Kuwait Airways Corporation and Another v. Kuwait Insurance Company S.A.K and Others

The House of Lords decided key questions of construction of an aviation war-risks insurance contract. The court held that the ordinary and inclusive meaning of the word "seizure" in the war-risks clause (section 1(e)) includes forcible dispossession by a foreign government and therefore the loss of spares in the Iraqi invasion came within paragraph (e) as well as paragraph (a). The spares extension clearly extended cover to perils other than paragraph (a) and the separate numerical limits for spares applied; the ground limit of US$300m did not operate to absorb the spares limits. By contrast, a proviso in the All Risks policy relating to "sue and labour" expenses meant those expenses were to be included within the policy limits; accordingly the insurers' aggregate limits were exhausted and no further sue and labour recovery was available. The court applied ordinary principles of contractual construction, proximate cause rules for peril-based cover, and s.78 of the Marine Insurance Act 1906 as to sue and labour principles where relevant.

The appellants, Kuwait Airways Corporation and another, sought indemnity under a war-risks insurance policy for aircraft and extensive spare parts and equipment seized and removed during Iraq's 1990 invasion of Kuwait. The insurers (respondents) had paid US$300m and contended that this satisfied their liability under the ground limit and that spares were excluded from ground cover except while in transit; they also relied on wording limiting recovery of sue and labour expenses.

The issues for Your Lordships included:

• Whether the ground limit of US$300m applied to aircraft alone or to aircraft together with spares on the ground.
• Whether the loss of spares was caused by a peril within section 1(a) (war and allied risks) only or also by section 1(e) (confiscation, seizure, requisition etc.), and thus whether spares were recoverable when lost on the ground.
• Whether the spares extension excluded paragraph (a) perils for spares not in transit or instead extended cover for paragraphs (b)–(f) so that spares were separately covered up to their own limits.
• Whether sue and labour expenses were subject to the same overall limits because of a proviso in the All Risks policy.

The House of Lords agreed with the Court of Appeal that the quotation and existing policy wording showed the US$300m ground limit related to aircraft and the separate spares limits applied to spares. The court held that the ordinary meaning of "seizure" encompassed forcible dispossession by a foreign government and that paragraph (e) therefore applied as well as paragraph (a); context did not justify narrowing the ordinary meaning. The spares extension was construed as an extension covering perils other than paragraph (a), so spares on the ground were insured up to the spares limits. However, the proviso to the sue and labour clause meant those expenses had to be included when applying the policy limits; as those limits were already exhausted, no further sue and labour recovery was permitted. The court emphasised ordinary contractual construction principles, proximate cause for peril-based cover, and the parties' chosen wording rather than substitution of commercial judgment.

Appeal allowed in part. The House of Lords allowed the appellants' appeal on the spares questions: the ground limit of US$300m did not absorb the separate spares limits and paragraph (e)'s ordinary meaning of "seizure" includes forcible dispossession by a foreign government so the loss of spares was recoverable up to the spares limit. The appeal was dismissed on the sue and labour point: the proviso required sue and labour expenses to be included within the policy limits, which were exhausted.

First instance: Commercial Court (Rix J) [1996] 1 Lloyd's Rep. 664; Court of Appeal (Staughton, Otton and Schiemann LJJ) [1997] 2 Lloyd's Rep. 687; leave to appeal to House of Lords given and decision reported [1999] UKHL 12.