RETREAT OF CONTINUING WARRANTIES?
| Date | 01 December 1997 |
| Published date | 01 December 1997 |
| Citation | (1997) 9 SAcLJ 139 |
The natural way to begin any discussion of the sort of terms which exist in the context of an insurance contract is point out that the law of insurance has its own peculiar terms of reference. The terms of reference used to denote the nature of particular terms in the law of insurance differs from that as used in the general law of contracts. A perfect example of how the law of general contracts classifies terms is found in the Sales of Goods Act1:
Whether a stipulation in a contract of sale is a condition, the breach of which may give rise to a right to treat the contract as repudiated, or a warranty, the breach of which may give rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated, depends in each case on the construction of the contract; and a stipulation may be a condition, though called a warranty in the contract, (emphasis my own)2
This is to be contrasted with the formulation found under the Marine Insurance Act3:
A warranty, as above defined is a condition which must be exactly complied with, whether it is 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.4
The mere labelling of a term as a “condition”, “condition precedent” or “warranty” does not automatically confer a definite legal status on the term, although it will go some way in showing the intention of the parties. In the ultimate analysis, the task is primarily one of determining the intentions of the parlies.5
It can be seen, therefore, that the terms “warranty” and “condition”, in the context of an insurance contract, have acquired a meaning peculiar only to insurance law. Under general contract law, a condition is the critical term with which the failure to comply entitles the innocent party to treat himself as discharged from the contract. On the other hand, a condition in an insurance policy is a term which would entitle an insurance company to claim damages in the event of a breach by the insured but not to disclaim liability under the policy.6
If an insurance company is to be entitled to disclaim liability for breach of a condition, the insurance company must make the condition a condition precedent to liability. Whether a term in a policy is a mere condition or condition precedent is a matter of construction. The mere fact that an insurer has labelled a term as a condition precedent does not turn that term into a condition precedent unless the context in which the term appears is capable of making the term a conditional precedent.7
In general contract law, a warranty is merely a collateral promise or term, a breach of which only entitles the innocent party to a remedy by way of damages. In contradistinction, a warranty as a term of an insurance contract is one upon the breach of which the insurer is discharged from the contract. Warranties must be strictly complied with. It is quite irrelevant that the breach is unconnected with a loss that occurs.
The severity of the consequences which follows the breach of a warranty can be appreciated by comparison with the position with non-disclosure or misrepresentation. In insurance law, the latter concept refers to a misstatement or non-disclosure of a past or existing fact which is made before or at the time of conclusion of the contract and which would influence the judgment of a prudent insurer in fixing the premium or determining whether he would take the risk.9 One fundamental difference between the concept of warranties and that of misrepresentation or non-disclosure is that it is
not required to show that the former is in any way relevant to the risks to be insured under the contract.10
In determining whether there has been a misrepresentation of fact, the representation in question must be considered in its entirety and in the context in which it was made. A representation of fact is regarded as true if it is substantially correct in the sense that the state of affairs would not be considered material by a prudent insurer. On the other hand, warranties must be strictly complied with. It is irrelevant that the promise contained in the warranty has been substantially complied with nor does it matter that the substratum of the bargain has not been altered by non-compliance.
The stark difference in classifying a term as a warranty and when it is not and, as such, the insurer has to show that there is a material misrepresentation can be seen by the comparison of two cases where the facts are strikingly similar. The first is that of Pawson v Watson11 where the assured represented that there were twelve guns and twenty men on board a ship. In fact she carried nine guns, six swivels, sixteen men and nine boys. On the other hand, in De Hahn v Hartley12, which concerned a marine policy covering a ship and its cargo from Africa to its port of discharge in the West Indies, the assured warranted that the ship sailed from Liverpool with 50 hands on board. In fact, it sailed with only 46 hands but took on an extra six hands in Anglesey, very shortly out of Liverpool, and it thus had and continued to have 52 hands before its capture.
In Pawson v Watson13, Lord Mansfield agreed that a warranty inserted in a policy of insurance must be literally and strictly complied with, whereas
a representation to the underwriter need only be substantially performed. But if it is false in a material point, it will avoid the policy. It was accepted by his Lordship that, in insurance law, there is no
clearer distinction than that which exists between a warranty which makes part of the written policy, and a collateral representation, which, if false in a point of materiality, makes the policy void: but if not material, it can hardly ever be fraudulent.14
Where it is a warranty, it must be strictly performed as being part of the agreement. A representation will only result in the avoidance of the policy if false in a point of materiality. In the ultimate analysis, it was found that the statement in question was a representation on the ground that if the parties had considered it as a warranty, they would have had it inserted in the policy. The representation was substantially true, actually resulting in the lowering of the risk. Thus, there was no misrepresentation and the insurers were not entitled to repudiate their liability under the contract of insurance.
In contradistinction, it was held in De Hahn v Hartley15 that the insurer could avoid all liability for breach of warranty, even though it was obvious that the breach could have had no connection with the loss which subsequently occurred and though the warranty was substantially complied with.
The court took great pains to point out that there is a material distinction between a warranty and a representation. Lord Mansfield put it in terms which was later to become the locus classicus:
There is a material distinction between a warranty and a representation. A representation may be equitably and substantially answered; but a warranty must be strictly complied with… A warranty in a policy of insurance is a condition or a contingency, and unless that be performed, there is no contract. It is perfectly immaterial for what purpose a warranty is introduced; but, being inserted, the contract does not exist unless it be literally complied with.16
Thus, it is clear that the very meaning of a warranty is to preclude all questions of whether it has been substantially complied with; it must be literally so.
The other preliminary point which must be noted is that the nature of a term used in a contract depends on the context in which it is used. The mere fact that a term has been labelled as a “condition” or a “warranty”
does not conclusively turn that term into a condition or a warranty if the context in which the term appears makes it inappropriate or inapt.17
As has been pointed out earlier, a warranty is to be strictly complied with. Irrespective of whether the breach relates to the risk or the loss in question, it takes the very slightest of breach of warranty to terminate the contract.
The traditional view, at least in the realm of non-marine insurance contracts, held until the decision of Lord Goff in Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd., The Good Luck18 in 1991,
was that the breach of warranty entitled the insurer to a right of election — whether to treat himself as discharged from his obligations under the contract of insurance from the time of such election, or to affirm the contract and have resort to the right of damages.19 This view must however now be treated as being “at the very least highly suspect”20 in the light of the decision of the House of Lords in The Good Luck.21
In The Good Luck22, the named ship was insured with the defendant shipowners’ mutual insurance club and mortgaged to the plaintiff bank. The benefit was of the insurance had been assigned to the plaintiff, as required by the mortgage. Further, a letter of undertaking had been given by the defendants to the plaintiff under which the defendants undertook to advise the plaintiff promptly “if the ship ceases to be insured”. It transpired that the ship was sent by the shipowner, in clear breach of warranty, to the Arabian Gulf which was a prohibited area under the rules of the club. The ship became a constructive total loss. Both the plaintiff and the defendants knew of the loss. However, the defendants failed to inform the plaintiff until a few weeks after they had themselves come to know of the breach of warranty. In this state of blissful ignorance, the plaintiff bank made another advance to the defendant, which it would not have done if it had been advised...
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