South Africa: Inchmaree Clauses, Warranties And Want Of Due Diligence In South Africa

The recent decision by the SA Supreme Court of Appeal in Viking Inshore Fishing (Pty) Ltd v Mutual & Federal Insurance

Introduction

The Inchmaree clause was introduced into marine hull insurance policies as a direct result of the case of Thames & Mersey Marine Insurance Co Ltd v Hamilton, Fraser & Co (1887) 12 AC 484. The clause covers damage or loss caused by the negligence of a vessel's own captain or crew or by any defect in the ship's hull or machinery. The clause extends the indemnity under the policy. The limitation on its operation is that it is subject to the proviso that the event giving rise to the claim should not be caused by the assured's want of due diligence.

In juxtaposition to the Inchmaree clause, there is often a tension between the Inchmaree clause and the warranties under the policy. Warranties, in particular promissory warranties, are nowadays found in almost all marine insurance policies (if not in all). The warranty is regarded as an essential term of the contract, non-compliance with which discharges the insurer from liability, arguably, even if there is no causal link between the breach of the warranty and the insured loss.

Inchmaree clauses, what constitutes a "want of due diligence" for purposes of such clauses and warranties under the South African Merchant Shipping Act 57 of 1951 (hereafter "the MSA") were considered in the recent case of Viking Inshore Fishing (Pty) Ltd v Mutual & Federal Insurance Co Ltd (SCA) unreported case no 41/2015 of 18 March 2016 (marked "reportable").

The facts

During the early hours of 8 May 2005, and a few miles off the coast near Cape St Francis, South Africa, the vessels Ouro do Brasil, a bulk juice carrier on a voyage from Singapore to Brazil, and the Lindsey, a small fishing vessel, collided, causing the Lyndsey to capsize and sink. Fourteen of the sixteen souls on board the Lyndsey lost their lives.

At the time of her loss, the Lyndsey was insured with the respondent (Mutual & Federal Insurance Co Ltd) under a marine hull insurance policy (hereafter "the policy"). The appellant (Viking Inshore Fishing (Pty) Ltd), the owner of the vessel, claimed in terms of the policy for its agreed value, being R3.5 million plus VAT and interest. The appellant was unsuccessful with its action in the Western Cape Division of the High Court. In denying the appellant's claim, the court per Yekiso J, primarily relied on a written statement provided by a certain Mr Ehlers (hereafter "Ehlers"), a spare hand on the Lyndsey at the time of her loss and one of the two surviving crew members - despite the fact that Ehlers later recanted his statement. For the reasons provided in the judgment on appeal, Wallis JA considered Ehlers' written statement (the one relied on by the High Court and the respondent on appeal) to be wholly unreliable; instead favouring the reconstruction evidence provided during the Court of the Marine Enquiry and the proceedings in the High Court, which was based on an analysis of the navigational equipment of the Ouro do Brasil by a certain Captain Cox.

The policy contained the following relevant clauses, which formed the basis of the appellant's claim for indemnification from the respondent:

  1. Institute Fishing Vessel Clause

    1. The insurance covers loss of or damage to the subject-matter insured caused by...negligence of the Master, Officers, Crew or Pilots...[or] barratry of Master, Officers or Crew.
  2. Inchmaree Clause

    1. In consideration of an additional premium this insurance is extended to cover...

      1. Loss of or damage to the vessel caused by any accident or by negligence, incompetence or error of judgment of any person whatsoever.
      2. The cover provided in [this clause] is subject to all other terms, conditions and exclusions contained in this insurance and subject to the proviso that the loss or damage has not resulted from want of due diligence by the assured, owners or managers.
  3. Warranty

    1. Warranted that the provisions of the South African Merchant Shipping Act and the regulations appertaining thereto shall be complied with at all times during the currency of this policy, provided that this warranty shall be effective only to the extent of those regulations which are promulgated for the safety and/or seaworthiness of the vessel. It is understood and agreed that this warranty shall in no way be construed to nullify the Inchmaree Clause, or any part thereof in the Institute Clauses attached to this policy.

The respondent denied liability under the policy, specifically the Inchmaree clause, by reason of (i) the appellant's breach of the above quoted promissory warranty (being the primary issue on appeal); and, in the alternative, (ii) the loss resulting from a want of due diligence on the part of the appellant. With regard to this second contention, the respondent argued that, at the time of the collision, the personnel in command of the navigation of the Lyndsey did not hold the necessary certification(s) in terms of the Safe Manning Regulations and thus that there was a want of due diligence on the part of the appellant.

The decision of the court

With regard to the respondent's main contention, i.e. that it was not liable under the Inchmaree clause due to the appellant's failure to comply with the MSA warranty, the court held that, based on the evidence at hand (i.e. the reconstruction evidence of Captain Cox), there can be no doubt that the collision would not have occurred and the Lyndsey would not have sunk were it not for the negligence of the crew of both vessels involved. That negligence, so said the court, gave rise to an obligation by the respondent to indemnify the appellant for its loss, unless it was entitled to rely on a breach of the promissory warranty to avoid such liability (the respondent's primary contention) or could show that the loss of the Lyndsey was due to want of due diligence by the appellant in terms of the proviso to the Inchmaree clause (the second respondent's contention).

The court rejected the respondent's argument that the Inchmaree clause and the warranty could be harmonised and read together. Indeed, because the two clauses are independent of each other, the interpretation advanced on behalf of the respondent runs contrary to the express wording of the Inchmaree clause. The warranty did however continue to operate and have full application with regard to claims arising under the Institute Fishing Vessel Clause, among others.

Although, strictly speaking, this rendered it unnecessary to further explore the respondent's argument regarding a breach of the MSA warranty, Wallis JA nevertheless proceeded to comment as follows on the warranty itself:

"[The respondent] adopted the approach that at every moment of every day during the period of cover [the appellant] was obliged to comply with every regulation promulgated under the MSA for the safety and seaworthiness of the vessel. It contended that any departure from this rigorous degree of compliance entitled it to avoid liability under the policy...Those contentions adopted an extreme view of what was required from [the appellant] in order to comply with the warranty. I am by no means satisfied that it was a correct view. Such warranties are to be construed favourably towards the insured...they are to be given a practical and businesslike construction in light of the purpose of the clause and the insurance policy. They are therefore not lightly to be construed as invalidating cover on grounds unrelated to the loss".

The above statement by Wallis AJ points to a construction of the warranty that it applies when the breach of the regulations is materially connected to the loss in question. This approach can be said to be in line with Roman-Dutch law (as opposed to English law), and perhaps also section 53 of the Short-term Insurance Act 53 of 1998, in that it implies that for a breach of a warranty to give rise to repudiation by the insurer, the breach had to be causative of the loss. Further, it appears from the above extract that a warranty such as the kind incorporated in the policy only requires compliance with the MSA when the vessel sets out on her voyage, meaning that cover is not lost if during the voyage the assured ceases to be compliant with the relevant laws.

The respondent's alternative argument, i.e. that the loss of the Lyndsey stems from a want of due diligence in that the appellant allowed the vessel to be operated by persons who lacked the requisite certification to do so, was also rejected by the court for the following two reasons. First, the court held that what must be established is a want of due diligence on the part of the assured, the owner or the manager of the vessel, or their alter ego in the case of corporate bodies, rather than a failure by a subordinate (such as a member of the crew, for example). The court also remarked that want of due diligence is concerned with equipping the vessel for the voyage, as opposed to seagoing and operational negligence. This approach is in accordance with the decision of the Supreme Court of Canada in Coast Ferries Ltd v Century Insurance Co of Canada & Others (The Brentwood) [1975] 2 SCR 477. Secondly, the court held that, based on the evidence before it, the Lyndsey was indeed properly crewed. It follows, therefore, that the contention that the loss of the Lyndsey was due to a want of due diligence on the part of the appellant, i.e. the owner, must fail.

As a further point of interest, the court also considered the admissibility of hearsay evidence in terms of section 6 of the Admiralty Jurisdiction Regulation Act 105 of 1983 (hereafter "the AJRA") and held that despite the "generous" approach provided in the AJRA, our courts must draw the line somewhere and refuse to admit evidence if the circumstances so demand. This, so said the court, was one such a case, and thus decided that Ehlers' (recanted) statement should not have been allowed into evidence by the court of first instance.

Conclusion

As noted by the court, there appears to be no authority in South African law on the question of the requirement in the proviso to Inchmaree clauses that the cause of the loss should not be want of due diligence on the part of the assured or the owners or the managers of the vessel. Therefore, to the extent the court decided on this issue, the judgment is of significant import for insurers and assureds alike. It is now settled that warranties should not be confused with the proviso contained in an Inchmaree clause, and that a court must look to the actions of the owner of the vessel, as opposed to the crew, when applying the proviso.

But the decision is also important for what was not decided. First, the court deliberately reserved judgment regarding the question of who bears the onus when a want of due diligence is averred: is it the assured or the insurer? Yet Wallis AJ's obiter remark that: "my inclination, however, in accordance with the practice of underwriters...would be to say that it is for the insurer to show a want of due diligence" cannot be ignored and also accords with the opinion of Hare (Shipping Law & Admiralty Jurisdiction in South Africa at page 932). Perhaps more importantly, Wallis AJ's obiter remarks with regard to promissory warranties signals a clear and unequivocal expression that the breach must be materially related to the loss in question. There is little doubt that this last obiter remark will carry great weight in future cases on the subject of warranties.

Inchmaree Clauses, warranties and want of due diligence in South Africa

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