Court considers limits on the construction of warranties

In a recent decision, the Court of Appeal has reiterated a reluctance to construe warranties literally if that would produce a result which was inconsistent with a reasonable and businesslike interpretation of the clause.

In this case, the court considered a variant on the standard marine insurance term which stated:

"Warranted Owner and/or Owner's experienced skipper on board and in charge at all times and one experienced crew member..."

The insured ship was moored for the night and the owner/captain and his crew had left it when a fire occurred. Insurers argued that the clause required strict compliance. The owner/skipper was not on board and in charge at the time. There was therefore a breach of warranty.

Insurers accepted that the clause was not a warranty in sense that they were discharged from all liability upon breach. Rather, they stated that it was a clause delimiting cover. On this basis, they were not on risk whilst the insured was in breach of the clause, but came back on risk once the insured complied with it again.

The Court of Appeal held that there was no breach of the clause. They concluded:

• the primary purpose of the warranty was to protect the vessel against navigational hazards. Here the ship was not at sea, but was held fast at port
• the clause could not be read literally to mean "at all times". There were clearly going to be times when the owner/captain could not be on board
• the clause was ambiguous, since it was not clear what the limitation to the phrase "at all times" should be. It should therefore be construed against insurers
• alternatively, the clause, when interpreted in the context of the policy as a whole, meant that the owner/captain had to be on board whilst it was being navigated but not when it was moored up. This conclusion stemmed particularly from the fact that the policy contained another warranty which stated that the vessel had to be manned by at least two medically fit people before it could be navigated. The literal reading of the warranty above would render this other warranty otiose

This case serves as a reminder that insurers cannot always rely on the strict terms of a warranty especially where there is any ambiguity. The courts will always be mindful of conflicting pressures.

On the one hand, they will not rewrite a clear bargain, and will (or at least should) acknowledge that insurers price risks based, amongst other things, on the terms of cover, including any applicable warranties. On the other hand, breach of warranty, no matter how trivial, will entitle insurers to what the courts consider to be a draconian remedy.

The courts are, therefore, sometimes keen to preclude insurers from relying upon them. So, if insurers want to maximise the chances that their warranties will be enforced, they should ensure that the terms are clear and unambiguous.

Further reading: Pratt v Aigaion Insurance Company SA [2008] EWCA Civ 1314