WARRANTIES: THE CURRENT LAW
MODERATING HARSH LAW THROUGH STRICT INTERPRETATION
12.44 For many years, the courts had attempted to moderate the harshness of the law.
It is well-established that warranties should be construed strictly, against the interest of the party who has put them forward. Terms which appear to be warranties may also be construed as “suspensive conditions”, which apply only for the duration of the breach.
12.45 The leading case is Provincial Insurance Company Ltd v Morgan & Foxton.48 Coal merchants declared that their lorry would be used for coal, which became the basis of the contract. On the day of the accident, the lorry had also been used to carry Forestry Commission timber, but at the time of the accident only coal was on board. The House of Lords held that on “a strict but reasonable construction”
the clause only meant that transporting coal was to be the normal use.
Transporting other goods would not terminate liability under the policy.49
Principles of interpretation
12.46 The courts have developed several principles of interpretation which can be used to mitigate the harsh effects of a warranty.50 These include:
(1) An ambiguous warranty will be construed against the insurer.51
(2) If the underwriters wish a warranty to have draconian consequences, they must stipulate for them in clear terms.52
(3) The draconian effect of a warranty is relevant to considering whether literal words are consistent with a reasonable and businesslike interpretation.53
45 See Reid & Blackie, Personal Bar (2006), paras 3-12 – 3-16 and 3-40 – 3-41.
46 1979 SC (HL) 56.
47 Above at 68-69 by Lord Fraser of Tullybelton and 71-72 by Lord Keith of Kinkel. See also Moodiesburn House Hotel Ltd v Norwich Union Assurance Ltd 2002 SLT 1069.
48 [1933] AC 240.
49 See also English v Western [1940] 2 KB 156 and Houghton v Trafalgar Insurance Co Ltd [1954] 1QB 247.
50 See also Issues Paper 2: Warranties, Part 4 at para 4.4 and following.
51 Pratt v Aigion Insurance Company SA (The Resolute) [2008] EWCA Civ 1314 at [14], [2009] 2 All E.R. (Comm) 387.
52 AC Ward & Sons Ltd v Catlin (Five) Ltd [2009] EWCA Civ 1098 at [28].
(4) The more unreasonable the result, the more unlikely it is that the parties can have intended it, and if they do intend it the more necessary it is that they should make the meaning clear.54
(5) The warranty may be construed as being relevant to only some risks covered in the policy.55
(6) A literal interpretation of a warranty must not be inconsistent with other terms in the policy.56
(7) The term may be found not to be a warranty but some other contractual term, such as one descriptive of the risk.57
Contrasting case law
12.47 How a court approaches the task of interpreting a term that appears to be a warranty may vary widely, as can be seen in the two cases we discuss next.
Kler Knitwear
12.48 A striking example where an apparent warranty was found not be a warranty is Kler Knitwear v Lombard General Insurance Co Ltd.58 The policyholders were subject to a term that their sprinkler system would be inspected 30 days after renewal. The contract stated that the term was a warranty and specified that non-compliance would bar any claim “whether it increases the risk or not”. In fact, the inspection was about 60 days late and showed that the system was working. The factory later suffered storm damage (which was wholly unconnected with the sprinklers).
12.49 Mr Justice Morland accepted in principle that if, on a proper construction of the clause, the parties intended it to be a warranty then the court “must uphold that intention”, however harsh and unfair the consequences. However, this particular clause was merely “a suspensive condition” limiting the risk. It applied only during the 60 days when the policyholder had failed to inspect the sprinkler system.
12.50 The case is difficult because on its facts it appears that the parties did intend the term to be a warranty. One commentator noted that:
53 AC Ward & Sons v Catlin (Five) & Ors [2008] EWHC 3585 (Comm) at [29].
54 Wickman Machine Tools Sales Ltd v Shuler AG [1974] AC 2325, cited in AC Ward & Sons v Catlin (Five) & ors [2009] EWCA Civ 1098 at [29].
55 Printpak v AGF Insurance Ltd [1999] Lloyd’s Rep IR 542.
56 AC Ward & Son Ltd v Catlin (Five) Ltd [2009] EWHC 3122 (Comm).
57 Farr v Motor Traders Mutual Insurance [1920] 3 KB 669, where the term that a taxi was to be driven for only one shift a day was held to be descriptive of the risk and cover was suspended when it was used for two shifts a day. The case was approved in Provincial Insurance v Morgan [1933] AC 240.
58 [2000] Lloyd’s Rep IR 47.
It is difficult to see how the insurer could have stipulated this in any clearer terms. The term itself was called a warranty and was drafted in clear and intelligible language and the consequences of non-compliance were spelled out.59
Sugar Hut
12.51 In the more recent case of Sugar Hut v Great Lakes Reinsurance (UK) Plc, the court took a different approach.60 The claimants insured four nightclubs. When the Brentwood club suffered fire damage, the insurers refused the claims on various grounds. The judge found that the insurers were entitled to refuse cover for multiple reasons, including several non-disclosures and breaches of warranty.
The judge considered the decision in Kler Knitwear but held that in this case several terms were in fact “true warranties” rather than suspensive conditions.
12.52 In particular, one term obliged the policyholders to install a burglar alarm that rang through to a central monitoring station. The court found that the alarm was inadequate as it only contacted a Sugar Hut employee. Mr Justice Burton held that this alone would be sufficient to absolve the insurers from liability under the contract. The term:
was significantly material to the risk of loss; and it does not influence such conclusion … that in the event the absence of such burglar alarm was not in any way causative of the loss suffered by the fire.61
12.53 The judge heard evidence that the insurers had extended the deadline for upgrading the alarm, which suggested that the term was treated as a suspensive condition. The judge found, however, that this made no difference. In Kler Knitwear, the sprinkler requirement was complied with before the storm damage.
Here the upgrade work was never carried out. As the defendants remained in breach, liability for all risks was suspended at the time of the fire.
12.54 As we discuss in Part 13, very few legal systems would consider it just to permit an insurer to refuse a claim for fire damage because the wrong sort of burglar alarm was installed. In Part 15 we return to this case and show how a different approach would be taken under our proposed reforms.
The result: inconsistencies of interpretation
12.55 There is no doubt that the courts have used interpretative principles to evade the harshness of the law and do justice in individual cases. The problem is that where the outcome of a case is dependent on the courts’ interpretation, inconsistencies creep in.
59 Bird’s Modern Insurance Law, (8th ed2010), para 9.8.
60 [2010] EWHC 2636.
61 Above at [49].
12.56 Two cases illustrate the point. The Newfoundland Explorer and The Resolute both turned on similarly worded contract terms.62 In The Newfoundland Explorer a yacht owner warranted that the vessel would be “fully crewed at all times”, while in The Resolute the owner warranted that the owner, or the skipper in charge and one crew member, would be on board “at all times”.
12.57 In each case the damage occurred while the vessels were either berthed or safely tied up, without crew on board. Both insurers rejected the policyholder’s claim and this decision was challenged. The challenge failed in The Newfoundland Explorer but succeeded in The Resolute.
12.58 In The Newfoundland Explorer, the court interpreted the warranty literally and found that “at all times” “means what it says – the whole time, not some of the time”. In The Resolute the Court of Appeal held that the warranty should be given a reasonable and businesslike interpretation in the light of its context and purpose.63 It followed from this that the principal time when the vessel should be crewed was when it was being navigated.
12.59 We have been told that the courts’ approach to construction discourages insurers from taking purely technical points, or attempting to use warranties in a wholly unreasonable way. While this has advantages it also introduces uncertainty into the law.