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You are here: BAILII >> Databases >> Scottish Sheriff Court Decisions >> Forfar Weavers Ltd v. MSF Pritchard Syndicate [2006] ScotSC 83 (26 April 2006)
URL: http://www.bailii.org/scot/cases/ScotSC/2006/83.html
Cite as: [2006] ScotSC 83

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A217/05

 

JUDGMENT OF SHERIFF PRINCIPAL JAMES A TAYLOR

in the cause

FORFAR WEAVERS LIMITED

PURSUERS

against

 

MSF PRITCHARD SYNDICATE

DEFENDER

                                                                        

 

 

GLASGOW, 26 April 2006.

The Sheriff Principal having resumed consideration of the cause, Assigns 11 May 2006 at 9.30 am as a case management conference; Reserves meantime the expenses of the appeal.

 

 

 

 

 

NOTE:

 

[1] The pursuers had entered into a contract of insurance with the defenders. During the currency of the contract. There was a flood. This was an insured peril. As a consequence the pursuers sustained loss. The pursuers are jute merchants. Loss was said to arise because jute and other materials were damaged by virtue of the flood.

 

The contract of insurance provided:-

 

"It is warranted that all stock is stored on racks, pallets or stillages at least 10cm above floor level."

 

During the appeal this was referred to by both parties as the stillage warranty. General Condition 4 was in the following terms:-

 

"4. Every warranty shall from the time that the warranty attaches apply and continue to be in force during the whole currency of this Insurance and non-compliance with any such warranty whether it increased the risk or not shall be a bar to any claim, provided that whenever this Insurance is renewed a claim occurring during the renewal period shall not be barred by reason of a warranty not having been complied with at any time before the commencement of such period.

 

[2] The purpose of the debate and the subsequent appeal was to determine whether the defenders were obliged to indemnify the pursuers in terms of the contract. The defenders offered to prove that at the time of the flood the pursuers' jute and other materials were not stored on racks, pallets or stillages at least 10cm above floor level. Although this averment was not formally admitted by the pursuers the debate and the appeal proceeded on the basis that it was taken pro veritate. The learned sheriff came to the view that the stillage warranty did amount to a warranty but related to "present fact only". It was not a warranty that during the currency of the policy the pursuers would store all stock on racks, pallets or stillages at least 10cm above floor level. All that the pursuers undertook was that at the time the policy was renewed the stock was so stored.

 

[3] The defenders in their submissions drew my attention to the language which was used in the policy. It was submitted that the language was that of a warranty. There was a menu of warranties provided in the policy at pages 22 and 23. They were all expressed in the present tense. However if one was to make business sense of say the waste warranty (Warranty B) one would have to expect that all waste would be removed at night. It would not avail the insurers to any extent if the warranty related only to the practice at the time when the contract was entered into. Mr Ellis acknowledged that Warranty J posed a potential problem for him in that the warranty was expressed in the present tense and then it was provided that it would apply "throughout the currency of this insurance". He anticipated a submission that if such a provision was contained in one warranty but not in others the implication might be that the others were not to apply throughout the currency of the insurance. He referred me to the case of Beaufort Developments (N.I.) Ltd v Gilbert-Ash (N.I.) Ltd [1999] 1 AC 266 and in particular at pages 273 to 274. He submitted that the use of the expression "throughout the currency of this insurance" was simply superfluous verbiage. If one looked at the warranties as a whole the only way in which to interpret them in a manner which would make any form of business common sense was to interpret them as a continuing obligation on the insured. If one then read the warranties in conjunction with General Condition 4 it was in Mr Ellis' submission impossible to interpret the warranty as a present fact warranty only. If one was to give any content to General Condition 4 one required to interpret the warranty as a continuing obligation upon the insured. There was no ambiguity when one read the two provisions together.

 

[4] Mr Ellis' fallback position was that if the stillage warranty was not properly characterised as a warranty then it was nonetheless a suspensive condition. Reference was made to the case of Kler Knitwear Ltd v Lombard General Insurance Company Ltd [2000] Lloyds Rep. 47. The general condition in the Kler case was in almost identical terms to the general condition in the instant case. Mr Ellis pointed out that there was no suggestion made by the court that the general condition in Kler did not introduce an element of futurity. He submitted that if I was against him in holding that the stillage warranty was truly a warranty I should deem it to be a suspensive condition. This was the approach adopted by Mr Justice Morland in Kler. Mr Ellis then took me through a number of cases which had been referred to at first instance. In particular he referred to Hussain v Brown [1996] 1 Lloyds Rep. at 627; Hales v Reliance Fire & Accident Insurance Corporation Ltd [1960] Lloyds Rep. 391; de Maurier (Jewels), Ltd v Bastion Insurance Company Ltd [1967] Lloyds Rep. 550; Provincial Insurance Company Ltd v Morgan [1933] AC 240; Palatine Insurance Company Ltd v Gregory [1926] AC 90; Roberts v Anglo Saxon Insurance Association Ltd [1927] 27 Ll.L. Rep. 313 and [1926] 26 Ll.L. Rep. 154 and Weber & Berger v Employers' Liability Assurance Corporation [1926] 24 Ll.L. Rep. 321. A proper interpretation of these cases in Mr Ellis' submission indicated that the learned sheriff was correct in characterising the stillage warranty as a warranty but wrong in considering that it was not a warranty with future content. There was nothing in any of the cases inconsistent with Mr Ellis' primary submission. If however the stillage warranty was held to be other than a warranty it was a suspensive condition. In either case the interlocutor fell to be recalled.

 

[5] In reply Mr Wade drew my attention to the fact that in the submissions before the sheriff there had been no suggestion that the stillage warranty was other than a warranty. The possibility that it was a suspensive condition had never been raised. He submitted that a warranty could apply to past actings as well as to the future. He reminded the court of the draconian effect should a warranty be breached. It required to be strictly complied with. Even if the insured did something better than provided for in the warranty there would still be a breach of the warranty. If there was a loss and a warranty was breached there need be no connection between the breach and the loss to enable the insurers to avoid their contractual obligations. He pointed out the commercial absurdity of treating the stillage warranty as having a future component. The insured might store their stock in a cupboard six feet off the ground but since the stillage warranty had not been strictly complied with the defenders would still be able to avoid liability under the policy. There was no commercial justification for treating the warranty as having continuing effect. The courts had constantly disapproved of insurers who sought to interpret contracts of insurance in such a way. Characterising the provision as a suspensive condition was almost as draconian. The stillage warranty was in a sense a "housekeeping" warranty in respect of which precise compliance was difficult to achieve and not fundamental to the risk. He submitted that it was highly significant that the defenders were unable to cite any case where a "housekeeping" warranty when breached had resulted in the policy being declared void. This problem was overcome if one adopted the approach of the learned sheriff and treated the warranty as a warranty to present facts only. He also drew my attention to the fact that the policy covered two insured parties and therefore precise compliance would be difficult. One party would require to monitor the performance of the other. It was almost inevitable that in a warranty of this type there would be a breach from time to time. The pursuers would thus be taking the premium without having the counterpart obligation to provide cover.

 

[6] When interpreting contracts of insurance the court should avoid a construction which flouted business sense. He referred to the speech of Lord Diplock in Antaios Compania S.A. v Salen Rederierna A.B. [1985] 1 AC 191 at pages 200 to 201. He also referred to the case of Kazakhstan Wool Processors (Europe) Ltd v Nederlandsche Credietverzekering Maatschappij N.B. [2000] Lloyds Rep. 271 to the same effect.

 

[7] When considering the present policy Mr Wade drew my attention to Warranty J which contained the words "throughout the currency of this Insurance" and contrasted the absence of these words in the other warranties. General Condition 4 did have content because it meant that the stillage warranty remained in force even if it was a present facts warranty. That did have benefit for the insurer. It meant that the insurer had the comfort of knowing that the insured adopted good housekeeping practices at the time the contract was entered into.

 

[8] From reading the various cases and passages from text books cited in argument it became apparent that the concept of a warranty was rather a moveable feast. One meaning of the word is what was urged upon me by the defenders namely that the compliance with the terms of whatever was warranted is a condition precedent for the insured to be able to claim indemnity under the contract of insurance. At paragraph 10-2 of McGillivray on Insurance Law one finds the following passage:-

 

"Any attempt at a comprehensive definition of "warranty" in insurance law is complicated by the sometimes indiscriminate use of the word to refer to clauses in policies which do not possess the judicial attributes of a warranty and by changes in legal terminology over the years. It has a different meaning from a warranty in the general law of contract."

 

[9] It seems to me to follow from the foregoing that just because the word "warranty" is used in a clause in a contract of insurance it does not follow that the courts will hold the particular clause to be a warranty in the sense that complete compliance is a condition precedent for indemnity. Thus in Roberts one finds Mr Justice McKinnon in the court of first instance stating:-

 

"Now, nothing turns upon the word "warranted"; the word "warranted" is always used with the greatest possible ambiguity in a policy. Because a phrase begins with the word "warranted" in a policy it does not by any means mean that that is a condition."

 

Roberts was decided in 1926. In 1999 one finds Morland, J in Kler stating:-

 

The facts that the clause is entitled "warranty" and contains the phrase "it is warranted that" are some indication that the parties intended that the clause be a warranty in the true sense of the word. Such words are frequently used in insurance policies and used in a wide variety of senses."

 

[10] It thus seems to me that the use of the expression "It is warranted that..." in a contract of insurance is to introduce an ambiguity. If eminent lawyers have difficulty in knowing precisely what the expression means what hope is there for the lay man. If the expressino is used its meaning should be set out in a definition clause or similar. Such an explanation or definition was not provided in this instance. Therefore, I am unable to agree with Mr Ellis that there is no ambiguity in the contract before the court. The position of the defenders was that should the pursuers at any time during the currency of the policy have failed to obtemper the terms of the stillage warranty the defenders were entitled to avoid liability under the policy. From that it follows that if the pursuers' failure occurred in the first week of the relevant period of insurance and was thereafter remedied and the loss occurred in the final week of the same period of insurance the defenders would nevertheless be entitled to avoid their obligation to indemnify the pursuers. The lack of any link between the breach and the loss claimed was of no consequence. That is truly a draconian interpretation. It is perhaps therefore not surprising that throughout the cases which were cited in discussion one finds quotations from the various judges not dissimilar to what was said by Mr Justice McKinnon in Roberts viz:-

 

"Now it has been long settled that an insurance company which desires for its own protection to insert a provision of that nature or indeed any provision or limitation of its liability must do so in plain terms, and an ambiguous provision affords them no protection."

 

[11] In my opinion it was necessary for the insurers to go further than was done in this contract if they were to avail themselves of that draconian interpretation of the contract. It was incumbent upon them to spell out in clear and simple language precisely what the insured must do during the currency of the policy and the consequences to the insured should they fail to comply.

 

[12] However the appearance of the words "warranty" or "warranted" in a clause does have some content. The use of such words will usually elevate the clause from a mere statement of intention. At paragraph 10-29 in McGillivray one finds the following passage:-

 

"On the other hand, it must not be thought that the words "warranty" or "warranted" are of no importance. They are good evidence of the party's intention to create a warranty, and even though a promise which is "warranted" may in some cases be construed as an exclusion clause or term delimiting the risk, it will usually be elevated at least from the level of a statement of intention or collateral stipulation. Prima facie, the use of the word "warranted" shows that the parties understood that a breach of it should be a permanent or temporary bar to the insurers' liability."

 

[13] Both parties were at one in agreeing that when construing the terms of a contract of insurance, the court should use the same rules of construction as in ordinary commercial contracts. Thus the contra proferentum rule applies to the construction of contracts of insurance. The meaning of a particular clause in a contract must be construed in the context of the contract read as a whole. The court should endeavour to adopt an interpretation which gives meaning to all the words used in the contract. If a semantic analysis of the words in a commercial contract gives rise to a meaning which flouts business commonsense it must yield to business commonsense.

 

[14] Some meaning must be given to the words of General Condition 4 which provides that the warranty shall "continue to be in force during the whole currency of the contract". The learned sheriff was of the opinion that the warranty only applied at the time the contract was entered into. It related only to the then present facts and did not involve the pursuers in having to comply with the terms of the stillage warranty throughout the period of insurance. In my opinion that fails to give content to the wording contained in General Condition 4. I do not see how one can say that one has given effect to the future content of General Condition by giving a meaning to the contract that the condition of the premises at the commencement of the period of insurance was a valid representation of the premises at the commencement and could be founded upon by the insurers at any time throughout the period of cover. So if it later came to light that the stock was not stored in terms of the stillage warranty at the commencement of cover the insurers could, in the future, found upon the breach. One does not require the provisions of General Condition 4 to achieve that. I also doubt whether the interpretation adopted by the sheriff gives rise to a commercially sensible construction. It would be of little value to the insurers to know that at the time the contract was entered into the stock was stored in compliance with the policy. Mr Wade did submit that such a declaration by the insured provided the insurer with the comfort of knowing that the insured adopted good housekeeping practices at least at the inception of the policy. That seems to me to be of little practical benefit to the insurers. The insurers have an interest in knowing how the stock will be stored throughout the period for which they are providing cover. The interpretation that this is a warranty of present fact only thus fails to give content to General Condition 4 and also flouts business common sense.

 

[15] However it does not follow that the provisions in the contract of insurance fall to be interpreted as a continuing warranty with the aforementioned draconian consequences should the provisions be breached. It must still be determined whether a breach of the provisions should act as a permanent or temporary bar to the insurers' liability. What is the extent to which the defenders' risk is to be limited? I have already indicated that in my opinion the contract is ambiguous. Thus the contra proferentum rule applies. It was not in dispute that the defenders are the proferens. Thus the interpretation least favourable to the defenders should be adopted. That points to there being a temporary, as opposed to a permanent, bar to the insurer's liability in the event that there is a breach of what was referred to in argument as the stillage warranty.

 

[16] The primary task of the court when interpreting a contract is to ascertain the meaning which the parties must have intended the terms of the contract should have. The court has to consider "the words the parties have used in the light of the context in which they have used them and (where the words admit of more than one meaning) selection of that meaning which seems most closely to correspond with the presumed intention of the parties" (Lord Justice Saville in Hussain at page 629). In this case one has to ask if the parties must have intended that if a roll of jute was stored other than is provided for in the stillage warranty on day one of the contract and for say one evening only that the contract would effectively be devoid of any benefit for the insured. It seems to me highly unlikely that such would have been their intention. I am entitled to look at the other terms of the contract as an aid to construction. One there finds a provision that the insured also warranted that "all combustible trade waste and refuse is removed from the buildings every night". There was a similar contractual provision in the case of Kler albeit that, like here, was not the contractual provision which was determinative of the case. At p 50 of his judgment Morland, J stated:-

 

"It would be utterly absurd and make no rational business sense whatever if at the end of a particular working day a small quantity of sawdust was not swept up and 300 days later a fire broke out due to an electrical fault that a claim for property damage should be barred;"

 

[17] Thus applying the rules of construction to which I have referred the conclusion to which I come is that the breach of the stillage warranty provides a temporary bar to the insurer's liability. The stillage warranty when read in conjunction with General Condition 4 delimits the risk which the defenders accepted when they entered into the contract. In my opinion the provision is not a warranty as to present facts nor is it a continuing warranty with all the draconian effects which attach. I respectfully adopt the passage to be found in McGillivray at paragraph 10-7 under reference to the case of Farr v Motor Traders Mutual Society [1920] 3 KB 669.

 

"It was held, however, that the statement amounted on its true construction to no more than a term delimiting the scope of the risk. Therefore the cover provided by the policy had re‑attached when the assured resumed single shift working, and the insurers were accordingly liable to satisfy the claim in respect of the accident in November, though they would not, of course, have been liable for any loss or damage occurring during the period of double shift working. Had the term suspending the risk been a warranty, the breach in August would have discharged the insurers' liability.

 

Clauses of this nature are sometimes referred to as "warranties descriptive of the risk" or "delimiting the risk". This usage is not an accurate one, but it serves as a reminder that a court may be prepared to construe a clause as one descriptive of the risk even though the word "warranty" or "warranted" appears in it, as where a car was "warranted used only for the following purposes". That case illustrates the point that there is no magic in the word "warranted" which is frequently used with considerable ambiguity in policies."

 

[18] I had the advantage of fuller submissions than did the learned sheriff. Mr Ellis submitted that if I was against him in his primary submission that the contract should be interpreted as containing a continuing warranty, I should find that the contractual provision was a suspensive condition. That was the approach adopted by Morland, J in Kler. Such a submission was not made before the learned sheriff. I am a little uncomfortable about characterising the contractual provision as a suspensive condition. It does not seem to fit too easily with the concept of suspensive conditions in Scots law. I refer in particular to paragraphs 5-35 to 5-40 in McBryde The Law of Contract in Scotland 2nd Edn. I am content to describe the provision as one which limits the insurers' risk.

 

[19] The discussion before me did not deal with the extent to which the defenders' risk should be limited. It could be that the risk is limited to the extent that there is no liability if there is a breach of the stillage warranty regardless of whether there is a causal connection between the breach and the loss sustained. Alternatively the risk might be limited to the extent that the insurers are able to avoid liability only if there is a causal connection between the breach and the loss in respect of which indemnity is sought. I offer no view on that issue. Should parties wish to address me on that aspect they should let me know. Rather than remit the case back to the sheriff to proceed as accords I have assigned a further case management conference before me.

 

[20] I was reassured that there was some future content to the stillage warranty when it was read in conjunction with General Condition 4 by the terms of the productions lodged by the defenders. The incidents giving rise to this litigation occurred in October and November 2002. The contract of insurance between the parties commenced on 31 March 2000. It would appear to have been renewed annually. The "Cover Confirmation" (6/2 of process) for the first period of the contract of insurance provides at Section A "N - Stillage Warranty - this warranty applies with effect from 1 June 2000." Endorsement No 001 to the contract and dated 7 April 2000 is to the same effect. When the contract of insurance was entered into in March 2000 the parties clearly considered that what was referred to as the stillage warranty applied beyond the inception of cover.

 


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