Calotropis procera (Arka): A Tribal Herb of Utmost Significance
How Could the Doctrine of Utmost Good Faith Affect Intermediaries and Mortgagees in Marine Insurance...
Transcript of How Could the Doctrine of Utmost Good Faith Affect Intermediaries and Mortgagees in Marine Insurance...
UNIVERSITY OF BIRMINGHAM
BIRMINGHAM LAW SCHOOL
[How Could the Doctrine of Utmost Good Faith Affect Intermediaries and Mortgagees
in Marine Insurance Contracts?] A Thesis Submitted for the Degree of LL.M in Commercial Law
By: Majed O. Bamarouf
[ Supervised by Dr. S. Hazelwood ]
[ Birmingham Law School , September 2011]
DECLARATION FORM
September 10th 2011
I further certify that this is an original work that this thesis does not contain any materials
from other sources unless, these sources have been clearly identified in footnotes and any and
all quotations have been properly marked as such and full attribution made to the author(‘s)
thereof.
I further authorize University of Birmingham, School of Law, the LLM Programme in
Commercial Law, Its Programme Board and Director and/or any authorized agents of the
Institution, to place my thesis in a library or other repository for the use of the visitors to or
personnel of said library or other repository. Access shall include but not limited to a hard
copy or electronic media.
ABSTRACT
A critical discussion as to how the doctrine of utmost good faith affects intermediaries and
mortgagees in marine insurance contracts will be conducted in order to determine what the
nature of their rights and obligations is in such contracts. In doing so, the notion that
surrounds the utmost good faith principle will first be reviewed by locating the relevant
principles that apply to this doctrine in Marine Insurance. This will allow a demonstration to
be given as to the doctrine’s crucial importance which will then enable an assessment to be
made as to whether the doctrine poses any problems or whether the principle is being readily
advocated. The elements and development of the duties of disclosure and misrepresentation
will then be investigated to enable a greater analysis to be given to the basic elements in
which they principle entails. Once this has been done, a discussion about the position of
intermediaries and mortgagees in relation to this doctrine will then be possible, which will
allow the nature of their duties to be highlighted. Subsequently, the rights and obligations of
such parties will be evaluated in order to explore how the duty of good faith affects them in
marine insurance contracts, followed by recommendations for reform and an appropriate
conclusion.
ACKOWLEDGEMET
Firstly, I am indebted to those people who have helped prepare this dissertation. I would
particularly like to thank my supervisor Dr Steven Hazelwood for his dedication, guidance
and tireless effort to advice me throughout this project. Without his advice and feedback, this
project would have taken any number of wrong turns. Special thanks also go to Dr
Djakhongir Saidov for his support and understanding of problems in, and out of, the office
has been crucial in the completion of my studies. Also, I would like to thank staffs of the
School of Law of the University of Birmingham and the Harding Law Library for their
assistance. It was a privilege to work with them, and I have taken advantage of their ‘open
door’ policy many times and they have fuelled my interest and enthusiasm in many other
I am most grateful for financial support provided by the General Organization for
Social Insurance of Kingdom of Saudi Arabia Royal Embassy of Saudi Arabia Cultural
Bureau in London. I’d especially like to thank Dr Khalid Abdulrab and Mohammed ben
Gaith for being always available during many difficult times.
Furthermore, I would like to thank my friends and informants (not in the order of
importance) Ghazai Al Motiri, Abdulatif al Obidallah, Mohammed Al Gothami, Khalid Al
Ghtani, and Abdullah Al Sibani for all their supports, infectious enthusiasm, and motivational
chats that have made my time at Birmingham so enjoyable.
Lastly, I would like to thank my Sons Abdul Rahman and Ghazi, and all my relatives
and friends for their never ending assistance, encouragement and prayers.
[I]
CONTENTS
TABLE OF CONTENTS ......................................................................................................... I
LIST OF CASES..................................................................................................................... II
TABLE OF STATUTES & STATUTORY INSTRUMENTS ............................................... V
LIST OF ABBREVIATIONS ................................................................................................ VI
1. INTRODUCTION………………………………………………………………………2
2. METHODOLOGY………………………………………………………………………4
3. BACKGROUND………………………………………………………………………..5
4. CRITICAL DISCUSSION AS TO THE ELEMENTS AND DEVELOPMENT OF THE
DUTY OF UTMOST GOOD FAITH IN INSURANCE CONTRACTS……………….8
4.1 Duties of Disclosure………………………………………………………………..11
4.2 Misrepresentation…………………………………………………………...……16
4.3 Criticisms of the Duty of Utmost Good Faith in Marine Insurance Contracts….….21
5. THE POSITION OF INTERMEDIARIES AND MORTGAGEES IN MARINE
INSURANCE CONTRACTS……………………………………………………………23
5.1 The Principle of Good Faith in Agency and Mortgage relationships………….….24
5.2 Intermediaries…………………………………………………………………....…30
5.3 Mortgagees……………………………………………………………………....…33
6. IS THERE A REAL NEED FOR REFORMING THE DUTY OF UTMOST GOOD
FAITH? - COMPARISON WITH US AND AUSTRALIAN APPROACHES………...37
7. RECOMMENDATIONS…………………………………………………………..…….41
8. CONCLUSION……………………………………………………………………..……43
BIBLIOGRAPHY…………………………………………………………………………45
[II]
LIST OF CASES
.................................................................................................................................. Alston v Campbell (1779) IV Brown 476 .............................................................................. 35
.................................................................................................................................. Albany Homes Loan Ltd v Massey [1997] 2 All ER 609 (CA). …………………………33
.................................................................................................................................. Albany Insurance Co v Anh Thi Kieul 927 F 2d 88, 1991 AMC 2211 (5TH Cir). ……..39
.................................................................................................................................. Anderson v Pacific Fire & Marine Insurance Co(1872) L R 7 CP 65…………………..16
Anthony John Sharp and Roarer Investments Ltd v Sphere Drake Insurance plc, Minster
Insurance Co Ltd and EC Parker and Co Ltd, ‘Moonacre’ [1992] 2 Lloyd’s Rep
501(HL)..5
Arab Bank plc v Zurich Insurance Co [1998] All ER (D)
273…………………………....28
Australian Securities and Investments Commission v Citigroup Global Markets Australia
Pty Ltd [2007] FCA 963………………………………………………………….……….24
Baines v Ewing (1866) LR 1 Exch
320……………………………………………………31
Bank Leumi Le Israel BM v British National Insurance Co [1988] 1 Lloyds Rep
71….....18
Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd “Good
Luck” [1990] 1 QB 818, [1992] 1 AC 233 (HL)…………….…………………………….8,
9, 35
Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1990] 1 QB 665..…5, 9,
11
Barclays Bank Plc v O'Brien [1994] 1 AC 180
(HL)…......................................................17
Bankers Trust International v Todd Shipyards Corp (The Halcyon Isle) [1981] AC 221..
27
Bell v Lever Bros Ltd [1932] AC 161……………………………………………...…2, 7,
9
Black King Shipping Corporation v Massie (The Litsion Pride) [1985] 1 Lloyd’s Rep
437…………………………………………………………………………………………34
Bray v Ford [1896] AC 44……………………………………………………………….
26
Bristol & West Building Society v Mothew [1998] 1 Ch 1……………………….. 24,
25, 26
Brotherston v Barber (1816) 5 M&S 418………………………………………………...
5
Brotherton v Aseguradora Colseguros SA [2003] EWCA Civ 705…………………….13
Butcher v Dowlen [1981] RTR 24………………………………………………………15
Cuckmere Brick Co v Mutual Financ [1971] 2 WLR 1207……………………………….
27
Carter v Boehm (1766) 3 Burr 1905………………………………………………
...2,3, 5, 8
Conlon v Simms [2008] 1 WLR 484 (CA)………………………………………………..
31
[III]
Container Transport International Inc and Reliance Group Inc v Oceanus Mutual
Underwriting Association (Bermuda) Ltd [1984] 1 Lloyd’s Rep 476…………………..11
Dawsons Ltd v Bonnin [1922] 2 AC
413………………………………………………….19
Donoghue v Stevenson [1932] AC
562……………………………………..……………..27
Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295………… 27,
35
Economides v Commercial Union Assurance Co plc [1997] 3 WLR 1066
(CA)……..16, 18
Edgington v Fitzmaurice (1885) 29 Ch D 459…………………………………………. 17
Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd and PS
Refson & Co Ltd “The Raffaella” [1985] 2 Lloyds Rep 36
(CA)………………………..............30
Esso Petroleum v Mardon [1976] QB 801……………………………………………… 17
Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 ……..
31
General Accident Fire & Life Assurance Corp Ltd v Midland Bank Ltd [1940] 2 KB 388
(CA)…………………………………………………………………………………28, 34
George Wimpey UK Ltd v VI Construction Ltd [2005] EWCA
77……………………….17
Glicksman v Lancashire and General Assurance Co [1927] AC 139 …………...….20
Godfrey v Britannic Assurance Co Ltd [1963] 2 Lloyds Rep 515
(QB) ………………...14
Hambro v Burnand [1904] 2 KB 10 (CA)………………………………………………31
Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 (CA)………………………………30
HIH Casualty and General Insurance v Chase Manhattan Bank [2003] UKHL 6
(HL)………………………..……………………………………………............. 6, 10
Hoff Trading Co v Union Insurance Society of Canton Ltd (1929) 45 TLR
466…………………………………………………………………………………………11
Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433... 5,
6
Ionides v Pacific Fire & Marine Insurance Co (1872) LR 7 QB 517…………………18,
19
Ionides v Pender (1874) LR 9 QB 531
(QB) …………………………………………..…11
Ireland v Livingstone (1872) All ER Rep 585
(HL)…………………………...................30
Item Software UK Ltd v Fassihi [2005] 2 BCLC 91……………………………………..
24
Joel v Law Union & Crown Insurance Co [1908] 2 KB 863 (CA)………. 5, 6, 9, 12,
14
Jones v Environcom Limited [2010] EWHC 759
(Comm)………………………………..37
Kelly v Cooper [1993] AC 205 (PC)…………………………………………………25,
26
Laidlaw v Organ15 US (2 Wheat) 178
(1817)……………………………………...…….39
[IV]
Lambert v Cooperative Insurance Society Ltd [1975] 2 Lloyd's Rep 485 (CA)……….. 5
Manifest Shipping Co v Uni-Polaris Insurance Co, ”The Star Sea” [2003] 1 AC 469…..
5
MCI Worldcom International Inc v Primus Telecommunications Inc [2004] EWCA Civ
957………………………………………………………………………………………..1
Medforth v Blake [2000] Ch 86
(CA)……………………………………………………..33
Midland Tool Ltd v Midland International Tooling Ltd [2003] EWHC 466 (Ch)………..
31
Mutual Life Insurance Co of New York v Ontario Metal Products Co Ltd [1925] AC 344
(PC)……………………………………………………………………………………….14
National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyds Rep 582(QB Com
Ct)……28
Neal v Irving (1973) 1 Esp
61…………………………………………………………….31
New Hampshire Insurance Co v MGN Ltd [1997] LRLR 24 (CA)………………………
28
New Zealand Netherlands Society “Oranje” Inc v Kuys [1973] 1 WLR 1126…... 24,
26
Palk v Mortgage Services Funding Plc [1993] 2 WLR 415…………………….. 27,
33, 35
Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501
(HL)………………………………………………………………………………5, 14, 18
Plasteel Windows Aust Pty Ltd v C E Heath Underwriting Agencies Pty Ltd (1989) 5
ANZ Ins
Cas.................................................................................................................................18
Prince Jefri Bolkiah v KPMG (A firm) [1999] 2 WLR 215, ………………………….. 24
Printpak v AGF Insurance Ltd [1999] 1 All ER 466 (CA)……………………………….
5
Punjab National Bank v de Boinville & ors [1992] 1 Lloyd’s Rep 7……………………
34
Re Coomber [1911] 1 Ch
723……………………………………………………...……..27
Re Goldcorp Exchange [1995] 1 AC
74………………………………………...………..25
Rivaz v Gerussi [1880] BD 222
(CA)……………....................................................……..12
Routestone Ltd v Minories Finance Ltd 1 [1997] BCC 180
(Ch)………………………….33
Samuel v Dumas [1924] AC 431……………………….……………………………….. 35
Santley v Wilde [1899] 2 Ch 474 (CA)……….…………………………………... 3,
33
Seagrave v Union Marine Insurance Co(1866) LR 1 CP
305………………………...…..28
Smith v Land and House Property Corp (1884) LR 28 Ch D
7…………………………..18
Stebbing v Liverpool and London and Globe Insurance Co Ltd [1917] 2 KB 433………
10 Sumitomo Bank Ltd v Banque Bruxelles Lambert SA [1997] 1 Lloyd's Rep
487……………………………………………………………………………………….12
[V]
Tilley & Noad v Dominion Insurance Co Ltd [1987] 2 EGLR 34
(Ch).…………....……11
Two Ellens (1869-72) LR 3 A & E 345……………………………………………….. 33
Watteau v Fenwick [1893] 1 QB
346……………………………………………………..30
Wlliam Pickersgill & Sons Ltd v London and Provincial Marine & General Insurance Co
Ltd [1912] 3 KB 614………………………………………………………………… 35
Wilson v Jones(1867) LR 2 Ex
139……………………………………………….………28
With v O’Flanagan [1936] Ch 575 (CA)………………………………………………. 17
[VI]
TABLE OF STATUTES & STATUTORY INSTRUMENTS
FSA Handbook of Rules and Guidance ................................................................................. 24
Law of Property Act 1925………………………………………………………………..... 34
Marine Insurance Act (1906)
Sections 17-20……………………………………………………..…………..6, 8, 21
Section 3 (2)………………………………………………………………………….3
Section 3 (2) (c) ……………………………………………………………………23
Section 5……………………………………………………………………………27
Section 5 (1) ………………………………………………………………………..28
Section 14 ………………………………………………………………………….34
Section 18 (4) …………………………………………………………………..12, 13
Section 18 (2) …………………………………………………………………13, 14
Sections 18 and 19……………………………………………………………..11, 31
Section20……………………………………………………………………………16
Section 20 (5) …………………………………………………………………18, 19
Section 50 (2) ……………………………………………………………………..35
Misrepresentation Act 1967……………………………………………………….17
[VII]
LIST OF ABBREVIATIONS
FSA Financial Services Authority
MIA (1906) Marine Insurance Act (1906)
ITCH 83 Institute Time Clauses, Hulls, 1.10.83
IMIC Institute Mortgagees' Interest Clauses
[2]
1. INTRODUCTION
In English common law not all contracts enjoying the privilege of the principle of good faith.1
Apart from special fiduciary relationships, contracts for partnership and contracts of
insurance are the leading instances where the parties perform the contract in utmost good
faith. 2 Since the ‘infant days of marine insurance’ the essential reason for holding such
contracts are based on good faith is to achieve justice between parties.3 This clearly can be
read in Carter v Boehm4 in Lord Mansfield words when he articulating this concept during
the 18th century;
“the underwriter trusts to his representation and proceeds upon the confidence that he
does not keep back any circumstance in his knowledge, to mislead the underwriter into
a belief that the circumstance does not exist, and to induce him to estimate the risqué
as if it did not exist."
Although, from the date of this noble Lord conclusion all parties in marine insurance
contract obliged to disclose all material circumstances and avoid making any
misrepresentation by the law, over the years this duty has been subject to attack and criticisms
on various grounds. One frequent accusation is that the good faith doctrine is ambiguous in
nature because the scope of the principle is still uncertain.5 Others believe that the duty of
utmost good faith enforcement in insurance contracts has become blurred and much
complexity has ensued as a result. 6 Therefore, since it cannot keep pace with modern
1 Hugh Beale, Chitty on Contracts (30th edn Sweet & Maxwell, London 2008) para 1.22. 2 Bell v Lever Bros Ltd [1932] AC 161, 227. 3 Using the words of Michael Kirby, ‘Marine Insurance: Is the Doctrine of "Utmost Good Faith" Out of Date?’ (1995) 13(1)
ABR 1. 4(1766) 3 Burr 1905, 1909. 5 Recently, the duty of utmost good faith in insurance contract has been labelled "more uncertain," see Francis Rose,
‘Information asymmetry and the myth of good faith: back to basis’ (2007) 2LMCLQ 181. 6 For brokers See The English Law Commission and the Scottish Law Commission, Consultation, Insurance Contract Law:
Misrepresentation, Non-Disclosure and Breach of Warranty by the Insured (Law Com No 182, 2007) para 1.55; For
mortgagees see John Birds, ‘Good faith in the reform of insurance law’ [2004] 111 BILAJ 2.
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commercial practice, this classical approach of the doctrine still remains at the centre of
attention and facing further calls for reform in order to cope with the developments in
commercial transactions.
While the law has not entirely settled upon the scope of the doctrine, it is important to
keep in mind that, the concept of good faith not only affects the original parties of insurance
contract “assured and insurer”, but it is common in some situations for the position of another
parties who involved to the insurance transaction may be affected by the duty; albeit they are
alien to the marine insurance contract. 7 The principle of good faith has enjoyed the possibility
of influencing others, such as intermediaries, as intermediaries often have the authority to act
on behalf of the assured, and mortgagees who have an interest in the subject matter insured.8
This article concentrates of how the duty of utmost good faith affects those others parties.
Whereas the leading aspect with regards to the duty of utmost good faith has been
described as “forbidden to either party”9; whether assured, insurer, or others, this article
focuses on others who may involved in marine insurance contacts and precisely
intermediaries and mortgagees. Furthermore, with the power of avoidance, the doctrine of
utmost good faith is associated with the twin obligations to make full disclosure, and to avoid
making any misrepresentation, this article will determine how the doctrine of utmost good
faith will affect intermediaries and mortgagees in Marine Insurance contracts. Finally, some
recommendations are offered upon how this concept may develop in the future.
7 Section 3(2) of the Marine Insurance Act (1906), hereinafter referred to as “MIA (1906.)” 8 Santley v Wilde [1899] 2 Ch 474 (CA). 9Carter v Boehm (1766) 3 Burr 1905, 1909.
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2. METHODOLOGY
In selecting the appropriate research method the relevant laws in relation to the utmost good
faith doctrine will first be examined which will allow a determination to be made as to
whether the law in this area is outmoded and in need of reform or whether it does in fact
appear workable. Thus, arguments for and against the doctrine will be provided in order to
determine whether the doctrine has proved to be effective. Once this has been done, the
effects of the doctrine upon other parties outside a contract will be considered in order to
assess its impact. Case law and various academic opinions will also be assessed which will
help support any assertions that have been made in the assignment and any disagreements
will be made clear. This will be done by reviewing relevant textbooks, journal articles, law
reports, court judgements and judicial decisions, governmental reports, web articles and any
international rules and regulations. Such methods will enable a critical analysis to be made as
to how the doctrine of utmost good faith will affect intermediaries and mortgagees in Marine
Insurance contracts and a greater understanding of Marine Insurance contracts will be given.
Library research will be conducted in order to access the applicable information as well as
appropriate search engines, governmental websites and legal databases such as Lexis Nexis
and Westlaw.
[5]
3. BACKGROUND
Although insurance contracts are governed by the same standards which govern all contracts
in general, they include some special distinctive principles. 10 Aside from other general
contracts, insurance is the essential example, where parties are under a legal obligation to act
in good faith.11 This is because, in order to ensure that a contract is fair, the ascertainment of
good faith is strongly influenced because as made clear in Banque Keyser Ullmann SA v
Skandia (UK) Insurance Co Ltd 12 by Slade LJ; “the law cannot police the fairness of every
commercial contract by reference to moral principles.” Consequently, the good faith doctrine
is largely relied upon because of the difficulty in defining the fairness of contracts and so any
failure to comply with the underlying principles will amount to a breach of contract by the
law.13 Hence, as noted by Brownsword; “the legal concept of good faith is largely a moral
concept comprised of notions of fairness.”14 In accordance with this it is evident that unless
good faith is being performed, fairness will not be effectuated and a contract will be rendered
unjust. Effectively, the doctrine of utmost good faith governs all insurance contracts
including those containing marine insurance and unless this is performed in any given
contract, that contract will be avoidable.15 This is because, as pointed out by Lord Mansfield
in Carter v Boehm16 these types of contracts are ‘based on speculation’ and associated with
10 Such as principle of indemnity Brotherston v Barber (1816) 5 M&S 418, 425, and The concept of insurable interest
Anthony John Sharp and Roarer Investments Ltd v Sphere Drake Insurance plc, Minster Insurance Co Ltd and EC Parker
and Co Ltd, ‘Moonacre’ [1992] 2 Lloyd’s Rep 501, 509. 11 In Carter v Boehm (1766) 3 Burr 1905, 1910 Lord Mansfield went to impose this civil law notion of good faith into all
contracts, but did not succeed as the opinion currently settled to be regarded as the duty of good faith applied to limited type
of contracts, including insurance. See Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433, 439 12[1990] 1 QB 665, 802. 13 As the law stands at present in English law under the MIA (1906) that the requirement of good faith applied by a rule of
law, for further discussion See Manifest Shipping Co v Uni-Polaris Insurance Co, ”The Star Sea” [2003] 1 AC 469, 493. 14 Roger Brownsword, “Positive, Negative, Neutral: the Reception of Good Faith in English Contract Law” in Roger
Brownsword, and others, Good Faith in Contract: Concept and Context (Aldershot, Dartmouth 1999) 16. 15 This has been asserted by courts in many reported cases before and after codification the insurance law. See Joel v Law
Union & Crown Insurance Co [1908] 2 KB 863 (CA); Lambert v Cooperative Insurance Society Ltd [1975] 2 Lloyd's Rep
485 (CA); Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501 (HL); and Printpak v AGF
Insurance Ltd [1999] 1 All ER 466 (CA). 16 (1766) 3 Burr 1905, 1909.
[6]
the legal rules related to ‘fairness’ and ‘honesty.’ Essentially, the doctrine is thus vital to all
insurance contracts because it is likely that contracts would not be executed if the high
performance of good faith was not a prerequisite.17 This was also recognised by Sir McKenzie
Chalmers when was drafted on the statutory footing of the MIA (1906) frankly asserted that
any contract are based on uberrimae fidei which means utmost good faith.18 Resultantly,
because this doctrine is a necessary requirement in marine insurance contracts, the parties are
able to have greater confidence that fairness and honesty has been achieved.
Although good faith is strongly influenced in contracts, it is unclear whether this is being
fully effected as it is applied various solutions as recognised by Bingham LJJ in Interfoto
Picture Library Ltd v Stiletto Visual Programmes Ltd.19 This is due to the different schools of
thought on the matter which inevitably leads to confusion since there is no definitive answer
as to the exact nature of the principle of good faith.20 Hence, because the notion of fairness
generally is often very difficult to define, great ambiguity ensues when trying to assess
whether good faith has been employed or not.21 Provided that parties deal with each other
honestly and fairly, however, the good faith doctrine will be assumed to have been executed,
yet this is rather difficult to achieve in insurance contracts since the parties are often unaware
of their exact rights and duties.22 This has been signified by Smith when he noted that one of
main reasons why insurance contracts are governed by the doctrine of good faith is because
17 HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, para 85. 18 It described as the most important of Sir Mackenzie Chalmers in his Digest of the Law relating to Marine Insurance
(London, 1901) is codifying its main principles such as utmost good faith in Sections 17-20 of MIA (1906). See B Soyer
“Reforming pre-contractual information duties in business insurance contracts - one reform too many?” (2009) JBL 15. 19[1989] QB 433, 439. 20 The notion of good faith is still subject of judicial circles and academic debate as exemplified by the debate in Roger
Brownsword, and others, Good Faith in Contract: Concept and Context (Aldershot, Dartmouth 1999). 21 Some considered the notion of good faith is not totally alien or prohibited in general English contract law. See Johan
Steyn, ‘Contract Law: Fulfilling the Reasonable Expectations of Honest Men’ (1997) 113 LQR 433, 439. 22 In the words of Fletcher Moulton LJ in of Joel v Law Union and Crown Insurance Company [1908] 2 KB 863, 883, there
is: “…something more than an obligation to treat the insurer honestly and frankly, and freely...”
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of the “natural imbalance between the insurer and the insured in terms of knowledge.”23 This
seems to suggest that there is greater difficulty in insurance contracts when trying to assess
the assured and insurer’s responsibilities, which is why such contracts are to be governed by
statute rather than the traditional ‘caveat emptor’ principle which governs standard
contracts.24 Despite this, nonetheless, legal scholars believe there is still much imprecision
within this area of the law since the decision as to whether good faith has been carried out
will be dependent upon the particular court that is deciding a case.25 As such, different views
will often be expended which is clearly considered unfair and detrimental to the parties
involved.26 Whether such difficulties will ever be rectified is questionable but as stated by
Rose; “…this has suggested the possibility of further applications without indicating whether
they are legitimate or what they might be.”27 Although there have been many attempts to
define the doctrine of good faith, it has became evident that such attempts have proven rather
complex because as put by Rose; “…the idea of an overarching notion of good faith is wider
than the recognized applications of it.”28 Essentially, because of the ambiguity that persists in
regards to this doctrine, it is clear that there will be even more confusion when it comes to
determining the effects of this doctrine upon intermediaries and mortgagees since they will
not be considered the original parties of an insurance contract and they will have great
difficulty when trying to assess their rights and obligations.29
23 Herbert Smith, ’10 Key Points to Remember About Insurance’ <http://www.herbertsmith.com/NR/rdonlyres/4459A3EA -
EEF4-427D-8090 5ECD8877E784/17295/1928180_1.PDF> Accessed 06 August 2011. 24 General contracts obscured by the doctrine of caveat emptor , and such type of contracts are often subject to implied terms
which may have an indirect effect of requiring that the seller disclose defects as c larified in Bell v Lever Brothers Ltd [1932]
AC 161, 227, see Hugh Beale, Chitty on Contracts (30th edn Sweet & Maxwell, London 2008) para 5.008. 25 Francis Rose, ‘Information asymmetry and the myth of good faith: back to basis’ (2007) 2LMCLQ 181, 199. 26 The BILA Sub-Committee, Insurance Contract Law Reform – Recommendations to the Law Commission (2002). 27 Francis Rose, ‘Information asymmetry and the myth of good faith: back to basis’ (2007) 2LMCLQ 181, 196. 28 ibid. 29 English Law Commission, Insurance Contract Law: Misrepresentation, Non-Disclosure and Breach of Warranty by the
Insured, A Joint Consultation Paper (Law Com No 182, 2007) para 1.46.
[8]
4. CRITICAL DISCUSSION AS TO THE ELEMENTS AND DEVELOPMENT OF
THE DUTY OF UTMOST GOOD FAITH IN INSURANCE CONTRACTS
As explained by Lord Mansfield in Carter v Boehm30 and in numerous subsequent cases, and
as enshrined later by Sections 17-20 of the MIA (1906), the general principle of good faith in
marine insurance contracts is to cover two major types of duties beneath the heading
“Disclosure and Representations”. The comprehensive and powerful authority of the good
faith principle in insurance contracts is expressed under section 17 which states:
“A contract of marine insurance is a contract based upon the utmost good faith, and,
if the utmost good faith be not observed by either party, the contract may be avoided
by the other party.”
It is important to bear in mind however that Section 17 of the MIA (1906) refers
specifically to the observance of utmost good faith “by either party”, and the question will
make whether other parties such intermediaries and mortgagees obliged to act in utmost good
faith. While the Act clearly makes a particular provision for intermediaries’ duties,31 there are
no specific duties applicable for mortgagees. Yet, whether this doctrine is precisely affecting
the intermediaries or mortgagees is doubtful since it is evident that there is a kind of
ambiguity surrounding the nature of this doctrine.32 Butcher suggested that “the courts have to
examine the precise nature of the contract…to identify whether it is one of insurance, and
whether therefore the duty of good faith applies to it….”33 This signified the decision In Bank
30 (1766) 3 Burr 1905, 1910. 31 Sections 19 and 20 of the MIA (1906). 32 Francis Rose, ‘Information asymmetry and the myth of good faith: back to basis’ (2007) 2LMCLQ 181, 202. 33Christopher Butcher, ‘Good faith in insurance law: a redundant concept?’ (2008) 5 JBL 375.
[9]
of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd “Good Luck”34
where the Court of Appeal refused to acknowledge that the assignee may be affected with
duty of good faith by assignment or insurance contract. Therefore, the doctrine of utmost
good faith in insurance contracts does not only influence the assured and the insurer, but also
has its own distinctive impacts on the entire insurance transaction.35
Moreover, insurance contracts are peculiarly subject to notions of good faith by law.
This has been asserted by courts in various cases, in Bell v Lever Bros Ltd36 the court refused
the contractual basis of duty of good faith in insurance contracts. Also in the Good Luck
case,37 the Court of Appeal rejected the implied nature of this duty in insurance contracts and
asserted the legal attributes as it arises; "…by operation of law as an incident of the contract
of insurance.” Therefore, insurance contracts enjoy their own distinctive trite,38 but the range
of twin obligations to make full disclosure and to avoid making material misstatements are
still uncertain. it will be seen by this chapter that what constitutes a performance of these
obligations is still a question of fact, and consequently as has been made clear by Powers that
the doctrine is best left undefined since the courts will be able to make necessary adoptions to
the term based upon the particular circumstances of any given case; “[it] is an elusive term
best left to lawyers and judges to define over a period of time as circumstances require.”39
Accordingly, the party must uphold the duty of utmost good faith, and such duty is the
highest priority as stated In Joel v Law Union and Crown Insurance Company 40
34 [1992] 1 AC 233 (HL). 35 Howard Bennett, The Law of Marine Insurance (2nd edn, OUP 2006) 104 36 [1932] AC 161, 225. 37 [1990] 1 QB 818, 890. 38In general contracts, it is sometimes difficult to recognise the duty of disclosure, see Banque Keyser Ullmann SA v Skandia
(UK) Insurance Co Ltd [1990] 1 QB 665. 39 Paul Powers, ‘Defining the Indefinable: Good Faith and the United Nations Convention on the Contracts for the
International Sale of Goods’ (1999) 18 JALC 333. 40 [1908] 2 KB 863, 883.
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“…something more than an obligation to treat the insurer honestly and frankly, and
freely…,” but at the same time the indefinable as left to parties of insurance contract to
modify some specific terms.41 It appears that, still quite difficult to identify to which standard
the duty of disclosure and representation should be performed as the extent of the principle is
repeatedly variable. 42 Where there is duty of utmost good faith, for example upon
intermediaries, such obligations are different to those in respect of the assured.43 In view of
the statutory duty of utmost good faith imposed upon brokers to inform the insurer not only
relevant material information, the broker as agent sometimes conducts negotiations and
provides contract formation in a more rigorous way than the original parties of the insurance
contract. Whether this is acceptable, however, will remain a subject for debate, since it
appears that because of the uncertainty that surrounds this doctrine it is rather unclear as to
how the duty of disclosure and misrepresentation will apply in insurance transactions.
41 Hugh Beale, Chitty on Contracts (30th edn Sweet & Maxwell, London 2008) para 1-017. 42 Stebbing v Liverpool and London and Globe Insurance Co Ltd [1917] 2 KB 433, 437. 43HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6 (HL).
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4.1 Duties of Disclosure
It is palpable that the doctrine of good faith must be preserved by all parties who are involved
in a marine insurance contract otherwise liability may be imposed upon them.44 Therefore, all
material facts must be disclosed as provided for under section 18 of the MIA (1906).
Unlike Section 17, Section 18 placed a limit upon the duty of utmost good faith in
marine insurance contracts by imposing a strict and absolute duty of disclosure.45 In the same
time, it is a flexible requirement which often can be modified by the contract, as was made
clear in the case of Tilley & Noad v Dominion Insurance Co Ltd,46 in which it was ruled that
the parties would be capable of making a decision between them as to what material facts
would be disclosed since parties to a contract are free to stipulate their own terms.
Nevertheless, as enunciated by Wilkinson “an insurance proposal requires certain material
facts which are uniquely within the knowledge of one party.”47 Essentially, this signifies that
the facts which are to be disclosed will be of the knowledge of one party since they will be
aware as to whether a disclosure ought to be made or not based upon the particular type of
insurance that is being taken out. 48 The proposer may find himself failed to disclose
information, if he reasonably consider it not relevant, or disclose it inaccurately. 49
Furthermore, an insurer may also have made it clear what type of facts will need to be
disclosed again highlighting the obligations of the assured or his agent which is provided for
under Section 19 of the MIA (1906):
44 Semin Park, ‘Origin of the Duty of Disclosure in English Insurance Contracts’ (1996) 25 Anglo-Am LR 221. 45 Strict duty in Container Transport International Inc and Reliance Group Inc v Oceanus Mutual Underwriting Association
(Bermuda) Ltd [1984] 1 Lloyd’s Rep 476, 529 and 492; and absolute duty in Banque Keyser Ullmann SA v Skandia (UK)
Insurance Co Ltd [1990] 1 QB 665, 771. 46[1987] 2 EGLR 34 (Ch). 47 H W Wilkinson, ‘Exclusions and Conditions in Insurance Policies’ (1989) 138 NLJ 914. 48 Hoff Trading Co v Union Insurance Society of Canton Ltd (1929) 45 TLR 466, 467. 49 Also, the proposer not obliged to disclose everything. See Ionides and Another v Pender (1874) LR 9 QB 531.
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“where an insurance is effected for the assured by an agent, the agent must disclose
to the insurer -
(a)Every material circumstance which is known to himself, and an agent to
insure is deemed to know every circumstance which in the ordinary course of
business ought to be known by, or to have been communicated to, him; and
(b)Every material circumstance which the assured is bound to disclose, unless
it come to his knowledge too late to communicate it to the agent.”
The relevant key words in the broker duty are “every material circumstances” and
“known” or “ought to be known” by the agent. The MIA (1906) did not, aside from citing
illustrations, what is meant by full disclosure. However, by analogy with Section 18 (4) of the
MIA (1906), that whether any particular circumstance should be disclosed or not is “in each
case, a question of fact” as put in Joel v Law Union and Crown Insurance Company50 by
Fletcher Moulton LJ; “The disclosure must be of all you ought to have realised to be material,
not of that only which you did in fact realise to be so.” Thus, as insurance has always been
regarded as a transaction requiring the utmost good faith between the parties and a term such
as ‘every’ is incapable of exact definition, what may be disclosed in one contract may not be
in another.51 This is integral because of the fact that insurers are unable to see the product
being insured, unlike that in other commercial transactions such as sale of goods contracts,
and so it is important that the parties fully co-operate when a decision is made.52 This was
stipulated by Wright “Insurance is an intangible. Insurers must effectively be placed in the
same position as the proposer if they are to run the risk on a profitable basis.”53 Because of
this, full disclosures of the material facts in question are required under the MIA (1906), as
50 [1908] 2 KB 863, 884. 51 Sumitomo Bank Ltd v Banque Bruxelles Lambert SA [1997] 1 Lloyd's Rep 487, 495. 52 Paul Powers, ‘Defining the Indefinable: Good Faith and the United Nations Convention on the Contracts for the
International Sale of Goods’ (1999) 18 JALC 333. 53 John Wright, ‘Risk Transfer – the First Hurdle’ (2011) 22 1 Const LJ 26.
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identified in the case of Rivaz v Gerussi54 because if they are not being made, the parties who
have failed to disclose such material information will suffer the consequences as a result. In
assessing whether information is material or not, it was in fact held in the Rivaz case,
however, that in accordance with the statutory test of “materiality” laid down in Section 18 (2)
of the MIA (1906) those facts which would affect the judgement of the prudent insurer must
be disclosed when a consideration is being given as to whether an acceptance of the risk shall
be made or not. 55 Yet this approach, variable upon circumstances surrounding every contract
to reach a level what described by Lowry “…strike a balance between the parties as to
achieve some symmetry between them.” 56 In effect, this requirement (of the concept of
disclosure) remains to achieve fairness and honesty in contract, but without being able in the
least to narrow the concept scope as much complexity will continue to persist when
determining which facts would be considered ‘material’ since what one may consider
material another may not. 57 Accordingly, this again signifies the problems that transpire
within this area of the law, yet it was made clear by the Law Reform Committee in 1957 that;
“the duty of disclosure of material facts...applies to all classes of insurance, and that the
question in every case is whether the fact not disclosed was material to the risk and not
whether the insured, whether reasonably or otherwise believed or understood it to be so.”58In
effect, this demonstrates that the materiality of facts will be decided based upon the particular
circumstances of the case and a review will be given as to whether or not the statement which
was being made was material to the risk that was posed. 59
The view adopted by the Committee appeared to reflect the views that were
employed in the case of Mutual Life Insurance Co of New York v Ontario Metal Products Co
54 [1880] BD 222 (CA). 55 Section 18 (2) of the MIA (1906). 56 John Lowry, ‘Whither the Duty of good Faith in UK Insurance Contracts?’ (2009) 16 Conn Ins LJ 156. 57 as explained by Lord Justice Mance in Brotherton v Aseguradora Colseguros SA [2003] EWCA Civ 705, para 24. 58 The Law Reform Committee, Conditions and Exceptions in Insurance Policies, Fifth Report ( Cmnd 62, 1957) 3. 59 Section 18 (4) of the MIA (1906).
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Ltd60 in which it was found that statements would be considered ‘material’ if such facts led a
reasonable insurer to decline the risk or to stipulate for a higher premium upon disclosure.
Therefore, if the information to be disclosed were to have affected the insurance policy in any
way, then it would be rendered material and thus applied to all classes of insurance. This is
not easily determinable, however, because as illustrated in the cases of Joel v Law Union &
Crown Insurance Co61and Godfrey v Britannic Assurance Co Ltd62 similar facts may be borne,
yet different outcomes may be produced. In Joel it was found that the mental state of the
proposer was not material facts and not have to be disclosed as it is only reflects the thought
of the assured, whereas in Godfrey details of a proposers health was in fact regarded as
material and so the proposer was guilty of non-disclosure for failing to disclose these facts.
Effectively, these two cases undoubtedly highlight the complexities that surround this area of
the law and it is evident that inconsistency is likely as a result of not understanding practical
effects. This is clearly unacceptable and as a result of this nature of intermediaries and
mortgagees remains even more imprecise. In order to alleviate the strictness of the disclosure
principles, however, Section 18 (2) of the MIA (1906) also placed a significant limitation on
the duty as it required such information should be influenced the prudent insurer decision in
taking the risk or assessing their value. This delimitation of the concept of materiality gave
rise to various formulations until courts settled to apply the actual inducement test which is
confirmed in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd, 63which considered
that such facts not only need to influence the decision of the insurer be disclosed, but it must
also be proved that the insurer was in fact influenced by the failure to disclose and was
therefore induced to enter into the contract. As such, it seems that even if there has been a
failure to disclose material facts, a person will not be guilty of non-disclosure unless it can be
60 [1925] AC 344 (PC). 61 [1908] 2 KB 863 (CA). 62 [1963] 2 Lloyds Rep 515 (QB). 63 [1995] 1 AC 501(HL).
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shown that the insurer was induced by the non-disclosure to enter into the contract and the
prudent insurer’s discretion may work only as a factor.64This approach of limitation of the
duty of good faith is placed upon other parties seems even further because of the fact that it
may be quite difficult to show that there has been an inducement of the contract.65
64 The onus of proofing that there has been no material facts have been disclosed is upon the insurer. See Butcher v Dowlen
[1981] RTR 24. 65 For example, where there is duty of disclosure upon intermediaries, section 19 imposes an independent and higher then
section 18.
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4.2 Misrepresentation
Under marine insurance contracts, there is also a general duty, in upholding the good faith
doctrine, not to make any misrepresentations which might induce a contract. This duty is
found under section 20 of the MIA (1906) which makes it clear that all parties to an insurance
contract must not make any misrepresentations when it is provided that;
“(1)Every material representation made by the assured or his agent to the insurer
during the negotiations for the contract, and before the contract is concluded, must be
true. If it be untrue the insurer may avoid the contract.
(2)A representation is material which would influence the judgment of a prudent
insurer in fixing the premium, or determining whether he will take the risk.”
If the provisions in Section 20 are complied with in marine insurance contracts, the
good faith doctrine will have been ascertained. Thus, duty of misrepresentation in marine
insurance is also very strict obligation like duty of disclosure. Despite this, however, parties
to a contract are often ignorant as to the extent of their obligations because of the fact that all
statements that are to be made by the proposer are to be statements of fact and not of mere
opinion.66 Furthermore, as shown in Anderson v Pacific Fire & Marine Insurance Co67 any
statements which have been made will only be actionable if they have been made in bad faith
which again makes it quite difficult to determine whether a misrepresentation has been
ascertained or not. In accordance with this, it has been stated by Butcher; “Insurers have
sought to argue that conduct of the assured in relation to the presentation of claims, even if it
falls short of dishonesty, amounts to a failure on the part of the assured to comply with the
66 Economides v Commercial Union Assurance Co plc [1997] 3 WLR 1066 (CA). 67 (1872) L R 7 CP 65.
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duty of the utmost good faith.” 68Accordingly, although there will be a general duty to act in
the utmost good faith in insurance contracts, it is quite difficult to assess whether good faith
is being effectuated and as such, the principle is repeatedly subject to modification because as
enunciated by the Law Commission; “There is a right to avoid even if the misrepresentation
was made without fraud… or even negligence….”69
In comparing this with the position in general contracts it is likely that parties will be
able to recognise a lot better when a misrepresentation has taken place as the “caveat emptor”
principle will not protect those who have acted in a dishonest manner.70Thus, parties who are
involved in a commercial contract will be prevented from making any misrepresentations
which would be likely to induce the other party.71A number of cases can be read as an
example of misrepresentation operating in commercial contracts such as in Barclays Bank Plc
v O'Brien 72 where the court prevented enforcement of the mortgagee legal rights as it would
be unconscionable from his misrepresented conduct. This due to an obligation imposed upon
parties not to state facts as to which the innocent party could have no reasonable grounds for
believing that they were true. In effect, if an authorized agent expressed that there were
grounds for believing that the statements made were true, it is clear that unless such grounds
are reasonable a misrepresentation will be found.73
68Christopher Butcher, ‘Good faith in insurance law: a redundant concept?’ (2008) 5 JBL 375.
69 The English Law Commission, Insurance Contract Law: Misrepresentation, Non-Disclosure and Breach of Warranty by
the Insured, A Joint Consultation Paper (Law Com No 182, 2007) para 2.13. 70 In such general contracts parties an implied terms which may have an indirect effect of requiring that the seller disclose
defects, see Edgington v Fitzmaurice (1885) 29 Ch D 459. This has also been provided for under section 2 (1) of the
Misrepresentation Act 1967. 71 Esso Petroleum v Mardon [1976] QB 801, 819. 72 [1994] 1 AC 180 (HL). 73 With v O’Flanagan [1936] Ch 575 (CA).
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While the requirement for reasonable ground for belief in general contracts was
justified in George Wimpey UK Ltd v VI Construction Ltd74 by Gibson LJ; “The phrase
‘honest and reasonable’ is not a term of art. It is a judicial attempt to sketch a line beyond
which conduct may be regarded as unconscionable or inequitable,” such a requirement was
ignored in insurance contract.75In the case of Economides v Commercial Union Assurance Cp
plc76 the court relied on provisions of the MIA (1906) and held that the requirement depends
on ‘solely one of honesty’ and ‘of good faith which is necessarily subjective’ in accordance
with Section 20 (5) which states: ‘representation as to a matter of expectation or belief is true
if it is made in good faith’. In effect, the decision in this case signifies that in marine
insurance contracts, representor’s need only prove that they were being honest when making
a statement that was later found to have been untrue regardless of whether their belief was
unreasonable or not. 77 This is widely criticized; in reading the case of Pan Atlantic
Insurance Co Ltd v Pine Top Insurance Co Ltd78 where the House of Lords asserted that
section 20 of the MIA (1906) is not exhaustive and cannot be read in literal sense without
support from general contract law provisions. Furthermore in practise, it seems that in cases
in which an intermediary makes a representation that is unreasonable, provided that an honest
opinion was given at the time of statement, no misrepresentations will be found.79In view of
this, it has been argued by Birds that; “the lack of a need for reasonable grounds is a fairly
recent development and it out of line with the general law of contract.”80
This is because, in insurance contracts the subject matter insured is not equally known
to both parties, and one party always in strong position entitled him to gather most important
74 [2005] EWCA 77, para 60. 75 The classical authority of misrepresentation in insurance is Ionides v Pacific Fire and Marine Insurance Co (1872) LR 6
QB 674 (QB). 76 [1997] 3 WLR 1066 (CA). 77 Plasteel Windows Aust Pty Ltd v C E Heath Underwriting Agencies Pty Ltd (1989) 5 ANZ Ins Cas 60-926. 78 [1995] 1 AC 501 (HL). 79 Economides v Commercial Union Assurance Cp plc [1997] 3 WLR 1066, 1082-1083. 80 John Birds, Birds’ Modern Insurance Law (7th edn, Sweet & Maxwell 2007) 111.
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information, which rendered his statement of opinion to be considered often as a statement of
a material fact.81It was made perfectly clear in the Bank Leumi Le Israel BM v British
National Insurance Co 82 that “such a statement can and often does carry with it a
representation that the person making the statement has an honest belief or expectation, based
on reasonable grounds, that events will turn out as stated…” Moreover, as has also been
contended in Ionides v Pacific Fire & Marine Insurance Co 83it must demonstrate that the
representation was substantially true or correct and that a material contribution by the
representor induced the contract. Whether this can be easily proven, however, is arguable and
as contended in MCI Worldcom International Inc v Primus Telecommunications Inc 84 by
Mance LJ; “… whether there is a representation and what its nature is must be judged
objectively according to the impact …” Therefore, it is evident that the decision as to whether
there has been a material contribution by the representor which has induced the contract will
depend upon the specific circumstances of the case which will be assessed according to the
reasonable mans characteristics and whether the representation would have induced a
reasonable person. Whether this is a plausible approach to take, nonetheless, is questionable
since it appears that much inconsistency will transpire as a result.
Hence, under section 20 of the MIA (1906), the misrepresentation must be considered
material and must also have induced the contract before any remedies can be awarded.
Nevertheless, it has been argued that because of the requirements that must be present for a
misrepresentation to be found, representations are essentially being turned into warranties
because a contract merely has to include a clause which states that any answers which are
81 This what often insurer relied on based on of Bowen LJ dictum in Smith v Land and House Property Corp (1884) LR 28
Ch D 7, 15. 82 (1872) LR 7 QB 517. 83 (1871) LR 6 QB 674 (QB). 84 [2004] EWCA Civ 957, para 30.
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given “form the basis of the contract.”85 Thus, because warranties are to be strictly complied
with, the requirements that a misrepresentation must be ‘material’ and must have ‘induced the
contract’ will be irrelevant. This is rather absurd and it appears that much confusion is likely
to transpire as a result of this, something which has clearly been identified in the Dawsons
Ltd v Bonnin86 case where it was held that because the contract had a clause contained in it
which stated that “the proposal shall be the basis of the contract” this had the effect of
converting the statement into a warranty, regardless of the fact that the misrepresentation was
immaterial to the contract. This is clearly unjustifiable and has been subjected to much
criticism and debate over the years with one scholar arguing that such practices were “mean
and contemptible.”87
85 ibíd. 86 [1922] 2 AC 413, 415. 87 Glicksman v Lancashire and General Assurance Co [1927] AC 139, 145.
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4.3 Criticisms of the Duty of Utmost Good Faith in Marine Insurance Contracts
The inconsistency of the extent doctrine explained by Croly and Merkin; “These sections (17-
20 of MIA 1906) are relatively detailed, but have proved to be of little worth as most of the
disputes are of fact. Where points of law have arisen, extensive litigation requiring recourse
to numerous pre-code cases has emerged….”88From this statement, it seems that legislative
changes are inevitable in order to rectify the difficulties that subsist since is becoming rather
imprecise as to what affects the good faith doctrine has upon parties to a contract since the
disclosure and misrepresentation principles are often blurred. In accordance with this, it has
been noted by the Law Commission that “the law is right to recognise that the parties to an
insurance contract have mutual duties of good faith” 89 since the nature of the insurance
bargain renders this a requisite, nevertheless, it was highlighted by them that the nature of the
insurer’s duties is somewhat unclear since the law in regards to the assured’s duties is much
more developed which is quite absurd and clarification within this area is clearly a necessity.
Resultantly, it was thus proposed by the commission that; “legislation should include
guidelines on the insurer’s duties. Drawing on existing cases and FSA rules.”90This would
certainly resolve some of the many problems that are inherent in marine insurance contracts
since parties to a contract would be aware of their duties more easily and the effects the
doctrine has upon intermediaries and mortgagees would be more simply understood.
Arguably, the effects in which the good faith doctrine has upon intermediaries and
mortgagees will almost certainly be more recognisable as will their duties, yet a greater
emphasis will be placed upon the insurer to certify that appropriate precess are obtained
before an insurance policy can be issued.
88 Colin Croly and Rob Merkin, ‘Doubts About Insurance Codes’ (2001) JBL 587. 89 The Law Commission and the Scottish Law Commission, Insurance Contract Law; Damages for Late Payment and the
Insurer's Duty of Good Faith (Paper 6, 2010) para S.33. 90 The Law Commission and the Scottish Law Commission, Insurance Contract Law; Damages for Late Payment and the
Insurer's Duty of Good Faith (Paper 6, 2010) para S.34.
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Not all agree that this will be as effective as anticipated, nonetheless, Butcher in
illustrating disclosure and representations duties stated; “the very existence of the doctrine
leaves a residual uncertainty…. not only are there such rules, but the general principle also
has a life of its own.”91 Therefore although it will be clearer as to what information ought to
be disclosed by the assured and what information ought to be obtained by the insurer, it is
questionable whether this will also apply to intermediaries and mortgagees. Essentially, while
the Act imposes an independent duty upon intermediaries to prevent non-disclosure and
misrepresentation from being made which effectively places the burden of good faith upon
them, the position surrounded mortgagees is still ambiguous.
91Christopher Butcher, ‘Good faith in insurance law: a redundant concept?’ (2008) 5 JBL 375.
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5. THE POSITION OF INTERMEDIARIES AND MORTGAGEES IN MARINE
INSURANCE CONTRACTS
A contract of insurance can affects others who are not the original parties of the insurance
transaction as section 3 (2) (c) of the MIA (1906) made it clear that a shipowner maybe incur
liability against third party. Therefore, intermediaries and mortgagees who are involved in
insurance contract through agency or mortgagee relationship, despite they are alien to
insurance contract and not considered as the original party, in some cases they will be
affected from insurance transaction. This is because as signified by Mandaraka-Sheppard;
“Brokers play a significant role in the negotiations and will use their skills and persuasion to
conclude a contract on best terms for their principals.” 92As for mortgagees, he was furtherer
stated that, “In order to manage or minimise such risks, the mortgagee will seek a
combination of contractual, insurance and security mechanisms.”93 Essentially, these notes
clearly illustrates the nature of duties and rights that intermediaries and mortgagees may
enjoyed since they must seek appropriate approaches to prevent variety of risks that attaches
to the subject matter insured. This chapter does not attempt to review general agency or
mortgage relationships principles. Instead will begin this part by highlighting how the
principle of good faith dealt in those types of contracts which may appear surprising when
viewed against insurance contract position. Then will conclude by outlining how an
intermediary or mortgagee will be involved in marine insurance contracts and nature of duties
and rights may imposed upon them, particularly which related to the duty of utmost good
faith.
92Alexandra Mandaraka-Sheppard, Modern Maritime Law and Risk Management, (2nd edn Informa Law, London 2009) 472. 93 Ibid 416-417.
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5.1 The Principle of Good Faith in Agency and Mortgage relationships
The position of English contract in relation to the relevance of good faith in the performance
of contracts, establishes various solutions based on fairness.94 Perhaps the most extensive use
is taken by fiduciary duties in agency law, as stated in Bristol & West BS v Mothew95 which
stated; “A fiduciary must act in good faith.” The same case considered fiduciary as a person
who has agreed to act for and on behalf of another person concerning a particular matter
which then gives rise to a special relationship of trust and confidence.96 This is because where
such a relationship arises, the fiduciary will be required to act in good faith at all times for the
sole benefit of the person on whose behalf he is acting and therefore make full disclosures of
all material facts and not make any misrepresentations.97 The basis of these obligations is to
proscribe any conflicts of interest and to ensure that the contract is fair.98 The duties that are
placed upon fiduciaries can, nonetheless, be significantly limited by way of a contractual
agreement or a structural approach, such as the use of “information barriers” whereby
creditors separate their committee activity from their trading activity.99 Thus, as stated in
Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty
Ltd 100 by Jacobson J; “...it dose not eliminate conflicts; they are no more than a technique for
managing conflicts of interests which continue to exist.” This illustrates that those who hold a
fiduciary duty and fail to act in good faith may in fact be able to limit any liability that is
94 Bristol & West Building Society v Mothew [1998] 1 Ch 1, 18. 95 ibid. 96 As identified in Bristol & West Building Society v Mothew [1998] 1 Ch 1, 18. 97In Item Software UK Ltd v Fassihi [2005] 2 BCLC 91, 41-44 (Where director of the company obliged to disclose secret
approach to client, Arden LJ described this duty imposed on director as a 'duty of loyalty' and a 'fiduciary principle'.) 98 New Zealand Netherlands Society “Oranje” Inc v Kuys [1973] 1 WLR 1126, see Francis Reynolds, William Bowstead,
Bowstead and Reynolds on agency (17th edn Sweet & Maxwell, London 2006) para 6.039. 99 Prince Jefri Bolkiah v KPMG (A firm) [1999] 2 WLR 215, 238-240. More details regarding information barriers referred
to commonly as “Chinese wall” can be found in the Financial Services Authority (FSA), ‘FSA Handbook of Rules and
Guidance’< http://fsahandbook.info/FSA/index.jsp>Accessed 06 August 2011. 100 [2007] FCA 963, para 310, see Joshua Getzler, ‘Excluding fiduciary duties: the problems of investment banks’ (2008)
124 LQR 15, 20.
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imposed upon them by adopting one of these techniques. Furthermore, where a contract
governs a fiduciary relationship, limitations may be placed upon the duties owed since as
stated in Kelly v Cooper 101 “the scope of the fiduciary duties owed by the agent to the
principal…are to be defined by the terms of the contract of agency.” Arguably, it is therefore
apparent that the duties placed upon a fiduciary will be dependent upon the terms of the
contract and may be constrained under fiduciary law.
This has subsequently been provided in Re Goldcorp Exchange102 by Lord Mustill
when it was put forward that; “the essence of a fiduciary relationship is that it creates
obligations of a different character from those deriving from the contract itself.” Conversely,
however, this may not always be an effective approach because as stated in Bristol & West
Building Society v Mothew 103 a fiduciary based on the particular feature surrounding the
relationship, “is not subject to fiduciary obligations because he is a fiduciary; it is because he
is subject to them that he is a fiduciary.” Therefore, it seems that because the terms of the
contract can be given due weight when assessing the duties of fiduciaries, the doctrine of
good faith may not be upheld in all instances. Nevertheless, as put by Conaglen; “fiduciary
doctrine comprises several doctrines…and it is those doctrines that constitute the concept of
fiduciary loyalty.”104 He went on to further add that; “the concept of loyalty is equated at
times with a duty to act in the best interests of the principal but this provides no immediate
yardstick against which to measure the propriety or impropriety of a fiduciary’s actions in a
particular case.”105 Essentially, this indicates that although fiduciaries are to act in the best
interests of the principal which means that full disclosures are to be made where necessary
and an avoidance of misrepresentations are to be ascertained, it is rather unclear when
101 [1993] AC 205, 215. 102 [1995] 1 AC 74, 98. 103 [1998] 1 Ch 1, 18. 104 Matthew Conaglen, ‘The Nature and Function of Fiduciary Loyalty’ (2005) 452 LQR 1, 479- 480. 105 Ibid.
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liability will be imposed upon a fiduciary for their actions. This is somewhat unjustifiable
since it is imperative that the duties of fiduciaries can be easily ascertained so that liability
can be imposed upon fiduciaries for any breaches that have occurred.106 Thus, as stated by
Hood; “the obligation of loyalty imposed on a fiduciary not only renders that person liable to
a higher standard of conduct, but also renders him liable to stronger consequences for
breaching that standard.”107
In accordance with this, it is palpable that those who are found to have engaged in a
fiduciary relationship will have a duty to disclose certain facts under a contract that are
considered material and will be prohibited from making any misrepresentations in regards to
the contract. This is because, as made clear in Bristol & West BS v Mothew, by Millett LJ108
“he must not make a profit out his trust; he may not act for his own benefit or the benefit of a
third person without the informed consent of his principal.” Therefore, provided that a person
has reposed trust and confidence in another party, a fiduciary relationship will undoubtedly
arise which will therefore indicate that the parties involved in a contract will have a duty to
act in the utmost good faith, and, any necessary disclosures are fundamental to a contract and
any failures to disclose will thereby amount to a breach of duty. Whether intermediaries and
mortgagees will be found to hold a fiduciary relationship with the assured is however
arguable because as expressed in New Zealand Netherlands Society “Oranje” Inc v Kuys109
by Lord Wilberforce; “The precise scope of [the obligation] must be moulded according to
the nature of the relationship.” In effect, it is very difficult to establish whether a relationship
gives rise to one of a fiduciary which is especially the case concerning mortgagees. This is
106 Bray v Ford [1896] AC 44, 48. 107 Parker Hood, ‘What is so special about being a fiduciary?’ (2000) Edin LR 335, 308. 108 Bristol and West BS v Mothew [1998] Ch 1, 18. 109 [1973] 1 WLR 1126, 1130.
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because - as has already been recognised in Kelly v Cooper 110 an agent and a principal
relationship give rise to a fiduciary one, yet it is debatable whether the same applies to
mortgagees. However, in Re Coomber 111 it was provided by the courts that “Fiduciary
relations are of many different types…” Therefore, if mortgagees are considered to act in
relation to the property affairs of another then they will be deemed to hold a fiduciary
relationship and will be required to disclose all material facts and will be prohibited from
making any representations in bad faith. 112 In effect, courts are generally quite open to
imposing a duty of good faith on mortgagees in using his authority of sale to discharge the
expense debts secured by mortgage and expenses of sale, 113by a duty of skill and care,114
holding that “a mortgagee must be exercised in good faith.”115
In order for the doctrine of good faith to affect those that are not parties to the original
contract, however, it must be shown that they have an “insurable interest” under the contract,
as required under the MIA (1906).116 An insurable interest has been described by the Law
Commission as being “a benefit from the preservation of the subject matter of the insurance
or suffer a disadvantage should it be lost.” 117 Whether this can be said to apply to
intermediaries and mortgagees is uncertain, yet it is apparent that intermediaries may be
involved in insurance transactions as brokers, 118whilst mortgagees demand that insurance
policies secure the loan provided by a property owner.119 In effect, these parties are clearly
110 [1993] AC 205 (PC). 111[1911] 1 Ch 723, 728. 112 It is now clear there is no separate “fiduciary duty of care”; the duty to exercise skill and care may be owed by a fiduciary ,
see Palk v Mortgage Services Funding Plc [1993] 2 WLR 415, 486. 113 Cuckmere Brick Co v Mutual Financ [1971] 2 WLR 1207. 114 Palk v Mortgage Services Funding Plc [1993] 2 WLR 415, 486. 115 Downsview Nominees Ltd v First City Corporation Ltd [1993] AC 295, 312. 116 Section 5 of the MIA (1906). 117 The English Law Commission and the Scottish Law Commission, Insurable Interest (ICL 4, 2008) 2. 118 “The term “broker” for persons who go beyond introductions and certainly do make contracts for their principals,” see
Francis Reynolds, William Bowstead, Bowstead and Reynolds on agency (17th edn Sweet & Maxwell, London 2006)1-019. 119 Bankers Trust International v Todd Shipyards Corp (The Halcyon Isle) [1981] AC 221, generally see Alexandra
Mandaraka-Sheppard, Modern Maritime Law and Risk Management, (2nd edn Informa Law, London 2009) 375- 416.
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involved in insurance contracts and so it is obvious that good faith ought to be expended.120
Regardless, however, the extent of this duty is somewhat ambiguous and the courts have
tended to broaden the scope of the ‘insurable interest’ in order to impose a duty of good faith
upon other parties who are found to have played a vital part in the establishment of a marine
insurance contract.121 Nevertheless, it is in fact provided for under Section 5 (1) of the MIA
(1906) that; “every person has an insurable interest who is interested in a marine adventure.”
Therefore, provided that a person “stands in any legal or equitable relation to the adventure
or to any insurable property at risk in it, of which he may benefit by the safety or due arrival
of insurable property, or may be prejudiced by its loss, or damage to it, or by the detention of
it, or may incur liability in respect of it” then he will be considered to have an insurable
interest in the contract.
The scope of insurable interests does, nevertheless, appear to be rather extensive, yet
as evidenced in the case of Wilson v Jones122 a person may be said to be interested in an event
when “if the event happens, the party will gain an advantage, and, if it is frustrated, he will
suffer a loss.” This was further identified in the case of Seagrave v Union Marine Insurance
Co123 when it was expressed by Willes J that to constitute an insurable interest it must be an
interest that would cause him to lose a benefit or incur a liability. Although it was initially
thought that these cases would be able to provide further clarification as to when the utmost
good faith doctrine should be performed, it seems as though great uncertainty still ensues
because of the fact that a decision will merely be based upon the specific circumstances of a
120 A contract or its performance can affect others Donoghue v Stevenson [1932] AC 562, see Hugh Beale, Chitty on
Contracts (30th edn Sweet & Maxwell, London 2008) Ch 18.
121 See New Hampshire Insurance Co v MGN Ltd [1997] LRLR 24 (CA), General Accident Fire & Life Assurance Corp Ltd
v Midland Bank Ltd [1940] 2 KB 388 (CA), Arab Bank plc v Zurich Insurance Co [1998] All ER (D) 273. 122 (1867) LR 2 Ex 139, 150-151. 123 (1866) LR 1 CP 305, 320.
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case. Thus, in National Oilwell (UK) Ltd v Davy Offshore Ltd124 the definition of an insurable
interest was extended further by Coleman J when it was found that an insurable interest
would even subsist in a case where the assured was not in possession of property, but his
relation to it was such that he may incur liability in respect of the property being damaged. In
effect, it seems that provided an intermediary or a mortgagee would be capable of incurring
liability in respect of property in an insurance contract, then they will be considered as having
an insurable interest and thereby may affected by the doctrine of the utmost good faith, which
has been described as “the cardinal principle governing the marine insurance contract.”125
124 [1993] 2 Lloyds Rep 582 (QB Com Ct). 125 Susan Hodge, Cases and Materials on marine Insurance Law (Cavendish, London 1999) 213.
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5.2 Intermediaries
An intermediary, also known as an agent,126 is a person who is called upon to act on behalf of
another person and thereby create a legal relationship with a third party. 127 Accordingly,
where such a relationship exists, a third party will be able to rely upon the representation of
the agent as being made in good faith and will therefore be able to sue the agent if they are
found to have acted in a dishonest manner. Nevertheless, if an agent acts within the scope of
his authority any actions undertaken will be in the name of the principal and will be
binding.128 Such authority can either be ‘actual’ which means that the principal has expressly
or implicitly conferred authority to the agent as in Ireland v Livingstone, 129 and Hely-
Hutchinson v Brayhead Ltd,130 or ‘apparent’ which means that the principals words or conduct
would lead a reasonable person to believe that that the agent was authorised to act on behalf
of the principal as shown in Egyptian International Foreign Trade Co v Soplex Wholesale
Supplies Ltd and PS Refson & Co Ltd “The Raffaella”.131 Hence, it is therefore evident that
provided the agent has actual or apparent authority to act on behalf of a principal, a third
party will be able to sue the principal if good faith has not been effectuated because of the
fact that the agent will be deemed to have been acting on the instructions of the principal as
exemplified in Watteau v Fenwick132 in which it was held that; “the principal is liable for all
the acts of the agent which are within the authority confided to the agent.” This will merely
be the case, however, if both the agent and the principal have been disclosed to the third party
since non-disclosure will result in the agent being found liable for acting contrary to the
126 Agents are intermediaries who employed to solicit for various businesses and may include insurance. Hugh Beale, Chitty
on Contracts (30th edn Sweet & Maxwell, London 2008) para 41.046. 127 See Francis Reynolds, William Bowstead, Bowstead and Reynolds on agency (17th edn Sweet & Maxwell, London 2006)
para 1.001. 128 Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, 501. 129 (1872) All ER Rep 585 (HL). 130 [1968] 1 QB 549 (CA). 131 [1985] 2 Lloyds Rep 36 (CA). 132 [1893] 1 QB 346, 348.
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doctrine of good faith.133 Things do not always appear as straightforward as this, however,
instead many difficulties transpire when analysing the rights and duties of agents.
Nonetheless, as pointed out by Dowrick; “a view as to the nature of the relation of principal
and agent which is still widely held is that it is essentially contractual.”134 Therefore, because
of this, it is evident that both the agent and the principal must act in accordance with the
doctrine of good faith which governs all insurance contracts.
This has clearly been provided for under sections 19 and 20 of the MIA (1906) since
provisions is made for both the parties to the contracts and their brokers as in Neal v Irving.135
Nonetheless, the authority of broker is limited to the terms in the agreement between the
broker and the assured which must not be exceeded.136 If such authority is exceeded, however,
the assured will not be found liable for his actions as in Baines v Ewing.137 Effectively, broker
will therefore be responsible for their own actions if they exceed their authority; this
evidently places a duty of good faith upon them. No liability will be imposed, however, if the
broker acts within the course of his authority that has been bestowed upon him by the assured
and instead the principal will seek to enforce liability upon the assured as illustrated in
Hambro v Burnand.138 Arguably, it is therefore clear in view of this that broker will merely be
held responsible if their conduct has gone beyond what was reasonably expected of them.
Therefore, if the assured is not found to have acted in good faith, the broker will not be
responsible unless of course the agent has acted in bad faith by exceeding his power.139 It is
believed by Hasson, nonetheless, that the doctrine of good faith have proven ineffective
because of the fact that it failed to provide due account to the expectations of the assured and
133 Conlon v Simms [2008] 1 WLR 484 (CA). 134FE Dowrick ‘The Relationship of Principal and Agent’ (1954) 17 MLR 24. 135 (1973) 1 Esp 61. 136 Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480, 502. 137 (1866) LR 1 Exch 320. 138 [1904] 2 KB 10 (CA). 139 British Midland Tool Ltd v Midland International Tooling Ltd [2003] EWHC 466 (Ch).
توضيح للبروكر :[u1] تعليق عليه
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the insurer. This again poses many problems since it will be very problematic when trying to
assess the expectations of intermediaries because as was asserted “the current English
principle is thoroughly unsatisfactory in that it does not reflect the reasonable expectations of
insurer and insured and in that it is a rule that works against fairness in the insurance
contract.”140
140 Reuben Hasson, ‘The Doctrine of Uberrima Fides in Insurance Law. A Critical Evaluation’(1969) 32 MLR 615.
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5.3 Mortgagees
There are certain duties a mortgagee owes to a mortgagor in equity; 141 yet such duties are
based upon the particular relationship between them, and as shown in the case of Palk v
Mortgage Services Funding Plc142 the mortgagee is not under an obligation to exercise his
powers, whether it may be advantageous to the mortgagor or not. Essentially, the mortgagee
will therefore be able to determine if and when he shall exercise his powers which will be
based upon his own interests as exemplified in the case of Routestone Ltd v Minories Finance
Ltd143 and he will thus not be obliged to enforce his security. Despite this, however, there is a
general duty that the mortgagee when exercising his powers does so with the utmost good
faith as shown in the case of Medforth v Blake 144 Here, it was enunciated that the good faith
doctrine will only be found to have been breached by a mortgagee if their conduct is
dishonest, yet this will only be in respect of obtaining payment as highlighted in Albany
Homes Loan Ltd v Massey.145 As such, mortgagees will not be under a duty to act in good
faith, yet this will be to their detriment if the mortgagor fails to act in good faith when
entering into an insurance contract with an insurer since they will suffer a loss as a
result.146This is because, the value of a mortgagee’s security will be significantly reduced if
the subject matter is lost or damaged at sea.147 Accordingly, because no provision has been
made in regards to mortgagees under sections 17-20 of the MIA (1906), it is further doubtful
141 It can be said that if their legal aspect are not addressed by statuary provision, the common law and equity principles will
be the base resource. The Two Ellens (1869-72) LR 3 A & E 345, 358-359. 142 [1993] Ch 330, 341. These powers are given to mortgagees by an Act of parliament. 143 [1997] BCC 180 (Ch). 144 [2000] Ch 86 (CA). 145 [1997] 2 All ER 609 (CA). 146 In equitable assignment of the policy, it may include a provision in the underlying mortgage agreement to the effect that
any insurance taken out by the mortgagor will not exclude the rights of interested party by including a “loss payee clause”.
See Susan Hodges, “Mortgagee’s Interest Insurance” in DR Thomas Rhidian, The Modern law of Marine Insurance, vol 1
(LLP, London 1996) 252. 147 It should be bear in mind that a mortgage relationship secures a liability, by transferring the debtor rights for the
employment of the asset, or it is insurance policies by assignment or conveyance Santley v Wilde (1899) 2 Ch 474 (CA).
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that they will be under a duty to act in good faith, yet they will still be affected by the
contract terms.
This has been identified in the case of Black King Shipping Corporation v Massie
(The Litsion Pride) 148 where a mortgagee of a vessel that had been insured against war risk
made a claim under the policy as an assignee, yet because the owners did not notify the
insurers that they intended to slip in and out of dangerous waters, the mortgagees claim failed
since the owner had not acted in good faith. Therefore, regardless of the fact that mortgagees
do not have a duty to act in good faith under a contract of insurance, they will still be affected
if the owners fail to exercise the utmost good faith.149 Nevertheless, there are certain instances
where a lender can be treated as a co-assured under the policy which will effectively enhance
their protection.150 Thus, as noted by Miller; “the advantage of co-insurance is that the lenders
have their own separate interest in the policy and the policy should not be avoided simply
because of some misrepresentation or non-disclosure by the borrower in breach of the duty of
utmost good faith.”151Furthermore, a mortgagee may also be able to take express security over
the insurances so that proprietary rights can be acquired, yet the insurance policy must be
assigned at law under Section 136 of the Law of Property Act 1925. 152 Arguably, it seems
that although mortgagees do not have a duty to act in good faith under an insurance contract,
they will be affected if the assured breaches his duty.153 As such, it is entirely necessary for
mortgagees to ensure that they are adequately protected against any loss or damages that may
occur to the subject matter by adopting a number of strategies.154
148 [1985] 1 Lloyd’s Rep 437 (QB). 149 It should be noted that mortgagee interests in the all cases cannot exceed the assignor interest. Section 14 of the MIA
(1906). 150 General Accident Fire and Life Assurance Corp Ltd v Midland Bank Ltd [1940] 2 KB 388, 404-406. 151 Hazel Miller, ‘Insurance as Credit Support’ (2007) 6 JIBFL 323. 152In the case of an assignment of insurance policy, the mortgagee derived his right from the assignor, and mortgagee as an
assignee, if it complied with assignment formalities, for example clause 5 of ITCH 83. 153 See section 50(2) of the MIA (1906). 154 Punjab National Bank v de Boinville & ors [1992] 1 Lloyd’s Rep 7, 23.
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This is because, a mortgagee’s security interests will be significantly affected if a
marine insurance claim is declined on the basis of the utmost good faith doctrine and unless
mortgagees have taken out an Institute Mortgagees Interest Clauses (IMIC), to protect
themselves against any losses that have arisen out of a failure to disclose or a
misrepresentation then they will suffer a large detriment as a result. 155Yet such policies
demand the mortgagee as assured to keep himself up to date and informed of circumstances
of the subject matter insured and the existence of the owner policy and provided it to the
insurer.156Mortgagees will still, however, be entitled to their basic rights because as pointed
out by Harwood; “most legal systems automatically confer certain statutory or common law
rights on registered mortgagees of ship.”157 Hence, such rights will include; their right to take
possession of the vessel, their right of sale, their right to appoint a receiver of the vessel, and
their right to foreclosure and arrest.158 It remains questionable as to whether theses rights are
sufficient nonetheless, because even if a mortgagee is entitled to assert his or her rights, any
remedies that hat may be eligible for award status will be limited to the amount that is
recoverable is accordance with the mortgagee’s interest under the contract.159 Therefore, great
losses may still be suffered as a result, which puts the rights of mortgagees at a high risk.
Moreover, although mortgagees will have a right to recover, this will be governed by good
faith duty of the assured (mortgagor) so if the mortgagor has failed to disclose material
information or any misrepresentations, mortgagees rights will be affected as a result.160 On the
whole, although mortgagees’ general rights will only be available in so far as the mortgagors
155 The Good Luck case [1988] 1 Lloyd’s Rep 514, 547 156 Clause 6.1 of Institute Mortgagees' Interest Clauses (IMIC). 157 Stephenson Harwood, “Shipping Finance” (3rd edn, Euromoney 2006) 127. 158Palk v Mortgage Services Funding Plc [1993] 2 WLR 415, 486; Downsview Nominees Ltd v First City Corporation Ltd
[1993] AC 295, 310. 159 The mortgagee as an assignee of a policy or as an original assured in (IMIC) rights no better than the assignor according
to Section 50 (2) of the MIA (1906) or Clause (1.2) of the (IMIC.) This rules has been long settled see Samuel v Dumas
[1924] AC 431,443 -444; and Alston v Campbell (1779) IV Brown 476, 481- 882 160 Wlliam Pickersgill & Sons Ltd v London and Provincial Marine & General Insurance Co Ltd [1912] 3 KB 614.
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conduct allows them, it seems that greater protection should be provided under marine
insurance contracts so as to prevent them from being affected by the actions of another whom
has failed to act in the utmost good faith.
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6. IS THERE A REAL NEED FOR REFORMING THE DUTY OF UTMOST GOOD
FAITH? - COMPARISON WITH US AND AUSTRALIAN APPROACHES
The insurance contract is evidently based upon the utmost good faith doctrine which thereby
illustrates that an insurer will be able to assume that the parties to the contract have disclosed
every material fact known to them that is relevant and that they have not made any
misrepresentations. It has been made clear, nonetheless, that there is a significant risk when
adopting this doctrine since it is often difficult to determine whether a fact is material or not
or whether a representation is one of fact or mere opinion.161 As such, the affects in which this
doctrine has upon intermediaries and mortgagees is often difficult to establish given that the
parties rights and obligations under an insurance contract are vague. This can be seen in the
case of Jones v Environcom Limited 162 where Environcom’s claim that the insurance brokers
should have made better inquiries that would have revealed the material facts was
unsuccessful. Such an approach, although it may be plausible, is often rendered unfair,
however and as contended by Tyldesley; “the critical flaw in insurance law is that it provides
insurers with remedies which in many circumstances will be disproportionate.”163 It is thus
unsurprising that unfair outcomes are being constructed if the principles as to which the
courts are basing their decisions upon are somewhat outmoded. Consequently, because of the
uncertainties that persist with this area of the law, it is doubtful that there will ever be clarity
as to the exact scope of intermediaries and mortgagees duties and rights in marine insurance
contracts. Nevertheless, as pointed out by Birds; “the Law Commission needs to explore
reform in the areas of: (1) non-disclosure and misrepresentation; (2) coinsurance; (3) terms
161 The Law Commission, Insurance Law Non-Disclosure and Breach of Warranty(Law Com No104, 1980) 162 [2010] EWHC 759 (Comm). 163 Peter Tyldesley, ‘Archaic, Unclear and Unfair?’(2009) 159 NLJ 961.
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and conditions; and (4) the insurer’s failure to pay.”164 Whether this will help a determination
as to the parties rights and obligations be more easily recognised is arguable but it is clear
that the law surrounding the good faith doctrine needs to be reformed so that greater precision
within this area can be effectuated.
This is because as asserted by Ludlam and Mckenzie; “It is unsurprisingly, in certain
respects, out of step with law in other European countries and the rest of the world, and the
needs of 21st-century business.”165 Arguably, this contention clearly highlights the need for
reform in relation to insurance contracts because although there have been many attempts to
clarify the law, these appear to have been without success and greater confusion has
transpired as a result. Whether this amendment on legislations will be effective remains to be
seen but it will surely be a far cry from what is presently in place. Not all agree that the law in
England is inadequate, however, and instead it has been argued by Steyn J that; “the English
law of contract is admirably designed to cope with the challenges of a modern and changing
business world. It draws its strength and vitality from a close adherence to the reasonable
expectations of the contracting parties.”166 Essentially, this seems to suggest that the law is in
fact capable of keeping abreast with the modern needs of society and that the intentions of the
parties under a marine insurance contract will be restored by the courts. Regardless of this,
however, various other jurisdictions such as the United States do not believe that the doctrine
of good faith is as effective as many believe and that it ought to be reformed so as to allow
greater fairness to exist within marine insurance contracts. This is because it appears that in
other jurisdictions the doctrine does not have any solid basis and unlike that under English
law, not all contracts have to be performed with the utmost good faith. Whether this is
justifiable remains a debatable subject but it was put forward by Schoenbaum that; “in the
164 John Birds, ‘Good Faith in the Reform of Insurance Law’ (2004) BILAJ 15. 165 GLudlam and K Mckenzie, ‘Ripe for Reform’ (2008) 158 NLJ 509. 166 Johan Steyn, ‘Contract Law: Fulfilling the Reasonable Expectations of Honest Men’ (1997) LQR 433.
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United States and elsewhere the doctrine of utmost good faith is increasingly being
questioned or repudiated”167 and that “In general contract law there is no general duty to
volunteer information. Non-disclosure is not actionable unless special circumstances are
involved.”168 It is doubtful that the same will apply to misrepresentations, however, since any
representations that have been made untruthfully will be actionable. In the case of Albany
Insurance Co v Anh Thi Kieul,169 however, it was held that the doctrine of good faith was not
entrenched federal admiralty law and so could not be actionable in the case of failing to
comply with its requirements. Furthermore, in Laidlaw v Organ170 it was also found that there
was no duty to disclose material information regardless of whether the seller had special
knowledge of it or not. This approach does, nevertheless, appear to be rather harsh since
parties to a contract will be able to refrain from making any disclosures that would be at their
disadvantage and would essentially be able to induce the contract as a result. In light of this,
it is therefore evident that the English approach is plausible to a certain extent, yet it is still
apparent that greater changes need to be made so as to remove any confusion that persists.
The Australian Law Commission also agree with the good faith doctrine since they made a
proposal in 2001 to incorporate an implied term into all marine insurance contracts so that
each party is under a duty to act with the utmost good faith at all times.171 Hence, as argued by
Aikens; “whatever the Supreme Court or the Law Commission comes up with, they must do
their best to ensure that London remains the world centre for commercial insurance and
particularly marine insurance, which it has been now for at least two centuries.”172 Arguably,
English law has evidently been able to deal with the doctrine of good faith in marine
insurance contracts for many centuries and although there are many confusions that arise, the
167 Thomas Schoenbaum, ‘The Duty of Utmost Good Faith in Marine Insurance Law: A Comparative Analysis of American
and English Law’ (1998) 29 JML&C 1. 168 Ibid. 169 927 F 2d 88, 1991 AMC 2211 (5TH Cir). 170 15 US (2 Wheat) 178 (1817). 171 Australian Law Reform Commission, Review of the Marine Insurance Act 1909, (Report No 91, 2001). 172 Richard Aikens, ‘The Post-Contract Duty of Good Faith in Insurance Contracts: Is there a Problem that Needs a
Solution?’ (2010) JBL 379.
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approach that is taken does appear to be effective since every case has different facts and so
the principles should be capable of being modified accordingly to the particular facts of each
case. This has also been recognised by Brownsword et al; when they noted that; “the courts
are better equipped to respond to the varying expectations encountered in the many different
contracting contexts and in particular, the courts are better able to detect co-operative dealing
where it is taking place.”173
173 Roger Brownsword, and others, Good Faith in Contract: Concept and Context (Aldershot 1999).27.
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7. RECOMMENDATIONS
There is a clear desire for the reform of the MIA (1906) to be effectuated because at present
there appears to be too much confusion and inconsistency around it.174 Thus, it is evident that
the recommendations put forward by the Law Commission that Legislation should include
guidelines as to the insurers’ duties would clearly add clarity to this area of the law since both
the assured and the insurer would have greater knowledge as to the extent of their
responsibilities. 175 This would certainly add conviction to the law surrounding marine
insurance contracts and the doctrine of good faith would evidently be executed to its greatest
potential. Resultantly, parties to a contract would be more aware of what type of information
is material to any given contract which would again remove any difficulties that existed when
trying to establish whether a certain piece of information was material or not. This would
essentially remove the burden that is currently placed upon the assured and their agent since
they are presently required to volunteer information which they think would be relevant. As
such, a greater burden would instead be imposed upon insurers and their duties would
become a lot clearer. Hence, insurers would be required to ask precise questions which would
give answers to the material information they required and where they failed to ask a
particular question, the assured would not be under a duty to disclose that information. This
would essentially limit the obligations enforced upon intermediaries and mortgagees and
would allow their rights to be ascertained where appropriate. Thus, any affects in which
marine insurance contracts had upon such persons would be abolished and less ambiguity
would be likely to transpire. This can only be seen as a welcoming step forward from the law
174 John Birds, ‘Good Faith in the Reform of Insurance Law’ (2004) BILAJ 15. 175 The Law Commission and the Scottish Law Commission, Insurance Contract Law; Damages for Late Payment and the
Insurer's Duty of Good Faith (Paper 6, 2010) para S.34.
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that is presently in place as there will be much more clarity that persists which is largely
advantageous and any harshness that currently exists will be removed.
The law regarding marine insurance contracts is evidently confusing; demonstrating the clear
need for greater transparency. Nevertheless, this can only be achieved if the present legal
regimes are reformed so as to allow greater precision to exist surrounding the exact rights and
responsibilities that are to be imposed upon insurers, assured’s, intermediaries and
mortgagees. This is especially the case when it comes to intermediaries and mortgagees since
they are unable to clearly determine whether the actions of another will have an effect upon
them which would be likely to lead to reluctance to enter into these types of contracts.176 This
would be highly detrimental in the long turn and as such, an immediate response to the
suggestions for reform is needed. Moreover, because of the confusions that constantly arise
regarding the issue as to whether an intermediary was acting for the assured or the insurer, it
is again inevitable that clarification within this area is provided. If the proposals for reform
are implemented, nonetheless, assured’s should still be able to volunteer information, yet
caution must be taken to ensure that such information does not mislead the insurer. Thus, in
regards to misrepresentations, it seems as though any remedies which are provided must be
dependent upon the party’s mind that has made the representation since a mistaken
representation may have been given and it would be unfair to impose sever liability on that
party under these circumstances. Such recommendations will certainly improve the law
within this area, yet whether all of the complexities that currently exist will be removed is
unlikely and as such it is probable that conflictions will still exist because of the differing
facts and circumstances of each case.
176 The BILA Sub-Committee, Insurance Contract Law Reform – Recommendations to the Law Commission (2002).
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8. CONCLUSION
Overall, it is clear that all parties to a marine insurance contract are under a common law duty
to act with the utmost good faith which thereby means that they are required to disclose all
material facts that are relevant to the contract in question and that they are prohibited from
making any misrepresentations that would be likely to induce the contract. Nevertheless,
although this is pretty much straightforward when it comes to the relationship between the
assured and the insurer, difficulties seem to transpire when it comes to determining the rights
and obligations of intermediaries and mortgagees since they are not the original parties to the
contract, yet they will be affected by its terms. Thus, if an intermediary enters into a contract
with a third party on behalf of its principal, any actions that are taken by the intermediary will
be the fault of the assured unless of course the intermediary was acting outside the course of
his duties. The assessment of this is often blurred, nonetheless, since it can be very
problematic when trying to determine whether an intermediary has been acting on the
instructions of the assured. Furthermore, it is also quite difficult to assess whether an
intermediary is in fact acting on behalf of the assured or the insurer which against poses many
problems since the assured will only be found liable if the intermediary was acting on his
behalf. As a result of this, much confusion has arisen when it comes to evaluating what
effects the doctrine of good faith has upon intermediaries and as such conflictions often
transpire. The consideration of mortgagee’s rights and obligations, on the other hand, seems
to pose further problems since there are certain duties a mortgagee owes a mortgagor in
equity, yet it is unclear whether these same duties apply in the commercial context.
Furthermore, the same applies to their rights since it is rather uncertain as to whether a
mortgagee will be entitled to any remedies where a marine insurance claim has been declined
as a result of the assured failure to act in good faith. Essentially, the doctrine clearly affects
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the rights of intermediaries and mortgagees, yet the extent of this is far from clear. This is,
however, largely dependent upon the fact that each case differs substantially from the next
and so it is quite difficult to give a specific reasoning as to what rules will apply in each
contract. Regardless of this, however, it is palpable that greater clarification and precisions
within this area of the law is evidently required which is likely to be effectuated once the
proposed recommendations are implemented. Whether all of the complexities will be
removed by this, however, is doubtful but it will certainly be a far cry from what is presently
in place since the doctrine of good faith is largely based upon 18th century principles which
signifies how dated the law in this area is.
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BIBLIOGRAPHY
I. Books
1. Alexandra Mandaraka-Sheppard, Modern Maritime Law and Risk Management, (2nd
edn Informa Law, London 2009)
2. Francis Reynolds, William Bowstead, Bowstead and Reynolds on agency (17th edn
Sweet & Maxwell, London 2006)
3. Hugh Beale, Chitty on Contracts (30th edn Sweet & Maxwell, London 2008)
1. Howard Bennett, The Law of Marine Insurance (2nd edn, OUP 2006)
2. John Birds, Birds’ Modern Insurance Law (7th edn, Sweet & Maxwell 2007)
3. Malcolm Clarke “The Law of Insurance Contracts” (5th edn, Informa 2006)
4. Roger Brownsword, Norma Hird, and Geraint Howells (eds), Good Faith in Contract:
Concept and Context (Aldershot 1999).
5. Stephenson Harwood, “Shipping Finance” (3rd edn, Euromoney 2006).
6. Susan Hodge, Cases and Materials on marine Insurance Law (Cavendish, London
1999).
7. Susan Hodges, “Mortgagee’s Interest Insurance” in DR Thomas Rhidian, The Modern
law of Marine Insurance, vol 1 (LLP, London 1996).
II. Articles
1. Christopher Butcher, ‘Good faith in insurance law: a redundant concept?’ (2008) 5
JBL 375
2. Colin Croly and Rob Merkin, ‘Doubts About Insurance Codes’ (2001) JBL 587
3. Francis Rose, ‘Information asymmetry and the myth of good faith: back to basis’
(2007) 2LMCLQ 181
4. FE Dowrick ‘The Relationship of Principal and Agent’ (1954) 17 MLR 24.
5. Hazel Miller, ‘Insurance as Credit Support’ (2007) 6 JIBFL 323.
6. Graham Ludlam, ‘Ripe for Reform’ (2008) 158 NLJ 509.
7. Herbert Smith, ’10 Key Points to Remember About Insurance’
<http://www.herbertsmith.com/NR/rdonlyres/4459A3EA-EEF4-427D-8090-
5ECD8877E784/17295/1928180_1.PDF> Accessed 06 August 2011
8. H W Wilkinson, ‘Exclusions and Conditions in Insurance Policies’ (1989) 138 NLJ
914.
9. John Birds, ‘Good faith in the reform of insurance law’ [2004] 111 BILAJ 2.
10. John Wright, ‘Risk Transfer – the First Hurdle’ (2011) 22 1 Const LJ 26
11. Joshua Getzler, ‘Excluding fiduciary duties: the problems of investment banks’ (2008)
124 LQR 15.
12. John Lowry, ‘Whither the Duty of good Faith in UK Insurance Contracts?’
(2009) 16 Conn Ins LJ 156
13. Johan Steyn, ‘Contract Law: Fulfilling the Reasonable Expectations of Honest Men’
(1997) 113 LQR 433, 439
[46]
14. K Jarvis, ‘Fiduciary Duties: Law Commission Report On Fiduciary Duties and
Regulatory Rules’ (1996) 17(4) Comp Law 111.
15. Kelly Godfrey, ‘The Duty of Utmost Good Faith’ (2002) ACILL 87.
16. GLudlam and K Mckenzie, ‘Ripe for Reform’ (2008) 158 NLJ 509
17. L Ho and P Lee, 'A Director's Duty to Confess: A Matter
of Good Faith?' (2007) 66 CLJ 348
18. M Conaglen “A re-appraisal of the fiduciary self-dealing and fair-dealing rules” [2006]
65 CLJ 366
19. Matthew Conaglen “The nature and function of fiduciary loyalty” [2005] 121 LQR
452
20. Michael Kirby, ‘Marine Insurance: Is the Doctrine of "Utmost Good Faith" Out of
Date?’ (1995) 13(1) ABR 1
21. Parker Hood, ‘What is so special about being a fiduciary?’ (2000) 4 ELR 308
22. Paul Powers, ‘Defining the Indefinable: Good Faith and the United Nations
Convention on the Contracts for the International Sale of Goods’ (1999) 18 JALC 333
23. Peter Tyldesley, ‘Archaic, Unclear and Unfair?’(2009) 159 NLJ 961.
24. Reuben Hasson, ‘The Doctrine of Uberrima Fides in Insurance Law. A Critical
Evaluation’(1969) 32 MLR 615.
25. Robert Merkin, ‘Reforming insurance law: is there a case for reverse transportation?’
report for the English and Scottish law commissions on the Australian experience of
insurance law reform.
<http://www.justice.gov.uk/lawcommission/docs/ICL_Merkin_report.pdf> Accessed
25 August 2011
26. S Panesar, ‘Is a ship mortgage inherently different from a mortgage over land?’ (2004)
15(8) ICCLR 239
27. S Panesar “The nature of fiduciary liability in English law” [2007] 12 Cov LJ 1
28. Semin Park, ‘Origin of the Duty of Disclosure in English Insurance Contracts’ (1996)
25 Anglo-Am LR 221.
29. S Robinson, ‘Mortgages - care and protection: Part 1 ‘(1989) CONV 336.
30. Thomas Schoenbaum, ‘The Duty of Utmost Good Faith in Marine Insurance Law: A
Comparative Analysis of American and English Law’ (1998) 29 JML&C 1.
III. Reports
1. The Australian Law Reform Commission, Review of the Marine Insurance Act 1909,
(Report No 91, 2001).
2. The BILA Sub-Committee, Insurance Contract Law Reform – Recommendations to
the Law Commission (2002).
3. The Law Commission, Insurance Law Non-Disclosure and Breach of Warranty(Law
Com No104, 1980)
4. The English Law Commission, Insurance Contract Law: Misrepresentation, Non-
Disclosure and Breach of Warranty by the Insured, A Joint Consultation Paper (Law
Com No 182, 2007)
[47]
5. The English Law Commission and the Scottish Law Commission, Insurable Interest
(ICL 4, 2008)
6. The Law Commission and the Scottish Law Commission, Insurance Contract Law;
Damages for Late Payment and the Insurer's Duty of Good Faith (Paper 6, 2010)
7. The Law Reform Committee, Conditions and Exceptions in Insurance Policies, Fifth
Report ( Cmnd 62, 1957)