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BMLA/Tulane Conference: Good Faith, Disclosure,
Misrepresentation and Paper
presented to the British
Maritime Law Association THE South African legal system is a strange yet vibrant hybrid of its civilian and common law roots. Its socio and legal history reflects a century and a half of Dutch rule during the period when the Dutch traders were masters of the seas -- a mastery at least matched by the brilliance of the Dutch jurists of the time in their pursuit of a proper recordal of the law of the Dutch provinces.[2] When the Dutch were ousted as the world's dominant trading nation by an all-powerful early 19thC England, they lost the South African colonies to the English. But throughout English rule (until Union in 1910), and even thereafter with the establishment of a Republic in 1961 and the birth of the New South Africa in 1994, the Roman-Dutch common law established by the Dutch remained the 'fall-back' regime of South African 'common law'. That Roman-Dutch law, distilled by the Dutch writers and fine-tuned by three and a half centuries of academic writing and judicial decisions, remains the cornerstone of present South African law. Through the dichotomy of its political background therefore, South African law was enriched by Roman-Dutch law, which in turn derived from the lex mercatoria and the broadly similar commercial practices of the civil law countries, and by the later English law through the conduit of which so much modern maritime law has flowed. It is indeed a blessing of history that the South African legal system emerged as the crucible in which was formed an amalgam of perhaps the two greatest legal systems the world has known, both providing input at the zenith of their halcyon days of maritime trade. Modern South African maritime law, too, reflects this rich amalgam, though the marriage of the Roman-Dutch law and English maritime law was to an extent an arranged union forged by s 6 of the 1983 South African Admiralty Jurisdiction Regulation Act. In essence, this provides that any heads of jurisdiction in respect of which the English Admiralty Court had jurisdiction at the time the 1890 Colonial Courts of Admiralty came into effect[3] now remain subject to English law,[4] whereas new heads of admiralty jurisdiction[5] are subject to the indigenous Roman-Dutch law, being in effect present South African common law. As marine insurance was not within the realm of 19th C Admiralty jurisdiction, it is this formula which dictates that, present marine insurance law in South Africa relies upon South African common law, and does not directly apply English law.[6]
Central to any decision of one person to assume the risk of another (albeit at a price) must surely be the ability of the person taking on the risk to assess the risk itself. And no meaningful assessment would be possible without full knowledge of the circumstances affecting the risk. The law recognises also that, in most instances, it is the assured who has the most intimate knowledge of the risk that is to be passed to the insurer. In relation therefore to the obligation to impart such knowledge to the insurer, the assured is bound by established principles requiring disclosure during negotiations leading up to the formation of an insurance contract.[7] But the duty to disclose which burdens both assured and insurer pre-contractually, is only part of the general notion of good faith. To approach good faith and the duty to disclose as one and the same concept is as common as it is incorrect.[8] The duty to disclose does not necessarily even flow from the requirement of good faith[9] though it encourages the good faith of each party upon which the other is permitted in law to rely.[10] For such an approach not only ignores the fact that contractual good faith goes far beyond the duty to disclose, but also can lead to the incorrect conclusion that observance of good faith in marine insurance stante contractu by both parties is, like disclosure, a pre-contractual duty only. Even in England, where the 1906 Act states in terms that a contract of marine insurance is a contract based upon the utmost good faith, and further that in the absence of the utmost good faith by either party, the contract may be avoided by the other, the courts seem reluctant to embrace good faith (or in England the utmost good faith) as a free-standing prerequisite extending much beyond non-disclosure.[11] It is only in instances of clear fraud that the courts appear to accept that they can rely upon a breach of good faith to allow the aggrieved party to avoid liability. Thus in The Litsion Pride[12] the Queen’s Bench found that filing a fraudulent claim under a policy amounted to a breach of the (continuing) duty of the utmost good faith. The assured or the insurer can however exhibit a lack of good faith short of fraud, and in that event the South African court would, regrettably, appear reluctant to grant relief based solely upon a breach of good faith. In so doing, the South African courts, and in particular, Videtski’s case,[13] would appear to be sending out to the market quite the wrong signals as to standards of acceptable behavior by the parties to a marine insurance contract. It is not only the duration of the obligation to observe good faith that has caused confusion in marine insurance legal circles. May a lead be found in general contract law? As a commercial contract, insurance is subject to the general rules regulating the formation and performance of contracts, as well as those rules, which are peculiar to insurance, itself. Is there in South African contract law in general, an overriding obligation upon the parties to the contract to observe basic tenets of good faith? Roman-Dutch law was inherently equitable.[14] The general application of good faith in South African Contract Law was previously given effect by the Roman-Dutch remedy of the exceptio doli generalis which allowed relief to any party averring the existence of dolus to the prejudice of that party. This general judicial exception for bad faith was however removed from South African practice by the Supreme Court of Appeal in Bank of Lisbon and South Africa v De Ornelas.[15] But the removal of the remedy did not remove the underlying requirement that parties to a contract should conduct themselves in good faith, each towards the other.[16] Whilst the Bank of Lisbon case has left the door open for the reliance upon a general principle of good faith, the removal of the exceptio doli generalis has clearly clipped the wings of the concept which would now appear to find its expression more in relation to specifics than to the ability of either party to rely unequivocally upon the good faith the other.[17] What has emerged from the emasculation of the principles of good faith by the Bank of Lisbon decision would appear to be an ill-defined residual notion of good faith which, particularly in relation to the marine insurance contract, the courts seem reluctant to embrace as a prerequisite warranting effective remedy. Thus, for example, in Videtsky the court allowed a claim supported by documentation which was knowingly fabricated by the assured in circumstances which were clearly mala fide.[18] The pre-EU[19] English law concerns that the general application of good faith in contract law was incompatible with the adversarial nature of English contracts clearly had their effect on South African legal thinking. The gradual erosion of these concerns to keep pace with perhaps increased expectations of commercial accountability and fairness will hopefully also rub off on South Africa so that we too may reach the stage of contractual good faith being ‘the cornerstone of a systematic co-operative ethic in contract’.[20] Equivocal as the general requirement of good faith stante contractu may remain, there is little doubt that in the South African law of marine insurance, good faith is a prerequisite.[21] Thus Joubert JA in Mutual & Federal Insurance Company Limited v Outdshoorn Municipality[22] was able to state that a contract of marine insurance is ‘indisputably a contract bonae fidei’. But the extent to which a breach of the general obligation to observe good faith founds a remedy in the hands of the innocent party, remains ill-defined in South Africa. Furthermore, there is by no means an international uniformity in relation to the Anglo-American concept of the 'utmost good faith' -- uberrimae fides. In relation to the duty to disclose, English Law has long recognised that an insurance contract is essentially one of intense speculation for the insurer, and the obligations of the assured should accordingly be judged according to the highest possible standards of openness and truthfulness. Early cases, such as Carter v Boehm[23] referred however to 'good faith', although as a much expanded notion from the simple good/bad faith of contract law. From a simplistic point of view, if an assured was not in bad faith, he could be said to be in good faith.[24] But the English courts were not satisfied only that the assured should not act in bad faith, nor indeed that he should merely display its corollary, good faith. They required the assured to be pro-active rather than merely passively honest. The courts were seeking a way to describe the high standards of good faith stipulated by Lord Mansfield in Carter v Boehm to indicate something more than mere ‘good faith’. Thus we see expressions such as 'the greatest good faith'.[25] At some time in the early 19th century the English courts coined an expression new to jurisprudence: 'the utmost good faith'.[26] By the end of the century, the English courts referred frequently to the utmost good faith as being the standard applicable at least to the duty to disclose,[27] and it can be stated with some confidence that by the time the 1906 Act was drafted, the English common law of insurance had adopted the utmost good faith as the standard applicable to the duty of disclosure and misrepresentation in insurance contracts. Marine insurance was no exception. Thus the 1901 edition of Arnould[28] confirms (though again in relation to non-disclosure and misrepresentation only) that marine insurance is a contract ‘to be made in the utmost good faith’.[29] It should be remembered that Arnould’s 7th edition was written at a time when English marine insurance law was already applicable at the Cape, and was about to become applicable in the Orange Free State. Although the 1906 Act was never specifically enacted to have application in South Africa, it is therefore equally clear that the English Law as imported into South Africa included the notion of the utmost good faith, certainly in relation to non-disclosure and misrepresentation. South African insurance cases in the intervening period before the abolition of the direct application of English Law in 1977[30] attached to a contract of insurance the label uberrimae fides.[31] The tide turned against the utmost good faith in South Africa with the landmark judgement of Joubert JA in the Outdshoorn Municipality case in 1985. The case had to deal with a non-marine indemnity policy and the effect upon the liability of the underwriter of the failure of the assured to disclose the existence of a potentially dangerous pylon in the approaches to a municipal airport operated by the assured. Joubert JA, in his comprehensive examination of the sources of South African insurance law, ruled that
Joubert JA’s reasoning was based upon his being able to find no reference to the utmost good faith in Roman-Dutch Law, or indeed in any of the other civilian European sources which were consulted. The learned judge therefore correctly concluded that the utmost good faith was an invention of the English legal system. He concluded further that it had no part to play in the Roman-Dutch law of insurance, neither historically nor now. In relation therefore to non-marine insurance, South African law relies upon the Roman-Dutch principles of good faith, and, in the view of Joubert JA, has no need to import a higher standard. This opinion, coming from the highest court in the land, remains binding, certainly in relation to non-marine insurance. Should Joubert JA's judgement apply however to marine insurance? Although the judgement was delivered a matter of weeks after the coming into effect of the Admiralty Jurisdiction Regulation Act (and particularly s 6 thereof), Joubert JA had no reason to consider the question from the perspective of marine insurance. However, a court deciding the same issue in a marine insurance claim (as opposed to an accident indemnity policy with which Outdshoorn Municipality was concerned) would have to take cognisance of the fact that the English common law was directly applicable in at least part of South Africa from 1879 to 1977. Because the Outdshoorn Municipality decision related to non-marine cover, a court dealing with a marine insurance claim should arguably be able to distinguish the Outdshoorn Municipality decision and should be able to find, on balance, that the utmost good faith became part of South African law through the conduit of English law - but only in relation to the duty to disclose and misrepresentation. And because the bulk of South African marine insurance is underwritten on the London market, or is reinsured there, it would be preferable for South African law not to seek to diverge from the English law, and the English standard of the utmost good faith in relation to marine insurance. To borrow the words of Professor Schoenbaum,
It should perhaps also be noted that the minority dissenting judgement of Miller JA in the Oudtshoorn Municipality case favoured the retention of the utmost good faith as a term of art peculiar to insurance: 'After the very many years in which the term has been used in this context, it is not, I think, potentially misleading' said the learned judge. Miller JA took comfort in the similar opinion of Corbett CJ in Perreira v Marine and Trade Insurance Co Ltd.[34] A return to the utmost good faith in relation to the duty to disclose and misrepresentation in marine insurance, advisable as it may be, should take note of the fact that it is only in the Anglo-American and Colonial systems that the utmost good faith is used as the determinant of the assured’s behavior. Continental systems including the Netherlands, France, Belgium and the Scandinavian countries, rely upon good faith, yet there is no indication that such systems would be satisfied with a lesser standard of honesty and integrity than the English law.[35] The duty to disclose is however almost invariably codified in the civilian systems.[36]
The general obligation to observe minimum standards of good (or utmost) faith arises ex iure. It is an incidental of the contract and is accordingly not required to be incorporated in a specific term.[37] Part of this general obligation, upon which specific rules have developed in marine insurance, is the duty to disclose. The duty to disclose also arises ex iure[38] and requires no contractual mention by the parties. But unlike the general requirement of good faith, it is pre-contractual duty which, apart from certain specific exceptions, falls away with the conclusion of the insurance contract. For this reason, the duty to disclose cannot be regarded as an implied term of the contract: the contract did not exist when the duty bound the parties. The duty to disclose is one of the most effective means of achieving contractual equality between the assured and the insurer.[39] Clearly, at the time the proposal is made by the assured, it is the assured who has the most intimate knowledge of the nature of the risk. Even with the sophisticated information databases available in today’s technological insurance market, the insurer is often at a considerable disadvantage in trying to assess the nature and extent of the risk. The law thus requires the proposer to volunteer all information material to the assessment of the risk by the prospective insurer which the proposer knows or ought to have known.[40] Nor is it sufficient defence for the proposer subjectively to have believed information withheld to have been immaterial. The test of materiality What then is the measure of materiality of a non-disclosed (or 'concealed') fact in South African law?[41] The prudent underwriter test of English law prior to the Pinetop case[42] was generally accepted in South Africa as the test for materiality of both disclosure and misrepresentation in marine insurance.[43] Indeed the prudent insurer test of English marine insurance law was applied directly to a fire insurance case decided by De Villiers JA on appeal from the Cape Court in Colonial Industries Limited v Provincial Insurance Company Limited.[44] De Villiers JA regarded as material every fact that would affect the minds of prudent and experienced insurers in deciding whether they will accept the contract, or when they accept it, in fixing the amount of the premium to be charged. This approach was however rejected by Joubert JA in his Oudtshoorn Municipality appeal decision.[45] The learned judge considered himself released from the English law followed by De Villiers JA in Colonial Industries because of the repeal of the 1879 Act (in 1977). He therefore applied Roman-Dutch Law in which he could find no suggestion of a prudent insurer test (nor indeed of a prudent insured test). He accordingly applied the generalised Roman-Dutch standard of the hypothetical diligens paterfamilias - the reasonable man or the average prudent person. The judge went on to say that ‘the test of the average prudent person is fair and just to both insurer and insured, in as much as it does not give preference to one of them over the other. Both of them are treated on a par.’[46] Which law should now bind the South African court in admiralty dealing with a marine insurance law problem of non-disclosure and misrepresentation?[47] Should the South African High Court in admiralty be bound by Joubert JA’s reasonable prudent person’ in Oudtshoorn Municipality, or can it be said that the present South African law of marine insurance incorporates not only the description of the utmost good faith, but also the test of the reasonable insurer for determining materiality?[48] If the English law on non-disclosure between 1879 and 1977 was settled, there would be a strong argument in favour of distinguishing the Outdshoorn Municipality decision and reverting to the prudent insurer test of De Villiers JA in Colonial Industries. But was the English law settled during the time it applied in South Africa? It seems that it was: during the period relevant to South Africa, 1879 to 1977, the English law remained settled upon the test of the prudent ‘rational’ underwriter in relation to risk and premium.[49] The ‘titanic judicial struggle’ referred to by Professor Schoenbaum in fact related more specifically to a comparatively recent interpretation of the non-disclosure and misrepresentation provisions of the 1906 Act, than to an analysis of pre-1906 English law. But the 1906 English Act has never applied directly in South Africa and therefore neither CTI nor Pinetop should have direct application in South Africa either. There is thus room for the argument in South African law that, notwithstanding Oudtshoorn Municipality, the test of materiality in cases of non-disclosure in marine insurance remains the prudent insurer test of English Law pre-Pinetop.[50] But would such a test be an equitable solution? The reasonable person, even if he is placed in the context of insurance,[51] cannot realistically be expected to appreciate and understand the specialist and technical factors which would affect a reasonable and prudent insurer in determining whether a risk should be underwritten or not. The more equitable process would require a two-stage inquiry: The first stage would require an insurer who raises the defence of material non-disclosure to prove to the satisfaction of the court that the insurer’s peers, as reasonable, prudent and responsible underwriters (not the diligens paterfamilias) would have seen fit to have declined the risk or to have charged a greater premium.[52] The second stage would then be to inquire whether a reasonable person in the position of the assured (but not necessarily the assured himself) ought to have known what the insurer’s attitude to the risk and the premium would have been in the light of the concealment . If the answer to both stages of the inquiry be ‘yes’, the insurer may avoid liability. As the entire inquiry is in the nature of a defence, the onus would remain on the insurer to prove both stages. This two-stage approach is favoured by many, including Miller JA in his minority judgement in Oudtshoorn Municipality,[53] and Gordon and Getz.[54] And it would appear to follow the more recent proposals of the English Law Commission relating to non-disclosure.[55] It is to be hoped that the South African Supreme Court of Appeal, when faced for the first time with a marine insurance matter concerning the test of materiality for non-disclosure will have the courage to cast off the non-marine chains of Oudtshoorn Municipality and apply a prudent insurer test, with the reasonable insured overlay proposed above.[56] The alternative would be legislative intervention.[57] Actual & constructive knowledge In Outdshoorn Municipality[58] Joubert JA indicated that (at least in non-marine insurance) the duty of disclosure relates to material facts of which the parties had actual knowledge or constructive knowledge prior to the conclusion of the contract of insurance.[59] No further elucidation is given on the extent or nature of constructive knowledge. In the later case of Anderson Shipping v Guardian National Insurance[60] (notwithstanding the name of the plaintiff, a non-marine matter) Nicholas AJA in applying the objective test of the reasonable man of Oudtshoorn Municipality, dealt briefly with actual and constructive knowledge in the context of a company. For the plaintiff Anderson Shipping to have had knowledge, that knowledge would have to be attributed to persons who are the directing mind and will of Anderson. The learned judge made reference to s 18(1) of the English 1906 Act, which stipulates that ‘the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him’. He referred further to the statement by Ivamy[61] that a proposer for insurance is bound to disclose not merely what he actually knows but also what was ascertainable by him by means of such inquiries as reasonable business prudence required him to make. Nicholas AJA ruled that it was ‘unnecessary to decide whether this rule forms part of South African insurance law’ but then assumed that it did.[62] It would seem that determining what is or is not the ‘constructive knowledge’ of the assured or its agent would rely upon principles similar to those used in other areas of the law, including delict.[63] The duration of the duty to disclose It is clear that the duty to disclose persists throughout the pre-contractual negotiations until the contract is concluded.[64] If circumstances are such that the policy is concluded by means of a slip,[65] then the duty to disclose will cease at that time.[66] Where a policy is to be renewed in circumstances where the risk has changed to the knowledge, actual or constructive, of the assured, the assured would be bound at the time of the renewal to disclose such changed circumstances. Facts which need not be disclosed The English Marine Insurance Act[67] stipulates those facts which need not be disclosed as those which diminish the risk, those known or presumed to be known to the insurer, being matters of common notoriety and matters in which the insurer in the ordinary course of his business ought to know, and facts which are rendered superfluous to disclose by being mentioned specifically in an implied or express warranty. It would appear that the wording of the 1906 Act largely reflected the circumstances which did not require disclosure under English common law prior to the Act.[68] A South African court would regard the old English Law upon the point as, at least, highly persuasive, and at most binding as having been incorporated into the South African common law during the period of the English law reception.
Fortunately, the South African legislature has stepped in to introduce a measure of certainty to the test of materiality where a proposer has misrepresented facts to the insurer. Unfortunately, however, the legislation is far from a perfect solution. The need for legislative reform was highlighted by the patently inequitable decision in Jordan v New Zealand Insurance[69] in which the proposer understated his age by a year on a proposal form which was made the basis of the contract, and which therefore amounted to a warranty.[70] In finding against the plaintiff upon the law as it then stood, the court expressed great sympathy with him, but found that hard cases could not be allowed to make bad law, this even though the assured presented, statistically, a lesser risk in view of his being older than he had declared in the proposal. The legislature acted swiftly, though unfortunately not altogether decisively, with the insertion of Section 63(3) into the then Insurance Act.[71] This Act has since been replaced by the Short Term Insurance Act and the Long Term Insurance Act, both of which contain a slightly reworded repeat of s 63(3). Sections 53 (Short Term) and 59 (Long Term) provide that an insurance policy
Whilst s 53(3) was designed primarily to reduce the often unfair effects of a breach of warranty by the misstatement of an immaterial or non-causative fact, it serves also to soften the insurer’s defences in relation to misrepresentations generally. But in doing so, it introduces an altogether new test of materiality: the ‘actual’ insurer, reasonable or unreasonable. To rely upon a defence of misrepresentation (whether by warranty or not) the insurer is only required to prove that in relation to the particular policy, it, as insurer, would have regarded the misstatement as materially affecting the assessment of the risk. Presumably it would not be unduly difficult for an insurer thus to prove its own attitude towards the assessment of the risk, for there is no overlay of objectivity requiring the insurer to show that its assessment was prudent or reasonable. The Supreme Court of Appeal first considered the effect of the then s 63(3) in the case of Qilingele v SA Mutual Life Assurance Society.[72] The court held that in view of s 63(3) and its clear wording imputing a test of subjectivity, cases of misrepresentation should be distinguished from those of non-disclosure in which the Oudtshoorn Municipality test of the objective reasonable person ought still to be followed. In this regard the Appeal Court overturned the court a quo which had applied the objective test of Oudtshoorn Municipality. The Qilingele test in accordance with the statute is therefore a pure subjective ‘actual insurer test’ which should be contrasted with the old English prudent insurer test, and the reasonable person and reasonable insured tests variously espoused.[73] Qilingele came under attack, but regrettably obiter, in the Supreme Court of Appeal in Clifford v Commercial Union Insurance Co of South Africa Ltd in which Schutz JA embarked upon an a largely uninvited[74] criticism of the interpretation of s 63(3) in Qilingele:
Schutz JA expresses the view that the purpose of s 63(3) was to ‘detoxify the warranty by removing its potential for abuse, without outlawing its legitimate use’, relieving the insurer from having to rely upon inducement. What Qilingele did, says the learned judge of appeal, was ‘to conflate the concepts of materiality and inducement’. In lamenting that the concept of materiality in its traditional, objective sense, has vanished in the process, Schutz JA expresses a clear preference for the views of Didcott J in Pillay v South African National Life Assurance Co Ltd,[75] conferring the common law meaning on the materiality -- i.e. requiring the test of the reasonable insurer. Schutz JA expresses disagreement with the opinion of Kriegler AJA (as he then was) that s 63(3) requires an examination of the particular insurance policy and the attitude of its underwiter in assessing materiality. He concludes that the words ‘assessment of the risk under the said policy’ (in the light of the aim of the section to detoxify the law relating to warranties) demands rather an examination of the policy as a type of insurance contrasted with other types.[76] Whilst one can identify with Schutz JA’s concerns that s 63(3) did not achieve what one would like to believe the legislature set out to achieve with its enactment, its wording is, with respect, sufficiently clear and its invocation of subjectivity sufficiently unambiguous to require legislative and not judicial remedy. Such remedy is unquestionably desirable.[77] It is not only in relation to materiality that s 53(1) fails to address the unduly onerous effects of the English law warranty: It also fails to establish a causative link between the misrepresentation and the loss. It is thus possible still for an insurer to aver that a misrepresentation of a fact totally unconnected to the circumstances of the loss would have affected its assessment of the risk, and thereby avoid liability. Section 53(1) also leaves untouched the common law requirement that a party to a contract who seeks to rely upon a misrepresentation needs to prove that he or she was induced by the misrepresentation to enter into the contract (by implication, which would not have happened but for the inducing false statement).[78] An insurer relying upon a misrepresentation will be faced with the following remedy options: first, the misrepresentation (whether fraudulent, negligent or innocent) may be sufficiently fundamental to vitiate consensus and result in the insurance contract being void ab initio upon the bases of mistake.[79] Second, where the misrepresentation is not fundamental to the extent that it vitiates consensus, the contract is voidable at the instance of the insurer as the ‘victim’ who may rescind the contract, but only if the misrepresentation was ‘material’ upon the test of s 53(1) and if inducement can be proved.[80] In insurance (and indeed in other fields of contract law) these two distinct remedies are often confused, with a voidable contract being loosely referred to as ‘void’. Confusion is compounded by misinterpretation of the phrase 'avoiding liability'. Although these different remedies for misrepresentations have different foundations in law, they have similar consequences relating to the premium.[81] Where the contract is void ab initio (such as with fundamental mistake or illegality) the risk never attached. Generally therefore any premiums paid should have to be returned to the assured. Where the contract is voidable at the instance of the insurer because of the assured's misrepresentations, the insurer repudiates the contract and thereby also seeks a return to the status quo ante. Generally, this would also involve a refund of premiums paid, upon the basis of the risk having been retrospectively avoided altogether.[82] The only exception concerns cases of illegality and fraud when the insurer is permitted to retain premiums paid provided that he has clean hands and does not therefore fall foul of the in pari delicto potior est conditio defendentis doctrine (or so-called par delictum rule).[83] Unlike a misrepresentation, a breach of a warranty generally allows the insurer to avoid liability, but uphold the contract and retain premiums paid to the date of the breach. For this reason (and also because proving a breach of warranty does not require proof of inducement) relying upon a breach of warranty is the preferable course of action for an insurer wishing to decline a claim.[84]
Present English marine insurance law provides that it is the duty of the assured to take such measures as may be reasonable for the purpose of averting or minimising a loss.[85] That such a duty existed prior to the 1906 Act is apparent from the 7th edition of Arnould:
Although the duty of the assured has been argued to relate specifically to the sue and labour clause and to arise only once a casualty has occurred exposing the insured property to risk.[87] The English courts have held that ‘sue and labour’ expenses properly incurred by an assured in pursuance of its duty to minimise the loss are properly recoverable even where there is no specific sue and labour clause in the policy authorising such recovery.[88] South African law could regard English law as persuasive, but hardly settled (outside of the 1906 Act provisions). It could however place reliance on the general principle of good faith to impose upon the assured a duty to take steps to avert the happening of the risk. Although the assured is covered for its own negligence, it is not covered for its wrongful and wilful acts. If a reasonable assured, acting in good faith, could have taken steps to avert the happening of the risk altogether, or, once it happened, to reduce the effect thereof, the insurer should be able to argue that the assured has acted in breach of its obligation of good faith.[89] The closest that the South African court has come to embracing good faith in insurance fully is Perreira v Marine and Trade Insurance Company Limited[90] per Corbett JA (as he then was) who obiter recognised the application of uberrima fides to an insurance contract, but nevertheless found it unnecessary to confirm that uberrima fides applied throughout the policy if he could rely upon an allegation of fraud as a defence for the insurer. The effect of a sue and labour clause in a policy (and possibly even in its absence) is to allow the assured to recover the reasonable costs of steps taken once the insured property was under threat of loss or destruction. Significantly, the cost of those steps are recoverable even if unsuccessful so that it is possible for an assured to recover more than the insured value by successfully claiming from the insurer his sue and labour costs in addition to a total loss.[91] However neither salvage nor general average are generally included in sue and labour charges.[92] In The Morning Star (Incorporated General Insurances Limited v Shooter t/a Shooter's Fisheries)[93] the Supreme Court of Appeal made brief mention of suing and labouring in the context of whether or not the owners of a vessel declared forfeit to the state of Mozambique for fishing violations were under a contractual and common law duty to sue and labour and pay the fines imposed upon their officers, which would have avoided forfeiture. The contractual clause in the policy was permissive, and the court then inquired whether the common law implied any duty to sue and labour. In finding that there is in Roman-Dutch law and South African law no determining authority upon the point, Galgut JA held however that 'in the Republic an insured is under an implied duty to minimise his loss.' He did not however expand further upon the duty.
The word ‘warranty’ has a special meaning in insurance law.[94] A warranty in insurance law is an essential term of the contract, non-compliance with which automatically gives the insurer the right to cancel the contract and therefore to avoid performance and liability. Perhaps more importantly, it does not matter whether the non-compliance is because of ignorance, innocent mistake, false information given by others or even if it has no bearing on the risk or the loss. A warranty has been described as the ‘trump card’ in the hand of the insurer.[95] And whether or not the insurer decides to play its trump card, depends upon the extent to which the insurer is prepared, in many instances, to rely on a non-causative and often irrelevant technicality. It is this unfettered power of the warranty in English law which sets its aside from the continental systems, and, since 1969 with the addition of s 53(1) to the Insurance Act, from aspects of the law of warranties in South Africa also.[96] The contractual warranty which the insurer requires an assured to commit himself, has long been a device for the benefit of insurers to promote what may otherwise have been a non-essential term to an essential term, thereby giving the insurer the power to cancel the contract without having to rely upon misrepresentation. With a defence of misrepresentation, it has been seen,[97] the insurer has not only to prove materiality, but also inducement in order to rescind the contract. Even if the insurer is able to do so, premiums already paid would have to be refunded because the misrepresentation results in the contract being regarded as voided at the instance of the insurer. Clearly, the reliance upon a breach of warranty is a much more decisive defence for the insurer. So decisive in fact, that the legislature in some countries has come forward to blunt its edge. The ground rules of warranties in South African law, which draw upon the English law of warranties, were set out by Innes CJ in Lewis Ltd v Norwich Union Fire Insurance.[98] The learned Chief Justice confirmed that a warranty was a statement ‘upon the exact truth of which, or the exact performance of which, the validity of the contract depends’.[99] There are in marine insurance law two types of warranties: the affirmatory and the promissory warranty. An affirmatory warranty states unequivocally that a certain state of affairs exists at the time of making the warranty. Such a warranty would state, for example, that a vessel is classified with a particular Classification Society at the time the proposal for insurance is submitted. A promissory warranty binds its maker to a promise to do or refrain from doing something during the currency of the policy, or that a certain state of affairs shall exist during the currency of the policy. A promissory warranty would be one in which a proposer warrants that his vessel shall, for example, at all times be manned in compliance with the Merchant Shipping Act.[100] The distinction between affirmatory and promissory warranties becomes significant when examining the effect of s 53(1). We have already examined the section in relation to the reliance of an insurer upon a misrepresentation made by the assured.[101] Section 53(1) and the relief it affords to the assured, accordingly only applies to ‘representations, whether warranted or not’. Are both promissory and affirmatory warranties to be regarded as based upon representations? Gordon & Getz[102] regard a representation as a statement of existing facts, not of future intentions. The authors, reflecting also the view of the editor of the 4th edition, Professor Davis, exclude the term ‘promissory representation’ and accordingly conclude that ‘the section will experience some buffeting if applied to promissory warranties, although their exclusion does limit the purpose of the Act.’[103] If it be that s 53(1) will not extend to promissory warranties, as is likely to be the case, Roman-Dutch Law would clearly require the warranty to be an essential term before the insurer is entitled to repudiate. For in Roman-Dutch law, even if the misstatement is of a warranty, if that warranty is non-essential, no repudiation would be possible. This is the view espoused by Reinecke & Van der Merwe,[104] but it may not provide the full answer: for again it may be argued, and cogently so, that particularly in the Cape and the Orange Free State, the statutory reception of English law for over a century introduced the overlay of the English insurance warranty to the existing Roman-Dutch Law. It seems clear that the South African courts have adopted, if only tacitly, the draconian English insurance warranty and in the process have ditched the Roman-Dutch contractual warranty and the requirement that such a warranty be essential in order to give rise to the right of repudiation.[105] Upon balance therefore, in South African marine insurance law the trump card of the warranty in the insurer’s hand remains, softened only partially by s 53(1). As has been pointed out with comments made in relation to representations generally, s 53(1) also fails to deal with the fact that the breach of warranty may be entirely non-causative. This is another area of the South African law of warranties where Roman-Dutch Law appears to have been displaced by English law: in Roman-Dutch Law for a breach of a warranty to give rise to repudiation, the breach had to be causative of the loss.[106] It would accordingly be appropriate for the legislature to heed the words of Didcott J in Pillay’s case[107] and to revisit s 53(1). There is no rational reason for distinguishing in that section between promissory and affirmatory warranties.[108] Where an insurer is able to establish a breach of warranty, the insurer may choose to waive the breach,[109] or (subject to s 53(1) and materiality), he may repudiate the contract from the date of the breach. This means that the insurer will remain liable for any claims which arose prior to the breach of warranty, and that he may accordingly retain premiums paid up to that date. The rationale behind this is that the insurer was at risk throughout the currency of the policy until the time that he chose to repudiate it. This should be contrasted with the insurer’s position where he is able to cancel the contract as void ab initio by reason of a misrepresentation. Here also one needs to distinguish the effect of a breach of an affirmatory warranty from that of a promissory warranty: where the assured breaches an affirmatory warranty, the chances are that the breach would have occurred even before the inception of cover. Where an insurer seeks retrospectively to rely upon the breach of an affirmatory warranty, the policy will be avoided from the date of the breach which would in most instances result in the necessity to return the premium (because the policy was indeed void ab initio). Where there has been a breach of a promissory warranty concerning events taking place in the future during the currency of the policy, the insurer will be entitled to retain the premiums paid up to the time of the breach. De-Toxifying the English Law Warranty From two platforms recently I have called for a review of the English law warranty. In November 1999 I made so bold as to do so in London in my talk at the BMLA's annual dinner. I there remarked:
After that speech, I was approached my many members of the profession, and not a few senior English judges, who identified with my views. In Antwerp, at that University's most successful marine insurance conference also in November 1999, I was again allowed the floor to state my concerns about the warranty and its unconscionable effects. I said there:
I hope that in Antwerp I stated my case for reform fully.[112] I took heart from the comments of Lord Renbury in Glicksman v Lancaster and General Assurance Company Limited:[113]
And from the highly critical report of the English Law Commission Report of 1980:[114]
But I lamented the fact that so little has been done in so few of the countries which the English warranty had tainted, and indeed so little in England itself, since those comments were made. I believe that the CMI initiative to re-examine the similarities and differences in national laws of marine insurance should grasp the opportunity to look at rational reform of the nature and effect of the warranty in those jurisdictions in which it exists. And I would hope that English lawyers can give the lead to those jurisdictions by applying the essential principles of fairness and equity which English law espouses, and by banishing the inequitable warranty. Some may say that the market has grown comfortable with the English warranty. That brokers are secure in the knowledge that insurer and insured alike know that strict compliance with warranties is required. Even that premiums, are assessed in the light of this knowledge. That the industry has provided a solution in warranty cover at an agreed AP. And perhaps that a review of the nature and effect of the warranty would result in insecurity for an already soft market. In essence, therefore, that the law has developed to suit the market in which it operates and it should be a sleeping dog. Comfort, and, with respect, at times sheer ignorance of the true effect of the warranty in law, should not displace the overall ideal that all law should be fair. Fair, that is to both sides of a contractual equation. In the minds of all right-thinking persons, there is no place for an unfair law in any legal system. And it is the legal profession which needs to take the initiative to provide an alternative yet equally comfortable solution to the industry which it serves. There is ample precedent that the English warranty is superfluous to marine insurance practice. The Norwegian Marine Insurance Plan, and indeed the practice of most European markets does very well without the generalised warranty. Contract law allows remedy for breach of a term. In most systems it is the nature of the breach, and whether it goes to the root of the contract, which will determine the rights of the aggrieved party. Not the label which the law has given to the term. To the idealistic jurist, the abolition of the insurance warranty would be first prize. It may be, however, that a more pragmatic approach can achieve the desired equity of result yet leave a place marine insurance practice for a warranty, albeit with clipped wings. If one regards the four most inequitable features of the warranty as --
then corrective measures should surely not be beyond the consultative abilities of the insurance industry and the lawyers. Much of the inequity would disappear with an amendment of sections 33(3) and 34(2) of the 1906 Marine Insurance Act. Other jurisdictions would surely follow the English lead. Precedent is to be found in attempts by some legislatures to address certain of the problems. Thus, for example the Civil Code of Quebec (though only in relation to non-marine policies) provides
And even the ill-conceived s 53(1) of the South African Short-Term Insurance Act, to the extent that it introduces a requirement of materiality, would be a start. Clearly, legislating issues of causation and materiality present a challenge, particularly in the English system which thrives on the fluidity of judge-made law. Yet the legal profession has an obligation to put right what the English Law Commission has, two decades ago, described with masterly English reserve, as quite wrong. For, notwithstanding market acceptance, the device of the warranty remains (to use Lord Renbury's words again) mean and contemptible. John Hare |
To website on: 02 January, 2001 / evr
