Supreme Court interprets Institute Classification Clause in marine insurance: Rajankumar and Brothers vs. Oriental Insurance Company (2020)

Date of the Judgment: 7 February 2020
Citation: 2020 INSC 123
Judges: Justice Mohan M. Shantanagoudar, Justice K.M. Joseph
Can a marine insurance claim be rejected if the insured vessel does not meet the standards of the Institute Classification Clause (ICC)? The Supreme Court of India addressed this crucial question in a recent judgment. The court examined the obligations of the insured to ensure the vessel’s compliance with the ICC and the insurer’s right to reject claims for non-compliance. This case clarifies the importance of adhering to the specific terms of marine insurance policies and the consequences of failing to do so. The judgment was authored by Justice Mohan M. Shantanagoudar, with Justice K.M. Joseph concurring.

Case Background

M/s Rajankumar and Brothers (Impex), the appellant, is a partnership firm involved in import and export, including steel coils. They obtained a Marine Cargo Cover Note from Oriental Insurance Company Ltd., the respondent, on 14 May 2010, for a sum of 12,63,712.50 US Dollars. This cover was for a voyage from any port in China to Mumbai Port. The policy was to be issued after the appellant provided details of the vessel carrying the cargo. The appellant informed the respondent on 26 May 2010, that the cargo would be carried on the vessel ‘Khalijia-III’, built in March 1985, and classified as ‘I.R.S.’. The appellant stated that they had communicated the details as per the documents provided by the Overseas Seller. The Overseas Seller shipped 80 prime hot rolled steel coils weighing 2000 Metric Tonnes on the subject vessel. The respondent issued a Marine Insurance Policy on 2 July 2010, covering all risks as per the Institute Cargo Clauses (A), Institute War Clause, and Institute Strike Clause.

The vessel reached Mumbai port on 6 July 2010. On 14 July 2010, the vessel was allotted a berth for unloading the cargo. However, the vessel’s crane malfunctioned, and the vessel was removed from the berth. On 19 July 2010, the appellant learned that the vessel had run aground on the midnight of 18 July 2010. The appellant informed the respondent on 20 July 2010, about the possibility of a claim under the Marine Insurance Policy. The shipowners engaged M/S. Smit Singapore Private Ltd. for recovering the cargo. M/s Richard Hogg Lindley was appointed as the General Average Adjustor (GAA). The GAA informed the appellant and the respondent on 27 July 2010, that the situation had given rise to a “General Average,” where all parties involved in a marine venture contribute to losses sustained during a peril.

The appellant requested the respondent to issue a General Average Guarantee in ‘Form B’, which the respondent issued on 3 August 2010, agreeing to pay the GAA on behalf of the appellant. The GAA then requested the appellant to pay a separate salvage security of 25 percent of the C.I.F. value of their cargo, amounting to 256,880 US dollars. The appellant requested the respondent to issue the salvage security on 5 August 2010. The respondent did not issue the salvage security and, on 20 August 2010, withdrew the General Average Guarantee, citing non-compliance with the Institute Classification Clause (ICC) in the Marine Insurance Policy.

On 7 August 2010, the vessel collided with a navy vessel. The Salvors claimed a maritime lien on the cargo and initiated arbitration proceedings against the appellant and the shipowners. The High Court of Mumbai restrained the appellant from removing their consignment until they furnished a bank guarantee of Rs. 14 crores. The appellant furnished the security and took delivery of the consignment on 3 September 2010. On 2 December 2011, the Arbitrator passed an award against the appellant and other cargo owners. The appellant requested the respondent to settle the losses on 2 February 2012, and sent a legal notice on 21 June 2012, followed by a reminder on 4 July 2012, which went unanswered. Consequently, the appellant filed a consumer complaint before the NCDRC seeking compensation for losses, deficiency in service, and legal expenses.

Timeline:

Course of Proceedings

The National Consumer Disputes Redressal Commission (NCDRC) dismissed the consumer complaint filed by the Appellant. The NCDRC noted that the Appellant failed to prove that the subject vessel complied with the ICC stated in the Marine Insurance Policy. The NCDRC relied on a communication dated 9 August 2010, where the Respondent’s claim settling agent in London stated that the vessel was classified with Lloyd’s Register of Shipping until 10 October 2007, after which the classification was withdrawn. The NCDRC also found that the vessel was more than 25 years old on the date of loss, and the Appellant had not produced any document showing that the vessel was classified as ‘I.R.S.’.

Legal Framework

The judgment refers to the following legal provisions:

• Section 35 of the Marine Insurance Act, 1963: Defines a warranty as a promissory undertaking by the insured that a particular thing shall or shall not be done, or that a condition shall be fulfilled. It states that a warranty must be exactly complied with, whether material to the risk or not. If not complied with, the insurer is discharged from liability from the date of the breach.

  “35. Nature of warranty.—(1) 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 or shall not be done, or that some condition shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts. (2) A warranty may be express or implied. (3) A warranty, as above defined, is a condition which must be exactly complied with, whether it be material to the risk or not. If it be not so complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date.”

• Section 36 of the Marine Insurance Act, 1963: Specifies when a breach of warranty is excused. It states that non-compliance with a warranty is excused when the warranty ceases to be applicable due to a change of circumstances, or when compliance is rendered unlawful by a subsequent law. It also states that a breach of warranty may be waived by the insurer.

  “36. When breach of warranty excused.—(1) Non-compliance with a warranty is excused when, by reason of a change of circumstances, the warranty ceases to be applicable to the circumstances of the contract, or when compliance with the warranty is rendered unlawful by any subsequent law. (2) Where a warranty is broken, the assured cannot avail himself of the defence that the breach has been remedied, and the warranty complied with before loss. (3) A breach of warranty may be waived by the insurer.”

The Court also discusses the Institute Classification Clause (ICC), which is a standard clause in marine insurance contracts relating to the seaworthiness of the vessel. The ICC requires that the vessel be classed with a Classification Society that is a member or associate member of the International Association of Classification Societies (IACS) or a National Flag Society. The ICC also specifies age limits for vessels. The Court notes that the ICC is designed to ensure that vessels meet certain minimum standards of seaworthiness.

Arguments

Appellant’s Submissions:

• The ‘I.R.S.’ classification was granted by the ‘International Register of Shipping,’ an independent classification society.
• After the issuance of the Cover Note, the Appellant provided all particulars regarding the vessel and asked if it was acceptable.
• If the Respondent had indicated at the time of issuing the Marine Insurance Policy that the classification was not acceptable, the Appellant could have paid an extra premium as per Clause 6 of the Cover Note.

  “6 For coverage of shipments by sea: the vessel shall conform to the current Institute Classification Clause; otherwise the cover shall be subject to additional steamer extra premium such as coverage, under tonnage, non­classification and non approval extra at underwriter’s discretion.”

• The Institute Marine Cargo Clause (A) within the Marine Insurance Policy provides for a waiver of any breach of implied warranties of seaworthiness unless the Appellant or its servants were privy to such unseaworthiness.
• The Appellant was merely a cargo importer, not the vessel owner, and had communicated all vessel particulars as provided by the Overseas Seller.
• Indemnification by the Respondent cannot depend on the amount of loss or the nature of the accident.
• Once the Respondent provided the General Average Guarantee, it was estopped from claiming that the Appellant had breached the ICC.

Respondent’s Submissions:

• There was a clear breach of the ICC as the Appellant failed to disclose that the classification granted by Lloyd’s Register of Shipping was withdrawn on 10 October 2007.
• ‘I.R.S.’ refers to the Indian Register of Shipping, not the International Register of Shipping.
• The Appellant did not submit a certificate proving the ‘I.R.S.’ classification to the Respondent or the NCDRC.
• The General Average Guarantee was provided to mitigate losses, and the Respondent began investigating the seaworthiness of the vessel only after the collision on 7 August 2010.
• The Respondent is not estopped from claiming a breach of the ICC because it had provided the General Average Guarantee in good faith.

Issues Framed by the Supreme Court

1. Whether the Appellant had committed a breach of warranty with respect to compliance with the ICC?
2. Whether the Respondent had waived such breach of warranty by the Appellant?

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court relied on Everbright Commercial Enterprises Pte Ltd v. Axa Insurance Singapore Pte Ltd [2001] SGCA 24 to emphasize that the purpose of the ICC is to ensure the vessel meets certain seaworthiness standards and that the obligation to ensure compliance lies with the insured.
• The Supreme Court used Thames and Mersey Marine Insurance Co Ltd v. H T Van Laun & Co [1917] 2 KB 48 and Liberian Insurance Agency Inc v. Mosse [1977] 2 Lloyd’s Rep 560 to support the interpretation of ‘held covered’ provisions, stating that it requires prompt notification and the availability of cover at reasonable commercial market rates.
• The Supreme Court relied on Nam Kwong Medicines & Health Products Co. Ltd. v. China Insurance Co. Ltd. [2002] 2 Lloyd’s Rep. 591 to emphasize that the ICC applies to both open cover and facultative insurance policies.
• The Supreme Court referred to Kam Hing Trading (Hong Kong) Ltd. v. The People’s Insurance Co. of China (Hong Kong) Ltd. and Anr. [2010] 4 HKLRD 630 to highlight that the obligation to disclose the vessel’s classification is a continuing obligation.
• The Supreme Court referred to the book Marine Reinsurance (1981) by Robert H Brown and Peter B Reed to explain the purpose of the classification clause in open cover policies.
• The Supreme Court referred to the book Kyraki Nouassia, The Principle of Indemnity in Marine Insurance Contracts: A Comparative Approach (Springer, 2007) to explain the concept of General Average in maritime law.
• The Supreme Court referred to the book John Dunt, Marine Cargo Insurance (Informa Law, Routledge, 2009) to explain the scope and relevance of the Institute Classification Clause (ICC) in marine insurance contracts.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Breach of Warranty: The Court found that the Appellant had breached the warranty by not ensuring that the vessel was classed with a member of the IACS, as required by the ICC.
• Lack of Prompt Notification: The Court noted that the Appellant did not provide prompt notification to the Respondent about the vessel’s non-compliance with the ICC.
• No Waiver by the Insurer: The Court held that the Respondent’s issuance of the General Average Guarantee did not amount to a waiver of the breach of warranty, as it was issued without knowledge of the breach.
• Importance of ICC: The Court emphasized the importance of the ICC in ensuring that vessels meet minimum standards of seaworthiness.
• Obligation of the Insured: The Court reiterated that the obligation to ensure compliance with the terms of the insurance policy lies with the insured.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio Analysis

Logical Reasoning:

The Court rejected the Appellant’s argument that the Respondent was estopped from claiming a breach of the ICC by providing the General Average Guarantee. The Court reasoned that the Guarantee was issued without knowledge of the breach and was intended to mitigate losses. The Court also rejected the argument that Clause 5.2 of the Marine Insurance Policy waived the breach of warranty, stating that the ICC was an express warranty and not an implied warranty. The Court emphasized that the insured is obligated to ensure compliance with the terms of the policy.

The Court observed that the Appellant had represented that the vessel was ‘I.R.S.’ classed, leading the Respondent to believe that the vessel was compliant with the ICC. The Court also noted that the Appellant had not provided any proof of the vessel’s classification. The Court stated that the burden to verify the vessel’s classification lies with the insured, not the insurer.

The Court quoted the following from the judgment:

“A warranty, as above defined, is a condition which must be exactly complied with, whether it be material to the risk or not. If it be not so complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date.”

“A breach of warranty may be waived by the insurer.”

“The representation must be of such a nature that it is sufficient for the insured to conclude that the insurer is aware of the breach of warranty and has chosen to waive such breach and indemnify the loss.”

The Court concluded that the Appellant had committed a breach of warranty and that the Respondent had not waived the breach. Therefore, the Respondent was justified in repudiating the claim.

Key Takeaways

• Compliance with ICC: Insured parties must ensure strict compliance with the Institute Classification Clause (ICC) in marine insurance policies.
• Prompt Notification: Insured parties must promptly notify the insurer if the vessel does not meet the ICC requirements.
• Burden of Proof: The burden of proving compliance with the ICC lies with the insured.
• Waiver of Breach: A waiver of breach of warranty by the insurer must be based on knowledge of the breach and an unequivocal representation to waive the breach.
• General Average Guarantee: Issuance of a General Average Guarantee does not automatically imply a waiver of breach of warranty.

Directions

The Court directed that the Intervenors be relegated to record their evidence before the NCDRC, and the NCDRC is requested to hear the matters on merits and decide the same expeditiously, in accordance with the law as stated by the Supreme Court.

Development of Law

The ratio decidendi of this case is that a breach of warranty, specifically the Institute Classification Clause (ICC), in a marine insurance policy discharges the insurer’s liability unless the breach is explicitly waived by the insurer. This judgment reinforces the strict compliance required with warranties in marine insurance contracts and clarifies that the burden of ensuring compliance lies with the insured. This decision aligns with the established principles of marine insurance law, emphasizing the need for the insured to provide full and accurate information regarding the vessel’s classification and to promptly notify the insurer of any non-compliance. There is no change in the previous positions of law.

Conclusion

The Supreme Court upheld the NCDRC’s decision, ruling that the insurance company was justified in rejecting the claim. The Court emphasized the importance of strict adherence to the terms of marine insurance policies, particularly the Institute Classification Clause (ICC). The judgment clarifies that the insured bears the responsibility to ensure the vessel’s compliance with the ICC and that the insurer’s liability is discharged if the insured fails to do so. This case serves as a crucial reminder of the need for transparency and accuracy in marine insurance contracts.