Case No. 1998 Folio No: 1564
BAILII Citation Number: [1999] EWHC 845 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
COMMERCIAL COURT
St Dunstans House
Date: Thursday 4th November 1999
Before:

The Hon. Mr. Justice David Steel
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B E T W E E N:

(1) GROUPAMA NAVIGATION ET TRANSPORTS
(2) CONTINENT SA
(3) MUTUELLES DU MANS
(4) ZURICH INTERNATIONAL FRANCE SA
(5) GIE GENERALI TRANSPORTS
(bodies Corporate)
Claimants
-and-

CATATUMBO C.A. SEGUROS (a body corporate)
Defendant
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MR. ANDREW GREEN (instructed by Messrs Stephenson Harwood) appeared on behalf of the Claimants.

MR. RICHARD LORD (instructed by Messrs Norton Rose) appeared on behalf of the Defendant.
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Judgment

The Hon. Mr. Justice David Steel

By a consent order made on the 20th May 1999, the parties agreed to the determination of various preliminary issues in this action.  The agreed or assumed facts for the purposes of the issues are as follows.

By contract of insurance dated the 25th June 1996, the Defendant provided hull and machinery cover to a Venezuelan company Empresa Carbones Del Guasare in respect of a fleet of vessels including the Guasarae XI and Guasare XII for the period of one year from the 20th June 1996.  This was subsequently extended for 3 months until the 20th September 1997.

Addendum Numbers 003 to the policy contain the following provisions:-

“3.	Clauses and Conditions

a.	American Institute Hull Clause 02.06.77
	......
c.	Protection and Indemnity Clause as per Form SP-14
	.....
d.	Seaworthiness guarantee in all on the part of the insured during the whole insurance period

e.	Guarantee of maintenance of class according to the A.B.S. standards and rules

f.	The vessels must at all times be seaworthy and maintain in force all certificates and permits issued by the competent authorities”.

The American Institute Hull Clauses contain a provision entitled “Change of Ownership” which provides:-

“.... if the Classification Society of the vessel or her class therein be changed, cancelled or withdrawn, then, unless the underwriters agree thereto in writing, this policy shall automatically terminate at the date of such change ...... of classification; provided, however, that:

a.	if the vessel has cargo onboard and has already sailed from the loading port, or is at sea in ballast, such automatic termination shall, if required, be deferred until arrival at the final part of discharge ..... or destination”.

By a re-insurance contract dated the 24th June 1997, the Claimants agreed to provide 50% facultative re-insurance cover to the Defendant in respect of its liability under the insurance contract (the balance being covered treaty re-insurers).  The period of the re-insurance cover was for the year ending the 20th June 1998.

The re-insurance contract was in the form of a slip policy as follows:-

“FORM: MAR 91 (Slip Policy)......

CONDITIONS:	All terms, clauses, conditions, warranties, additional premiums, return premium, as original and to follow all decisions, settlements, agreements of same in every respect.

	Net equivalent, if required.

	Several Liability Notice LSW 10001

	Deferred Account, if required.

	Broker’s Cancellation Clause.

	...........

	CESAM Claim Handling Procedure

	Warranted existing class maintained

	Warranted maximum lifting capacity not exceeded

	.......

INFORMATION	Original Conditions (Say):-

(N.L.O.W.)	.......

	Classification Clause 1/1/98

	.........”

(Evidence from the Claimants suggested that it was their intention to include the Classification Clause 1/1/98 in the re-insurance wording but, by virtue of a mistake it was inserted in the information section instead.  There is no application for rectification and I say no more about it.)

On about the 27th August 1997, the two vessels referred to above were heavily damaged in a storm.  The claim for repair costs was put forward by the owners in the amount of US$5,460,778.

During the course of subsequent investigations, it emerged that the vessels, whilst subject to regular surveys, were not actually classed at the time of the casualty or indeed at any time during the currency of the cover.  The Defendants nonetheless indicated that they were minded to pay the claim because:-
a.	Any breach of warranty under the underlying insurance was not causative and thus might not terminate the cover as a matter of Venezuelan law.
and
b.	in any event, given the owners good claim’s record, an ex gratia payment was appropriate.

This prompted the Claimants to institute the present proceedings seeking inter alia a declaration that, by virtue of the owners failure to maintain the vessels in class, they, the re-insurers, were discharged from all liability by virtue of the consequence breach of the warranty contained in the slip policy.

The Defendants responded that the effect of the warranty in the re-insurance was to be treated as equivalent to the effect of the clause in the underlying cover which in the original Spanish read: “Garantia de mantenimiento de clase segun normas y reglas del A.B.S.”.  Thus, it was contended, if the Defendant was liable under the policy issued to the owners despite the fact that the vessels were not classed at the time of the damage, so also were the Claimants liable to indemnify the Defendant.

The form of the agreed preliminary issues was as follows:-

“1.1	Whether there has been a failure to comply with the warranty contained in the re-insurance contract that “(warranted) existing class maintained”.

1.2	Whether the re-insurance contract and/or the said warranty is governed by English law or Venezuelan law.

1.3	If English law is the proper law of the re-insurance contract and/or the warranty whether, as a matter of construction, the said warranty nevertheless has an effect equivalent to the effect of the clause pleaded in warranty 4.1 of the Points of Defence.

1.4	If the answer to the third issue is no, whether the re-insurance contract has been terminated and or the Claimants had been discharged from liability thereunder.”

In fact the argument centred on issue 1.3 since it was common ground:-
a.	that there had been a failure to comply with the warranty in the re-insurance contract by reason of the fact that the vessels were not classed
and
b.	the proper law of the re-insurance contract was English law.

The underlying theme of the Claimant’s submission was that the warranty in the re-insurance slip policy was “free standing”.  By that, I understood it to be said, the warranty should be construed without regard to the meaning or effect of any warranties as to class contained in the underlying cover and purportedly incorporated into the re-insurance cover.  Put another way, it was contended that the re-insurance cover was not “back to back” with the original cover.

The motivation for urging such an approach is, of course, to be found in the possible disparity between the proper law of the underlying insurance (Venezuelan Law) and the proper law of the re-insurance (English Law) as regards the need or otherwise for any breach of warranty to be a cause of the relevant loss.  This in turn caused an anxiety on the part of the Claimants to distinguish the present case from the decision of the House of Lords in Forsikringsaktieselskapet Vesta -v- Butcher [1989] A.C. 852.

In support of the submission that the policies were not back to back, considerable emphasis was placed by the Claimants on the fact that the slip policy, whilst providing that all terms were to be “as original”, nonetheless went on to make provision for a wide range of other terms only consistent, it was suggested, with a manifestation by the parties of their intention that the cover should not be viewed as back to back.

First, attention was drawn to the form of the slip policy being “MAR 91”.  The effect of this is twofold:
1.	the subscribing companies are only liable for their respective proportions
2.	the insurance is subject to the exclusive jurisdiction in the English courts.

There is nothing here inconsistent with the concept of the re-insurance being back to back with the underlying cover.  The exclusive jurisdiction clause may well be fully consistent with English law being the proper law but that the fact that the proper laws of the two contracts do not match is merely a premise to the issue that has arisen and not a resolution of it.

Next, reliance was placed on the “Several Liability Notice”.  But this is merely a repetition or reinforcement on the MAR 91 provision that the subscribing re-insurers were only liable “to the extent of their individual subscriptions”.  There is no conceivable conflict or inconsistency with the underlying cover here.

Emphasis was then placed on the “Brokers Cancellation Clause”.  This provides that the policy may be cancelled by underwriters (or the brokers) in the event of failure to pay premium following 14 days notice.  This does not, in my judgment, have any bearing on the scope of the cover.

Finally, it was contended that the express warranties in the re-insurance themselves demonstrated that the covers could not be properly viewed as back to back.  As regards the warranty “maximum lifting capacity not exceeded”, there is nothing inconsistent with the underlying warranty of seaworthiness which would presumably encompass overloading.  Equally there is no conflict between the warranties of “existing class maintained” and the guarantee of maintenance of A.B.S. Class.  Indeed both the warranties in the re-insurance, far from restricting the scope of the cover, are more lax than the scope of the underlying warranties.

I recognise, on one view, the re-insurance warranties may  be thus rendered mere surplusage.  This may well be so.  But at least:-

a.	they preclude any argument as to incorporation by virtue of the term “as original”.

b.	they preclude argument as to the continuing nature of the “guarantees”.

c.	they preclude any argument as to whether the underlying “guarantees” were equivalent to “warranties”.

In short there is nothing in the slip policy from which it can be inferred that the cover was not to be back to back.  To the contrary, the incorporation of the terms “as original” together with a “follow all decisions” provision is consistent with the scope of the cover being identical:-

“The only sensible intention I can attribute to the parties is that they were concerned to make sure that the risk undertaken by reinsurers was identical, as to period, geographical limits, and nature of the risk, with the risk undertaken by the primary insurers:” per Gatehouse J. in Pine Top v. Unione Italiana [1987] 1 Lloyds’s Rep. 476 at p.480.

Indeed, in the context of facultative re-insurance, it would be proper to adopt a presumption that the cover is back to back with the underlying cover: Vesta -v- Butcher [1989] A.C. 852:-

“An insurer who has accepted a risk by issuing a policy of insurance goes to reinsurers to lay off part of that risk.  Before the reinsurer accepts part of the insurer’s risk, he will wish to assess the risk for himself.  The reinsurer can only assess the risk if he is shown the terms on which the insurer has accepted the risk; in other words if the reinsurer is shown the policy that has been or is to be issued by the insurer.  When the reinsurer has assessed the risk covered by the policy he can then decide whether or not he will reinsure the risk.  In the ordinary course of business reinsurance is referred to as “back-to-back” with the insurance, which means that the reinsurer agrees that if the insurer is liable under the policy the reinsurer will accept liability to pay whatever percentage of the claim he has agreed to reinsure.  A reinsurer could, of course, make a special contract with an insurer and agree only to reinsure some of the risks covered by the policy of insurance, leaving the insurer to bear the full costs of the other risks.  Such a contract would I believe be wholly exceptional, a departure from the normal understanding of the back-to-back nature of reinsurance and would require to be spelt out in clear terms.  I doubt if there is any market for such a reinsurance”: per Lord Griffiths at p.895.

For all those reasons, I am unable to accept the Claimant’s argument that the warranty in the re-insurance cover is to be regarded as “free standing”.  To the contrary, despite the repetition of the relevant warranty in both contracts rather than the incorporation of the warranty in one into the other, I am unable to distinguish the circumstances of this case from those considered in Vesta -v- Butcher:-

“By the reinsurance policy, the underwriters promised that if Vesta became liable for a loss under the insurance policy, then the underwriters would make good 90 per cent. of the loss.  Vesta became liable for a loss under the insurance policy and the underwriters must perform and observe their promise in the reinsurance policy.  The provision incorporated in the reinsurance policy that upon a breach of warranty the reinsurance policy shall become null and void is identical with the provision in the insurance policy that upon a breach of warranty the insurance policy shall become null and void.  In my opinion, in the absence of any express declaration to the contrary in the reinsurance policy, a warranty must produce the same effect in each policy.  The effect of a warranty in the reinsurance policy is governed by the effect of the warranty in the insurance policy because the reinsurance policy is a contract by the underwriters to indemnify Vesta against liability under the insurance policy.  The reinsurance policy could have provided expressly that the warranties were to have different effects in the two policies.  The reinsurance policy could have limited the liability of the underwriters by providing that a breach of warranty by Vesta would absolve the underwriters even if an identical breach of warranty by the fish farmer did not absolve Vesta.  Any such limitation would, however, have been inconsistent with the concept of reinsurance, unacceptable as a basis for the business relationships between brokers, insurers and reinsurers and contrary to the language of the reinsurance policy which insists on the identity of terms, subject matter and risk involved in both the reinsurance policy and the insurance policy”: per Lord Templeman at p. 892.

Accordingly, the warranty in the reinsurance cover in the present case is to be construed so as to produce the same effect as the underlying warranty as to class and the answer to preliminary issue 1(3) is “Yes”.