Warranty - Breach - Claimant's tug insured by defendant and two others

P.T. Buana Samudra Pratama v Marine Mutual Insurance Association (NZ) Ltd: Queen's Bench Division, Commercial Court (Mr Justice Teare): 29 September 2011

The proceedings concerned a claim under a marine insurance policy. The claimant was the owner of a tug (the tug) which was insured under a policy of marine insurance (the policy) by three underwriters, of whom the lead underwriter was Axa. The defendant was one of the two other underwriters (the following market).

The policy contained a 'follow Axa' clause (the follow clause) which provided as follows: 'It is agreed to follow Axa HK in respect of all decisions, surveys and settlements regarding claims within the terms of the policy, unless these settlements are to be made on an ex gratia or without prejudice basis.'

The policy also contained a warranty to the effect that the tug would not undertake towage or salvage services under a contract previously arranged by the claimant. In September 2005, a tanker ran aground and required to be towed for tank cleaning. The tanker was owned by a subsidiary of APOL and the claimant was also a subsidiary of APOL. APOL decided to use the tug to tow the tanker.

En route, the tug ran aground and was subsequently declared to be a constructive total loss. In November 2005, Axa agreed to put the claimant 'in the same position as if the writ had been issued this day'. By June 2006, Axa and the third underwriter paid their share of the claim. By contrast, the solicitors acting for the defendant informed Axa that the defendant was rejecting any liability because, in breach of warranty, the tug had been engaged to provide towage and/or salvage services to the tanker.

The claimant brought proceedings and made an application for summary judgment on the basis that the defendant was obliged to follow the settlement of the claim by the leader, Axa and that, in any event, there was no breach of warranty. The defendant contended that it was not obliged to follow the settlement by the leader in circumstances where there had been a breach of warranty. Furthermore, it was discharged from liability because, on 13 July 2006 and on 20 April 2007, fraudulent misrepresentations were made on behalf of the claimant to the defendant that it was never intended that the tug should undertake the towage of the tanker and that it had always been intended that towage of the tanker should be undertaken by a different tug.

The claimant denied any fraudulent misrepresentation, but submitted that, in any case, in circumstances where the leader, Axa, had agreed to pay the claim before the alleged fraudulent misrepresentations were made, such alleged misrepresentations did not provide the defendant with a defence to the claim.

The issues that fell to be determined were, inter alia: (i) what the true construction of the follow clause was; and (ii) whether the defendant had a real prospect of succeeding on its defence that the claimant had deployed a fraudulent device and that its claim was accordingly forfeit. In relation to issue (i), the claimant submitted that, on the correct construction of the follow clause, the decision of Axa to settle the claim was a decision or settlement 'regarding claims within the terms of the policy' and accordingly the defendant was obliged to follow that decision whether or not there had been a breach of warranty.

By contrast, it was submitted by the defendant that, where there had been a breach of warranty, the claim was not 'within the terms of the policy' and so there was no obligation on the part of the defendant to follow the decision of Axa. Furthermore, the wording of the follow clause obliged the following market to follow a settlement where a claim fell within the terms of the policy, in other words, to follow as to quantum, but not where liability for the claim was disputed.

In relation to issue (ii), the claimant submitted, inter alia, that the alleged fraudulent misrepresentations did not give rise to any real prospect of success because they were made at a time when the claimant and the defendant were no longer in a relationship which attracted a duty of good faith in the presentation of the claim and instead the defendant was bound to follow the Axa settlement. Consideration was given to Agapitos v Agnew [2002] 1 All ER (Comm) 714 and Stemson v AMP General Insurance (NZ) Ltd [2006] All ER (D) 220 (Jun).

The court ruled: The 'follow' clause had to be given that meaning which it would be reasonably understood to have. In deciding what that meaning was, it was necessary to bear in mind the commercial purpose of 'follow' clauses in marine insurance policies. That was part of the background of which the assured and underwriters would be aware. The real question in the instant case was whether or not the words used in the policy indicated an intention by the parties to restrict the ambit of the follow clause in the manner suggested by the defendant, namely, to limit its ambit to an obligation to follow as to the quantum of claims within the terms of the policy, but not as to whether or not the claim in question was within the terms of the policy (see [23] - [24] of the judgment).

On the facts, the claimant's construction of the clause was preferable, for the following reasons, inter alia: (i) that in that context, the words 'regarding claims within the terms of the policy' would reasonably be understood as encompassing decisions or settlements as to whether claims were within the terms of the policy; and (ii) to impose a limited obligation to follow settlements only as to quantum would require much clearer language than that found in the clause in instant case.

Furthermore, the follow clause was not reasonably to be understood as being inapplicable where a breach of warranty had occurred before the date of the decision or settlement (see [26], [28] of the judgment). American International Marine Agency of New York Inc v Dandridge [2005] 2 All ER (Comm) 496 considered.

The defendant had real prospects of succeeding on its defence that the claimant had deployed a fraudulent device and that its claim was accordingly forfeit. That defence was supported by dicta in Agapitos v Agnew and by the decision of the Privy Council in Stemson v AMP General Insurance (NZ) Ltd.

The defence based upon the alleged fraudulent misrepresentations was an area of the law which was in a process of elucidation and development. It was not appropriate or sensible to seek to determine the merits of the opposing arguments on the basis of assumed facts, notwithstanding that they had been pleaded in some detail. The precise facts should first be found (see [49] - [50] of the judgment). The application would be dismissed (see [51] of the judgment).

Agapitos v Agnew [2002] 1 All ER (Comm) 714 considered; Interpart Commerciao E Gestao SA v Lexington Insurance Co [2004] All ER (D) 53 (Jul) considered; Marc Rich Agriculture Trading SA v Fortis Corporate Insurance NV [2004] EWHC 2362 (Comm) considered; Stemson v AMP General Insurance (NZ) Ltd [2006] All ER (D) 220 (Jun) considered.

Nigel Jacobs QC (instructed by Horn and Co.) for the claimant. Mark Templeman QC (instructed by Holman Fenwick Willan LLP) for the defendant.