A promissory warranty is a promissory condition precedentSurprisingly, the nature of a promissory warranty and, more significantly, the legal effects of its breach were not debated until recently, when the House of Lords presided over the milestone case of Bank of Nova Scotia v Hellenic Mutual4  In Hore v Whitmore (1778) 2 Cowp 784, even an embargo laid on by a British Governor which

prevented the insured ship from sailing on a given date was held not to be a valid excuse for the

breach of the sailing warranty.

5  See Mills v Roebuck, ‘Mills Frigate’, reported in a footnote in Gibson v Small (1853) 4 HL Cas 352;

10 ER 499, p 501, which is also discussed in Gibb, DEW, Lloyd’s of London, 1972, London: LLP, p

67.

6  Op cit, Arnould, fn 3.

7  This issue is discussed in Chapter 12, p 500.

War Risks Association (Bermuda) Ltd, ‘Good Luck’ [1991] 2 Lloyd’s Rep 191, HL,8 below. As will be seen, the principles pertaining to the legal effects of a breach of a warranty and to the right of the insurer to waive such a breach are closely related to the fact that a promissory warranty is essentially a promissory condition precedent.

Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd, ‘Good Luck’ [1991] 2 Lloyd’s Rep 191, HLThis was an incident which took place during hostilities between Iran and Iraq. Good Luck was one of a number of ships owned by the Good Faith Group which was insured with the defendant P & I Club under a war risks policy. The policy included a rule which specified that, should the vessel enter an additional premium area, the insurers should be given prompt notice. The rule further stated that failure to give the club notice of entering into a prohibited area would result in the rejection of all claims. Good Luck was mortgaged to the plaintiff bank who were assignees to the policy. The Club had signed a letter of understanding that it would, at all times, inform the bank should the insurance cover ‘cease’. Both the Club and the bank knew that Good Luck was under charter to an Iranian company but, when the Club discovered that ships of the Good Faith Group were entering prohibited areas, they failed to inform the bank or deter the owners in their actions. When, therefore, Good Luck was struck by an Iraqi missile in the Persian Gulf and declared a constructive total loss, the P & I Club refused any indemnity because, they contended, they had been given no notification of the vessel’s entry into an additional premium area. The plaintiff bank, in turn, sued the P & I Club for damages for failing to inform them that Good Luckhad become uninsured. Their claim was premised on: (a) breach of the letter of undertaking given by the Club; (b) breach of a duty of utmost good faith in failing to disclose to the bank what they (the Club) knew; and (c) breach of the duty to speak.

To determine whether the Club had committed a breach of the letter of the undertaking, the court had to ascertain whether the policy had in fact ‘ceased’, for it was only upon the cessation of the cover that the duty to inform would arise. And to

answer this question, it was necessary for the court to ascertain the precise effect of the breach of the warranty.

The House of Lords, in overturning the decision of the Court of Appeal and reinstating the

decision of the trial judge, ruled that the P & I Club had failed in their duty to inform the bank that

the insurance cover had ‘ceased’ due to the breach of the warranty. Lord Goff took the opportunity

to clarify the status of a warranty and the effects of its breach.

8  Hereinafter referred to as the Good

Luck case.

Lord Goff of Chieveley: [p 202] …Section 33(3) of the Act reflects what has been described, in successive editions of Chalmers and Owen, The Marine Insurance Act 1906, as the inveterate practice in marine insurance of using the term ‘warranty’ as signifying a condition precedent. As Lord Blackburn said, in Thomson v Weems (1884) 9 App Cas 671, p 684:In policies of marine insurance, I think it is settled by authority that any statement of a fact bearing upon the risk introduced into the written policy is, by whatever words and in whatever place, to be construed as a warranty, and, prima facie, at least that the compliance with the warranty is a condition precedent to the attaching of the risk.

Once this is appreciated, it becomes readily understandable that, if a promissory warranty is not complied with, the insurer is discharged from liability as from the date of the breach of warranty, for the simple reason that fulfilment of the warranty is a condition precedent to the liability or further liability of the insurer. This, moreover, reflects the fact that the rationale of warranties in insurance law is that the insurer only accepts the risk provided that the warranty is fulfilled. This is entirely understandable; and it follows that the immediate effect of a breach of a promissory warranty is to discharge the insurer from liability as from the date of the breach…Here, where we are concerned with a promissory warranty, that is, a promissory condition precedent, contained in an existing contract of insurance, non-fulfilment of the condition does not prevent the contract from coming into existence. What it does (as s 33(3) makes plain) is to discharge the insurer from liability as from the date of the breach. Certainly, it does not have the effect of avoiding the contract ab initio. Nor, strictly speaking, does it have the effect of bringing the contract to an end. It is possible that there may be obligations of the assured under the contract which will survive the discharge of the insurer from liability, as, for example, a continuing liability to pay a premium. Even if, in the result, no further obligations rest on either parties, it is not correct to speak of the contract being avoided; and it is, strictly speaking, more accurate to keep to the carefully chosen words in s 33(3) of the Act, rather than to speak of the contract being brought to an end, though that may be the practical effect.

…But, as I have said, the insurer does not avoid the policy. Moreover, it is only in the sense of repudiating liability (and not of repudiating the policy) that it would be right to describe him [the insurer] as being entitled to repudiate. In truth, the insurer, as the Act provides, is simply discharged from liability as from the date of the breach, with the effect that thereupon he has a good defence to a claim by the assured.

Legal effects of a breach of warranty

Section 33(3) states that if a warranty is not exactly complied with, ‘…the insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date’. In the light of the Good Luck case, the word ‘automatically’ should now be read before the word ‘discharged’.

Automatic discharge from liability

That, after the breach of a promissory warranty, the insurer is automatically discharged from liability or further liability, was clearly illustrated by Lord Goff in the Good Luck case, cited above.Lord Goff of Chieveley: [p 202] …So it is laid down in s 33(3) that, subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach of warranty. Those words are clear. They show that discharge of the insurer from liability is automatic and is not dependent upon any decision by the insurer to treat the contract or the insurance as at an end… [Emphasis added.]Lord Goff was at pains to point out that only the insurer’s liability, and not the contract itself, is terminated by the breach of a promissory warranty. Thus, when a ship enters a prohibited area and breaches a geographical warranty, and then leaves that area, the policy itself remains, to all intents and purposes, intact. It is also apparent that, from the very moment the breach of the warranty is committed, the insurer is discharged from liability or further liability under the policy.

This approach to a breach of a promissory warranty was actually proposed earlier by Kerr LJ, in State Trading Corporation of India Ltd v M Golodetz Ltd [1989] 2 Lloyd’s Rep 277. Although this case was concerned with a contract of sale wherein a cargo of sugar was totally lost when the vessel carrying it sank, the question arose as to whether a condition in the sale amounted to a condition precedent. Thus, the court was essentially concerned with the same issues as those posed by promissory warranties; it was suggested that a ‘new approach’ was required, which was later confirmed by Lord Goff in the Good Luck case.

More recently, in Hussain v Brown [1996] 1 Lloyd’s Rep 627, where commercial premises were damaged by fire, the insurers refused to indemnify the owners on the grounds that the proposal form, with respect to the fire alarm system, had been incorrectly completed. This, they argued, amounted to a breach of a warranty. Saville LJ said: [p 630] ‘…the breach of such a warranty produces an automatic cancellation of the cover, and the fact that a loss may have no connection at all with that breach is simply irrelevant.’

The insurer may waive the breach

Section 34(3) of the Act confirms that the insurer has the right to waive a breach of a warranty. But one may wish to ask the question as to whether it is still possible for an insurer to waive a breach of a warranty when he has, by reason of the breach, already been automatically discharged from liability or further liability as from the date of breach. This point arose as early 1874 in Provincial Insurance Co of Canada v Leduc, below, where the precise inquiry was whether a waiver, by way of an acceptance of an abandonment, albeit a

constructive acceptance, can be of any avail in the event of

a breach of warranty which, at that time, was known to

have had the effect of terminating the contract.9 The case is

significant in its ruling that a waiver may take the form of

an acceptance (actual or constructive) of an abandonment.

Provincial Insurance Co of Canada v Leduc (1874) LR 6 PC 224, PCA schooner was lost when she entered the St Lawrence, a prohibited area. When the shipowner learned of the loss, a notice of abandonment was served on the insurers, who did not expressly accept the abandonment. In fact, the insurers sent their agent to the scene of the loss, who salved what he could of the cargo and carried out repairs to the vessel. The insurers then successfully claimed a salvage award against the schooner, which was sold on their behalf, but refused to indemnify the assured under the policy because of the breach of the warranty.

The court ruled that the insurers were liable under the policy, as they had constructively accepted the abandonment and, in so doing, waived the breach of the warranty.Sir Barnes Peacock: [p 242] …It was contended that the vessel was not insured at the time when she was lost, as the insurance did not extend to a loss in the Gulf of St Lawrence after 15 November, and that an abandonment can be of no avail when there is no insurance. But the vessel was in fact insured; the loss occurred during the time and upon a voyage described in the policy, but there was a breach of one of the warranties or conditions expressed.

[p 243] …Suppose that, after they [the insurers] had raised the vessel, they had sold her for £10,000 in excess of the salvage expenses, it is clear that the plaintiff could not have turned round and claimed the full amount of the proceeds of the vessel upon the ground that the loss was not caused by a risk insured against, and that he had, consequently, no right to give notice of abandonment. If the plaintiff could not have treated the abandonment as a nullity, surely the defendant cannot be allowed, after acceptance, to rely upon a breach of the warranty or condition of which they had full notice at the time of their acceptance of the abandonment. Estoppels are mutual. If the mouth of one party is closed, so also is that of the other. By the abandonment and the acceptance of the abandonment, the matter is closed. The whole interest of the plaintiff in the thing abandoned was transferred to the defendants, and became their property.Fortunately, this issue has now been largely resolved by the House of Lords in Good Luck [1991] 2 Lloyd’s Rep 191, HL, where Lord Goff confirmed that the breach of a

warranty only discharged the insurer from liability or further liability under the policy, but did not

terminate the contract. Any liability

9  It is to be noted that, at the time when this case was decided, the law on the effect of a breach of a

warranty was still unclear.

which the insurer had incurred under the policy prior to the breach is not discharged.Lord Goff of Chieveley: [p 202] …Even if in the result no further obligations rest on either parties, it is not correct to speak of the contract being avoided; and it is, strictly speaking, more accurate to keep to the carefully chosen words in s 33(3) of the Act, rather than to speak of the contract being brought to an end, though that may be the practical effect. When, as s 34(3) contemplates, the insurer waives a breach of a promissory warranty, the effect is that, to the extent of the waiver, the insurer cannot rely upon the breach as having discharged him from liability. This is a very different thing from saying that discharge of the insurer from liability is dependent upon a decision by the insurer. As Kerr LJ said, in State Trading Corporation of India Ltd v M Golodetz Ltd [1989] 2 Lloyd’s Rep 277, p 287, after referring to the decision of the Court of Appeal in the present case:Thus, the correct analysis of a breach of warranty in an insurance contract may be that, the consequence of the breach is that the cover ceases to be applicable unless the insurer subsequently affirms the contract, rather than to treat the occurrence as a breach of the contract by the insured which the insurer subsequently accepts as a wrongful repudiation.

It was no doubt because of the decision of the Court of Appeal in the present case that Kerr LI expressed himself in tentative terms. But I respectfully agree with his basic approach, as I do with the approach of the judge, which is entirely consistent with the plain meaning of s 33(3) of the Marine Insurance Act 1906.

Notes

In his speech, Lord Goff raised several salient points. It can be seen that the legal effects of a breach of a promissory warranty is intimately connected with the fact that a promissory warranty is a promissory condition precedent, the breach of which would now automatically discharge the insurer from liability or further liability under the policy. As a promissory condition precedent, it does not, in the event of a breach, have the effect of bringing the contract to an end. And, as the contract still remains on foot, there is nothing (not even the consequence of automatic discharge) to prevent an insurer from exercising his right to waive the breach. Should the insurer decide to do nothing, the rule of automatic discharge will take its natural course—upon which he is freed from liability or further liability under the policy. Under the rule of automatic discharge, an insurer does not have to take any steps to discharge himself from liability, but he would have to take overt steps to waive the breach if he wishes to continue to be liable under the policy.

It should be noted here that, under common law, a breach of the warranty of legality cannot be waived.10

10  See Gedge and Others v Royal Exchange Assurance Corporation [1900] 2 QB 214, discussed

below, p 334.

The Waiver Clause: cl 5.2 of the ICC (A), (B) and (C)

With respect to cargo, all the Institute Cargo Clauses, in cl 5.2, employ a Waiver Clause, which states:The Underwriters waive any breach of the implied warranties of seaworthiness of the ship and fitness of the ship to carry the subject matter insured to destination, unless the Assured or their servants are privy to such unseaworthiness or unfitness.Provided that neither the Assured nor their servants are privy to such unseaworthiness or unfitness, the Waiver Clause, in essence, negates both ss 39(1) and 40(2) of the Act.11

Held covered clause

The severe consequences which the law has imposed upon an assured in the event of a breach of a warranty have led parties to include within their policy a provision such as the ‘held covered’ clause. As a reprieve, the insurer is not, provided that the terms of the clause are met, immediately discharged from liability by the breach of the specified warranty.

The ‘Breach of Warranty’ Clause, cl 3 of the ITCH(95), affirms that the policy is:Held covered in case of any breach of warranty as to cargo, trade, locality, towage, salvage services or date of sailing, provided notice be given to the Underwriters immediately after receipt of advices and any amended terms of cover and any additional premium required by them be agreed.With respect to the IVCH(95), the Change of Voyage Clause, cl 2, only covers a breach of warranty ‘as to towage or salvage services’. Equivalent ‘held covered’ clauses are also contained within other Institute Clauses, notably with respect to cargo12 and freight.13

In the case of Greenock Steamship Co v Maritime Insurance Co Ltd, [1903] 1 KB 367; aff’d [1903] 2 KB 657, CA, the vessel insured under a voyage policy containing a held covered clause was adjudged unseaworthy when she left Montevideo with insufficient bunkers. The whole philosophy behind the ‘held covered’ clause was analysed by Bigham J, in the court of first instance, who laid down the rule that, when fixing an additional premium, ‘…the parties must assume that the breach was known to the parties at the time it happened, and must ascertain what premium it would then have been reasonable to charge’. It is also to be noted that the held covered clause under consideration was of general application, covering anybreach of warranty.11  See below, p 325.

12  See ICC (A), (B) and (C), cll 5.2 and 10.

13  See ITCF(95), cl 4 and IVCF(95), cl 3.

Immediately after receipt of advicesIt is to be recalled that14 some clarification as to the assured’s duty to notify under a held covered clause was provided in Mentz, Decker and Co v Maritime Insurance Co [1909] 1 KB 132 and Liberian Insurance Agency Inc v Mosse [1977] 2 Lloyd’s Rep 560, where the expressions ‘due notice’ and ‘prompt notice’ were employed

respectively. Though the Institute Hull Clauses specify that notice be given to the underwriters ‘immediately’ after receipt of advices,15 nevertheless, the cases are useful for the purpose of illustrating the point that, no matter how promptly or immediately after a breach an insurer must be notified, the law allows for the fact that an assured is only in a position to notify the insurer after he is in receipt of the relevant information concerning the breach. Thus, even if the insurer is informed of the breach only after a loss has taken place, that alone will not prevent the assured of the right to be held covered, provided that the notice is promptly or immediately issued after receipt of the advice.

Where a held covered clause is unqualified with respect to the time allowed to give the insurer notice of the breach of a warranty, as was the case inGreenock Steamship Co v Marine Insurance Co Ltd [1903] 1 KB 367; [1903] 2 KB 657 and Thames and Mersey Marine Insurance Co Ltd v Van Laun and Co [1917] 2 KB 48, HL,16 the courts have held that the notice must be given within a reasonable time after the discovery of the breach.

EXPRESS WARRANTIES

The form of a warrantyAn express warranty must be incorporated into the contract of insurance by means of written words. Oral statements made during negotiations do not amount to warranties; they are representations. Thus, the Act in s 35(1) states:An express warranty may be in any form of words from which the intention to warrant is to be inferred.And, s 35(2) then goes on to affirm that:An express warranty must be included in, or written upon, the policy, or must be contained in some document incorporated by reference into the policy.14  For a fuller discussion of the ‘held covered’ clause, see Chapter 4, p 161.

15  The Breach of Warranty Clause in the Institute Freight Clauses—Time and Voyage, also uses the

word ‘immediately’, but the ICC (A), (B) and (C), in cl 10, employ the word ‘prompt’.

16  These two cases are discussed in Chapter 4, pp 161–63.

Thus, a statement made in writing upon a slip or a proposal form or even a covering note, provided that it is then incorporated into the policy, may amount to a warranty. Furthermore, if an oral statement, a representation, is later incorporated in writing into the policy, it may also be construed as a warranty.

The principles laid down with respect to warranties were established long ago, and may be illustrated in two early cases; Bean v Stupart (1778) 1 Dougl 11 and Pawson v Watson (1778) 2 Cowp 786. In Bean v Stupart, where, in the margin of the policy of insurance, were written the words ‘Eight nine-pounders…30 seamen, besides passengers’ and the vessel sailed with a crew of 26 men, the owners were held to have breached what amounted to a warranty.

Lord Mansfield: [p 14] …There is no doubt, but that this is a warranty. Its being written on the margin makes no difference. Being a warranty, there is no doubt but that the underwriters would not be liable, if it were not complied with, because it is a condition on which the contract is founded.But, in Pawson v Watson, where the issue was again the armament of a vessel and the sufficiency of crew, Lord Mansfield held that the condition only amounted to a representation because, inter alia, there was no written incorporation into the policy.Lord Mansfield: [p 786] …At the trial I was of opinion, that it would be of very dangerous consequence to add a conversation that passed at the time, as part of the written agreement. It is a collateral representation; and if the parties had considered it as a warranty, it would have been inserted in the policy.It is also emphasised that, as s 35(1) avers that: ‘An express warranty may be in any form of words…’, it is immaterial whether such a warranty is in standard form, as in the Institute Clauses, or is in the words of the contracting parties, provided that ‘…the intention to warrant is to be inferred.’

Exception clauses

Promissory warranties, though they need not be couched in any particular form of words, are generally prefaced with the word ‘warranted’. Indeed, it is unfortunate that the same expression is also employed in marine policies to introduce an exception clause. The use of the phrase ‘warranted free from …’17 is, thus, misleading, implying that the term could amount to a promissory warranty when it is patently not the case; such a condition or term17  Eg, ‘warranted free from particular average’ and ‘warranted free from capture and seizure’.

In Naviera de Canarias SA v National Hispanica Aseguradora SA, ‘Playa de las Nieves’ [1977] 1

Lloyd’s Rep 457, HL, Lord Diplock remarked: [p 459] ‘“Warranted free from claims” of a

particular description is the term of art used in a policy of marine insurance to introduce an

exceptions clause excluding the liability of the insurer for losses of the kind described…’

is intended only to relieve the insurer from liability for the specific loss resulting from its breach. But, when a true promissory warranty is infringed, the insurer is discharged from liability or further liability as from the date of breach, unless, of course, the breach has been waived by the insurer.

An exception clause is limited in scope. The insurer is excepted from liability only when the loss is occasioned by the specific excepted risk. Thus, a causal connection is paramount. In each case, it is for the court to decide whether a so called warranty is, or is not, a promissory warranty. Such was the issue in The Cap Tarifa, below, and in the recent case of Transthene Packaging Co Ltd v Royal Insurance Co (UK) Ltd [1996] LRLR 32.

Simons v Gale, ‘Cap Tarifa’ [1957] 2 Lloyd’s Rep 485; aff’d [1958] 2 Lloyd’s Rep 1, PCThe plaintiff loaned money to a third party, who wished to purchase and convert the vessel Cap Tarifa to carry cattle; the loan was to be repaid when cattle were actually

loaded aboard her at Townsville. The plaintiff insured the loan with the defendants under two policies of insurance, whereby the risk underwritten was that the insurers would be liable under the policies if the cattle were not loaded within 90 days of Cap Tarifa leaving Noumea, where she underwent the conversion. However, the policy was claused: ‘Warranted animals available for loading and all arrangements for conversion of vessel made at inception of insurance.’ The cattle were not loaded within the prescribed time limit, and the plaintiff claimed on his policies, but the underwriters rejected the claim, on the basis that Cap Tarifa had not been converted to carry cattle before she left Noumea and, therefore, the plaintiff was in breach of the warranty.

The Supreme Court of Australia ruled that the warranty was a condition and not a promissory warranty. Nevertheless, as the plaintiff had breached the condition, he could not recover under the policy. The court, in its deliberations, was most careful in classifying the status of the term.Walsh J: [p 490] …The question as to the onus of proof appears to me to require a consideration of the nature of the warranty. Is it to be regarded as a true condition precedent such that, unless it be fulfilled, no liability can be regarded as ever attaching under the policies? Or should it be regarded as a condition, the breach of which discharges the insurer from a contractual liability which is assumed to have come into operation?

The term ‘warranty’ is used in different senses and, in insurance law, special considerations are applicable to the problem under discussion, apart from the general principles of contract law. Thus, the familiar distinction between conditions and warranty in the general law of contract is not applicable in the discussion of warranties in policies of insurances…

[p 491] …In the present case, it is contended, for the plaintiff, that the warranty is of the latter type of condition, that is, a condition which has no effect on the formation of the contract, but which may operate to discharge or