The Meaning of the Word Warranty

Warranty in insurance law is not exactly what it means in law of contract. “In insurance law, it refers to a certain term of an insurance contract, breach of which has particular legal consequences” [1] . It simply means that by virtue of a warranty the assured confirms certain fact or situation, the compliance of which is a must on the part of the assured and in case the assured fails to comply with the same, it simply relieves the insurer of his liability. Thus the meaning of the word warranty confers that the same should be strictly followed whether or not the warranty is materially related to the subject matter. More specifically if analyzed the significance of warranties in different branches of insurance law itself, then it would be seen that the warranties have a wider implication in marine insurance than it has in non-marine insurances. For instance the applicability of implied warranty is recognized in marine insurance under English Marine Insurance Act, 1906 whereas in non-marine insurance the same is not as recognized. Moreover as a statutory rule, express warranty must be stated or incorporated in the policy itself. On the contrary, a mere declaratory signature of the assured will suffice in non-marine insurance. [2] Section 35 of the Marine Insurance Act, 1963 (here-in-after referred to as the M.I.A, 1963) incorporates warranty. This Act resembles striking similarity to that of the English Marine Insurance Act, 1906. In India, warranty in marine insurance refers to a promissory warranty apart from a ‘warranty free of capture and seizure’ clause. Section 35 of the M.I.A, 1963 clearly states that:-

“A warranty, in the following sections relating to warranties, means a promissory warranty, that is to say a warranty by which the assured undertakes that some particular thing shall be fulfilled, whereby he affirms or negatives the existence of a particular state of facts.”

As per section 35(2) warranty may be express or implied. In marine insurance contracts are based on utmost good faith and therefore there the warranty is not any superficial condition but is deep rooted in the contract itself and give the insurer the option to repudiate the contract for any breach of warranty [3] . As warranties should be strictly complied with whether or not material to the risk, the strict compliance of warranties becomes easier in case of express warranties. But after preliminary literature study it appeared that the problem lies with that of implied warranties which are not expressly incorporated in the contract but otherwise inherent in the contract itself. Furthermore the provisions for implied warranty must be read in consonance with the provision of disclosure of every material fact. Section 20 and 21 of the Marine Insurance Act, 1963, deals with disclosure of material facts both on the part of the assured as well as the agent of the insurer respectively. So it may be construed that the insurer also has a liability to disclose and should know certain material fact which in the ordinary course of business ought to be known by the agent. Because here the relationship between the insurer and the agent is that of a principle agent. So following the law of contract, the insurer incurs a liability in case of any non-disclosure of any material fact on the part of the agent. Moreover, one hundred and twelve law commission report provided that the insurer must not be placed in the same level as of the other litigants. Because insurance is a source of social security in India. It is the duty of the insurer to make the assured aware of every clause of the contract, whether he has really understood the contract as well as the consequences in case of default of the contract. In spite of this, the assured has a higher degree of responsibility to disclose the material facts.

In SeaLark Fisheries v. United India Insurance Company and Another [4] , the appellant was the owner of a sea vessel known as SeaLark. The vessel was engaged for fishing purposes. The appellant obtained a loan from Canara Bank. At the time of sanction of loan, the Bank obtained an insurance policy from United India Insurance Company in respect of the said vessel. It was insured on 12-4-1979 to cover the period from 12-4-1979 to 12.04.1980 which was further renewed up to 11.4.1981. The vessel sunk on 21.7.1980. Eventually the petitioners claimed the compensation but the respondents denied on the basis that the ship was unseaworthy. So on special leave petition by the petitioner honorable Supreme Court held that the petitioner had not disclosed certain material facts whose disclosure are a must under section 20 of the MIA, 1963 and all these disclosures are relating to the seaworthiness of the ship and thus the respondents were right that the ship was not seaworthy when it sunk and thereby the insurer is not liable to compensate.

“An implied warranty is a condition of the contract of insurance which is so fundamental to that contract that it is presumed to apply without having to make express provision for such” [5] . Implied warranties are of four types- a) the implied warranty of seaworthiness b) the implied warranty of portworthiness, c) the implied warranty of cargoworthiness, d) the implied warranty of legality. In the MIA, 1963 section 41, which is almost similar to that of the English Act, deals with the types of implied warranty prevalent in India. But the question now arises what should be construed as implied. In this paper; this issue of implied warranty of seaworthiness would be addressed. The objective of such a paper is to analyze as to how implied warranty of seaworthiness is interpreted. Is there any particular standard regarding as to what constitutes seaworthiness or privity or it is merely a relative factor.

The implied warranty of seaworthiness

The implied warranty of seaworthiness depends on two main factors that are 1) ability of the ship and 2) ordinary perils of the intended voyage. Thus it stands as such that the ship should be preliminary able to counter the ordinary perils, for example “ordinary stress of wind, waves and other weather which vessel might ordinarily be expected to counter” [6] , what-so-ever comes in the way of voyage. This implied warranty of seaworthiness may be in two cases —- warranty of seaworthiness in voyage policies and warranty of seaworthiness in time policies.

Implied warranty of seaworthiness in voyage policy

“Where the contract is to ensure for a particular voyage the particular subject matter at and from, or from one place to another or others, the policy is called a voyage policy.” [7] The matter of seaworthiness of the ship is dealt widely in a voyage policy than that of the time policy. Unlike a time policy, in case of a voyage policy the insured cannot recover the loss if the loss had happened due to the unseaworthiness of the ship even if the owner of the ship had no actual or constructive knowledge of the unseaworthiness of the ship. As per section 41 of the MIA.1963, implied warranty of seaworthiness applies to the word ship. Now the question arises what is meant by ship. In case of a hull policy the seaworthiness only refers to the ship. But in case of a cargo policy, both the cargo and the ship should be seaworthy. But what constitutes a ship is a bit debatable. Besides the carrying ship, the subsidiary crafts such as barges or lighters used for loading and unloading cargoes for discharging the carrying ship would also be included in the word ship. The general definition of the ship is found under section 313 of the MSA, 1995, which states that ship includes every description of vessel used in navigation. In Steadman v. Schofield, navigation had been defined as a planned or ordered movement from one place to another [8] . Go by this, the carrying ship does include lighters and such other crafts. This question was raised in Lane v. Nixon [9] . In this case a ship was carrying goods from Liverpool to Melbourne and for this voyage the goods were insured. But eventually the goods were damaged while they were being carried from the ship to the port of discharge with the help of a lighter. It was argued that the insurers were held responsible for a cover clause which states that until the goods were landed safely in the port of discharge, including all risks to and from the ship. The court held that the implied warranty of seaworthiness does not extend to lighters or other crafts because the owner of the goods is not in a position to have knowledge of them or have no means to control or regulate them.

Instead of putting this argument there can be a better way of justifying the insurer’s liability. It is worded in the provision that the ship should be seaworthy for every separate voyage. And the wordings clearly mention that the ship should be seaworthy at the initial stage, there is nothing mentioned about the subsequent seaworthiness. Since landing of carriage from the carrying ship to the port of discharge constitute part of the same voyage, so there is no requirement of further seaworthiness of the ship.

An analysis of implied warranty of seaworthiness in time policy

Time policies are generally taken for a period of not exceeding twelve months during which the contract is made to ensure the subject matter. Well there is no implied warranty in case of a time policy. This is basically because these policies are generally affected while the ship is at sea. So it is not very practical for the assured to know the seaworthiness of the ship while it is already on the way to its venture.

Thus it stands that there is a difference of implied warranty of seaworthiness in case of voyage policy and in case of time policy. This difference is not unintentional but very much deliberate. The reason for this difference is best explained in the case of Gibson v. Small [10] . In this case, there was an insurance of the vessel Susan which was a time policy by the plaintiff with the defendants for one calendar year. While it was on its voyage from Madras to Mauritius, it faced bad weather and suffered severe damage. So it was brought back to Madras. But the day when the police was attached Susan was at sea and was in unseaworthy condition. Eventually Susan was sold as it was badly damaged and it was not economically viable to repair the same. Thereby the plaintiff claimed compensation. But the insurer rejected the same on the ground that the ship was not seaworthy at the time of the attachment of the risk. It was on this context held that there is no implied warranty in case of time policy. Firstly it is not possible for the assured to know about the seaworthiness of the vessel at the moment at which the warranty will bite, if it is considered that the warranty will bite at the moment the contract is made or at the time fixed for the inception of the risk. This being the situation, the insurance cover will cease to be there the moment the ship becomes unseaworthy at sea at the moment warranty starts to bite which would affect the assured. The converse is also applicable. If the ship got damaged in its first voyage at the moment the inception of the risk has taken account, the same may affect harshly the insurer. Secondly whereas “under a voyage policy, the standard of seaworthiness could be pitched by reference to the contemplated voyage, this will not work where the cover may encompass only the later part of a voyage that is already in progress, or the part of the voyage, plus one or more wholly different voyages, with or without the addition of the first part of yet another voyage” [11] .

But there is also an exception to this rule of no implied warranty in case of time policy. If the assured had enough privity of unseaworthiness of the vessel before it had started its venture and the loss has occurred because of the unseaworthiness of the vessel then the assured cannot claim recovery of the loss from the insurer and the insurer is relieved of his liability to compensate the loss and the knowledge of the assured regarding the unseaworthiness of the ship may be actual or constructive. Here simple negligence in not knowing the state of the ship is not enough [12] . This is also incorporated in Section 41 sub-section 5 of MIA, 1963. Behind enacting this legislation the intention of the legislature is to uphold the age old principle of law that no one should gain from his own fault [13] .

But the crux of the matter is the conception of seaworthiness of the ship at the start of its voyage which is also ambiguous. According to section 41(4), a ship is deemed to be seaworthy if it is reasonably fit in all respects to encounter the ordinary perils of the seas of the adventure insured. The term reasonability is very vague. What may appear reasonable to one may not be reasonable for other. But this argument would be countered by the mere fact that reasonability means the reasonable conscience of an ordinary prudent man. For example can be given that “a particular ship which appear to be seaworthy for one port may fail to be seaworthy at another, may be seaworthy only for a river but not for ocean or sea, may be seaworthy only for a particular sea or voyage but not for another, may be seaworthy for a calm deep sea but not a whaling voyage”. It can also be argued that the ship though apparently look seaworthy soon after the commencement of the voyage may become unseaworthy because of the lack of fuel whereas a ship may be unseaworthy for some meager defect which can virtually be corrected with almost no severe effort by the crewmembers themselves. [14] . So seaworthiness is altogether a relative conception and not an absolute one. In this connection two contrasting cases may be cited [15]

Quebec Marine Insurance Co. v. Commercial Bank of Canada- In this case a time policy was taken on a ship sailing from Montreal to Halifax. When it started its voyage a defect in its boiler which was not previously noticed while it was in the river but soon had appeared when it sailed to the sea. She was brought back to the port, repaired and then again started its voyage. But on its way due to bad weather the ship was lost. It was held that the ship was not seaworthy when it started its voyage though the default was repaired soon after it proceeded for its voyage thereby the insurer was held not liable. On the other hand another case,

Thomas v. Tyne [16] – In this case, the ship was insured under a time policy. With due acknowledgment or privity of the assured the ship was sent to the voyage with insufficient crew. But during its voyage the ship was lost in the sea because of a defect in its hull. But this defect in the hull was not within the privity of the assured. It was held that the assured was entitled to claim the loss from the insurer. From the above two cases it becomes clear that though the so called unseaworthiness was repaired still it made no sense since once a breach always a breach of implied warranty in marine insurance.

In case there are two defects in the ship one of which was within the knowledge of the assured and the other was not, then the insured can get relieved of its liability only in case he can prove that the loss was incurred because of the defect which was known to the assured and not otherwise. Thus there arises the question relating to privity of knowledge. Regarding this certain words of Mr. Miller may be substantiated. He contended that if it was deliberate intention not to survey the ship when the ship was required to be surveyed, for example if the age of the ship is such that it needs regular vigilance before sent to the voyage and the owner is very much aware of it then such a belief turns to knowledge. But mere omission to take due precautions on the part of the assured against the possibility of the ship being unseaworthy, does not amount to the privity of the assured regarding the unseaworthiness of the ship for its voyage [17] . The term ‘privity’ is best explained in the case Compania Maritima San Basilio SA v. Oceanus Mutual Underwriting Association (Bermuda) Ltd, ‘Eurysthenes’ [18] . In this case the plaintiffs insured their vessel named ‘Eurysthenes’ with the defendant P and I Club under a time policy. In 1974, during its voyage from the United States to the Philippines, the vessel stranded. The owners of the cargo it was carrying made claim against the plaintiff. Thus the plaintiff wanted the insurer to compensate the loss. But the insurer alleged that the ship was unseaworthy in many respects and the same was under the privity of the assured. It was held that the term ‘privity’ includes both ‘knowledge and concurrence’. And at the same time privity does not necessarily include willful misconduct. To prove that there was a privity of unseaworthiness of the ship on the part of the assured it is not enough that the assured had knowledge of the facts constituting the unseaworthiness but also the knowledge that all these factors in turn can render the ship unseaworthy.

Findings after the analysis

After a detailed analysis of the implied warranty of seaworthiness, what comes out is that both the MIA, 1963 and also different judicial decisions had failed to maintain a perfect definition of seaworthiness and privity. In certain cases it appeared that only because there was once a breach of implied warranty of seaworthiness, though that was urgently repaired and not even the proximate cause of loss still then the assured was not given compensation whereas there is a rule that if the loss is not due the cause of unseaworthiness and of which the assured was not aware, the insurer is liable. So here the law looks partial. Similarly there may be cases where the owner had actually no knowledge of the unseawoerthiness or the unseaworthiness may be such that the defect would be visible only after it started sailing and it is a voyage policy then the owner of the ship will not be compensated and the insurer is free from his liability. Here the law definitely looks partial. So the law should be amended and in that respect experts view should be taken so that there comes uniformity in the law.

Conclusion

Because of the increasing risk of the ships due to human errors and other terror attacks the IMO had laid down ISM Code. ISM Code is a self contained document. Compliance with the code was made mandatory by the SOLAS in 1994 conference. The ISM is mainly concerned with the safety regards of the ship and includes every such thing which is necessary for the safety measures for example adequate communication of the ship with the shores, a well maintained safety management system(SMS), provisions dealing with the system required for ensuring the maintenance of the ship and her equipment etc. Seaworthiness does not only include physical condition of the vessel but also include other aspects like adequacy of fuel, number of crews etc. Inspite of provisions of precaution there also remains the same loopholes. For instance a ship may have adequate SMS system but may have latent defects in the hull. Thus compliance with the ISM Code cannot be the sole standard of seaworthiness. India is also a signatory to SOLAS and thereby ISM Code is also binding on it. So far in India no judicial view had been expressed on the basis of SOLAS. But hope that in the near future while deciding a case along with section 41 of the MIA, 1963 ISM Code will also be followed.