characterising the provision as a
suspensive condition was almost as draconian.
The stillage warranty was in a sense a "housekeeping" warranty
in respect of which precise compliance was difficult to achieve and not
fundamental to the risk. He submitted
that it was highly significant that the defenders were unable to cite any case
where a "housekeeping" warranty when breached had resulted in the
policy being declared void. This problem
was overcome if one adopted the approach of the learned sheriff and treated the
warranty as a warranty to present facts only.
He also drew my attention to the fact that the policy covered two
insured parties and therefore precise compliance would be difficult. One party would require to monitor the
performance of the other. It was almost
inevitable that in a warranty of this type there would be a breach from time to
time. The pursuers would thus be taking
the premium without having the counterpart obligation to provide cover.
[6] When interpreting contracts of insurance
the court should avoid a construction which flouted business sense. He referred to the speech of Lord Diplock in Antaios Compania S.A. v Salen Rederierna
A.B. [1985] 1 AC 191 at pages 200 to 201.
He also referred to the case of Kazakhstan Wool Processors (Europe) Ltd v Nederlandsche Credietverzekering Maatschappij N.B. [2000]
Lloyds Rep. 271 to the same effect.
[7] When considering the present policy Mr
Wade drew my attention to Warranty J which contained the words "throughout
the currency of this Insurance" and contrasted the absence of these words
in the other warranties. General
Condition 4 did have content because it meant that the stillage warranty
remained in force even if it was a present facts warranty. That did have benefit for the insurer. It meant that the insurer had the comfort of
knowing that the insured adopted good housekeeping practices at the time the
contract was entered into.
[8] From reading the various cases and
passages from text books cited in argument it became apparent that the concept
of a warranty was rather a moveable feast.
One meaning of the word is what was urged upon me by the defenders
namely that the compliance with the terms of whatever was warranted is a
condition precedent for the insured to be able to claim indemnity under the
contract of insurance. At paragraph 10-2
of McGillivray on Insurance Law one finds the following passage:-
"Any attempt at a comprehensive definition of "warranty"
in insurance law is complicated by the sometimes indiscriminate use of the word
to refer to clauses in policies which do not possess the judicial attributes of
a warranty and by changes in legal terminology over the years. It has a different meaning from a warranty in
the general law of contract."
[9] It seems to me to follow from the
foregoing that just because the word "warranty" is used in a clause
in a contract of insurance it does not follow that the courts will hold the
particular clause to be a warranty in the sense that complete compliance is a
condition precedent for indemnity. Thus
in Roberts one finds Mr Justice
McKinnon in the court of first instance stating:-
"Now, nothing turns upon the word "warranted"; the word
"warranted" is always used with the greatest possible ambiguity in a
policy. Because a phrase begins with the
word "warranted" in a policy it does not by any means mean that that
is a condition."
Roberts was decided in 1926. In 1999 one finds Morland, J in Kler stating:-
The facts that the clause is entitled "warranty" and contains
the phrase "it is warranted that" are some indication that the
parties intended that the clause be a warranty in the true sense of the
word. Such words are frequently used in
insurance policies and used in a wide variety of senses."
[10] It thus seems to me that the use of the
expression "It is warranted that..." in a contract of insurance is to
introduce an ambiguity. If eminent
lawyers have difficulty in knowing precisely what the expression means what
hope is there for the lay man. If the
expressino is used its meaning should be set out in a definition clause or
similar. Such an explanation or definition was not provided in this instance.
Therefore, I am unable to agree with Mr Ellis that there is no ambiguity
in the contract before the court. The position of the defenders was that should
the pursuers at any time during the currency of the policy have failed to
obtemper the terms of the stillage warranty the defenders were entitled to
avoid liability under the policy. From
that it follows that if the pursuers' failure occurred in the first week of the
relevant period of insurance and was thereafter remedied and the loss occurred
in the final week of the same period of insurance the defenders would
nevertheless be entitled to avoid their obligation to indemnify the pursuers. The lack of any link between the breach and
the loss claimed was of no consequence.
That is truly a draconian interpretation. It is perhaps therefore not surprising that
throughout the cases which were cited in discussion one finds quotations from
the various judges not dissimilar to what was said by
Mr Justice McKinnon in Roberts
viz:-
"Now it has been long settled that an insurance company which
desires for its own protection to insert a provision of that nature or indeed
any provision or limitation of its liability must do so in plain terms, and an
ambiguous provision affords them no protection."
[11] In my opinion it was necessary for the
insurers to go further than was done in this contract if they were to avail
themselves of that draconian interpretation of the contract. It was incumbent upon them to spell out in
clear and simple language precisely what the insured must do during the
currency of the policy and the consequences to the insured should they fail to
comply.
[12] However the appearance of the words
"warranty" or "warranted" in a clause does have some
content. The use of such words will
usually elevate the clause from a mere statement of intention. At paragraph 10-29 in McGillivray one
finds the following passage:-
"On the other hand, it must not be
thought that the words "warranty" or "warranted" are of no
importance. They are good evidence of
the party's intention to create a warranty, and even though a promise which is
"warranted" may in some cases be construed as an exclusion clause or
term delimiting the risk, it will usually be elevated at least from the level
of a statement of intention or collateral stipulation. Prima facie, the use of the word
"warranted" shows that the parties understood that a breach of it
should be a permanent or temporary bar to the insurers' liability."
[13] Both parties were at one in agreeing that
when construing the terms of a contract of insurance, the court should use the
same rules of construction as in ordinary commercial contracts. Thus the contra
proferentum rule applies to the construction of contracts of insurance. The
meaning of a particular clause in a contract must be construed in the context
of the contract read as a whole. The court should endeavour to adopt an
interpretation which gives meaning to all the words used in the contract. If a semantic analysis of the words in a
commercial contract gives rise to a meaning which flouts business commonsense
it must yield to business commonsense.
[14] Some meaning must be given to the words of
General Condition 4 which provides that the warranty shall "continue
to be in force during the whole currency of the contract". The learned sheriff was of the opinion that
the warranty only applied at the time the contract was entered into. It related only to the then present facts and
did not involve the pursuers in having to comply with the terms of the stillage
warranty throughout the period of insurance.
In my opinion that fails to give content to the wording contained in
General Condition 4. I do not see how
one can say that one has given effect to the future content of General
Condition by giving a meaning to the contract that the condition of the
premises at the commencement of the period of insurance was a valid
representation of the premises at the commencement and could be founded upon by
the insurers at any time throughout the period of cover. So if it later came to light that the stock
was not stored in terms of the stillage warranty at the commencement of cover
the insurers could, in the future, found upon the breach. One does not require the provisions of
General Condition 4 to achieve that. I also doubt whether the interpretation
adopted by the sheriff gives rise to a commercially sensible construction. It would be of little value to the insurers
to know that at the time the contract was entered into the stock was stored in
compliance with the policy. Mr Wade did
submit that such a declaration by the insured provided the insurer with the
comfort of knowing that the insured adopted good housekeeping practices at least
at the inception of the policy. That
seems to me to be of little practical benefit to the insurers. The insurers have an interest in knowing how
the stock will be stored throughout the period for which they are providing
cover. The interpretation that this is a
warranty of present fact only thus fails to give content to General Condition 4
and also flouts business common sense.
[15] However it does not follow that the
provisions in the contract of insurance fall to be interpreted as a continuing
warranty with the aforementioned draconian consequences should the provisions
be breached. It must still be determined
whether a breach of the provisions should act as a permanent or temporary bar
to the insurers' liability. What is the
extent to which the defenders' risk is to be limited? I have already indicated that in my opinion
the contract is ambiguous. Thus the contra proferentum rule applies. It was not in dispute that the defenders are
the proferens. Thus the interpretation least favourable to the
defenders should be adopted. That points
to there being a temporary, as opposed to a permanent, bar to the insurer's
liability in the event that there is a breach of what was referred to in
argument as the stillage warranty.
[16] The primary task of the court when
interpreting a contract is to ascertain the meaning which the parties must have
intended the terms of the contract should have.
The court has to consider "the words the parties have used in the light
of the context in which they have used them and (where the words admit of more
than one meaning) selection of that meaning which seems most closely to
correspond with the presumed intention of the parties" (Lord Justice
Saville in Hussain at page 629). In this case one has to ask if the parties
must have intended that if a roll of jute was stored other than is provided for
in the stillage warranty on day one of the contract and for say one evening
only that the contract would effectively be devoid of any benefit for the
insured. It seems to me highly unlikely
that such would have been their intention.
I am entitled to look at the other terms of the contract as an aid to
construction. One there finds a
provision that the insured also warranted that "all combustible trade
waste and refuse is removed from the buildings every night". There was a similar contractual provision in
the case of Kler albeit that, like
here, was not the contractual provision which was determinative of the
case. At p 50 of his judgment Morland, J stated:-
"It would be utterly absurd and make no rational business sense
whatever if at the end of a particular working day a small quantity of sawdust
was not swept up and 300 days later a fire broke out due to an electrical fault
that a claim for property damage should be barred;"
[17] Thus applying the rules of construction to
which I have referred the conclusion to which I come is that the breach of the
stillage warranty provides a temporary bar to the insurer's liability. The stillage warranty when read in
conjunction with General Condition 4 delimits the risk which the defenders
accepted when they entered into the contract.
In my opinion the provision is not a warranty as to present facts nor is
it a continuing warranty with all the draconian effects which attach. I respectfully adopt the passage to be found
in McGillivray at paragraph 10-7 under reference to the case of Farr v Motor Traders Mutual Society
[1920] 3 KB 669.
"It was held, however, that the statement amounted on its true
construction to no more than a term delimiting the scope of the risk. Therefore the cover provided by the policy
had re‑attached when the assured resumed single shift working, and the
insurers were accordingly liable to satisfy the claim in respect of the
accident in November, though they would not, of course, have been liable for
any loss or damage occurring during the period of double shift working. Had the term suspending the risk been a
warranty, the breach in August would have discharged the insurers' liability.
Clauses of this nature are sometimes referred to as "warranties
descriptive of the risk" or "delimiting the risk". This usage is not an accurate one, but it
serves as a reminder that a court may be prepared to construe a clause as one
descriptive of the risk even though the word "warranty" or
"warranted" appears in it, as where a car was "warranted used
only for the following purposes".
That case illustrates the point that there is no magic in the word "warranted"
which is frequently used with considerable ambiguity in policies."
[18] I had the advantage of fuller submissions
than did the learned sheriff. Mr Ellis
submitted that if I was against him in his primary submission that the contract
should be interpreted as containing a continuing warranty, I should find that
the contractual provision was a suspensive condition. That was the approach adopted by Morland, J
in Kler. Such a submission was not
made before the learned sheriff. I am a
little uncomfortable about characterising the contractual provision as a
suspensive condition. It does not seem
to fit too easily with the concept of suspensive conditions in Scots law. I refer in particular to paragraphs 5-35 to
5-40 in McBryde The Law of Contract in Scotland
2nd Edn. I am content to
describe the provision as one which limits the insurers' risk.
[19] The discussion before me did not deal with
the extent to which the defenders' risk should be limited. It could be that the risk is limited to the
extent that there is no liability if there is a breach of the stillage warranty
regardless of whether there is a causal connection between the breach and the
loss sustained. Alternatively the risk
might be limited to the extent that the insurers are able to avoid liability
only if there is a causal connection between the breach and the loss in respect
of which indemnity is sought. I offer no
view on that issue. Should parties wish
to address me on that aspect they should let me know. Rather than remit the case back to the
sheriff to proceed as accords I have assigned a further case management
conference before me.
[20] I was reassured that there was some future
content to the stillage warranty when it was read in conjunction with General
Condition 4 by the terms of the productions lodged by the defenders. The incidents giving rise to this litigation
occurred in October and November 2002.
The contract of insurance between the parties commenced on 31 March 2000. It would appear to have been renewed
annually. The "Cover
Confirmation" (6/2 of process) for the first period of the contract of
insurance provides at Section A "N - Stillage Warranty - this warranty
applies with effect from 1 June 2000." Endorsement No 001 to the contract and
dated 7 April 2000 is to the
same effect. When the contract of
insurance was entered into in March 2000 the parties clearly considered that
what was referred to as the stillage warranty applied beyond the inception of
cover.
