K/S MERC-SCANDIA XXXXII v CERTAIN LLOYD’S UNDERWRITERS OCEAN MARINE INSURANCE CO LTD AND OTHERS

Section 17 of the Marine Insurance Act 1906 may apply after an insurance contract has been made, including to materially fraudulent conduct by the assured. Avoidance is available only where the fraud is relevant to the insurer’s ultimate liability and is sufficiently serious, or has sufficiently serious consequences, to justify termination for breach. The remedy must be aligned with the insurer’s contractual remedies and must not operate disproportionately. Fraud concerning the forum or law applicable to an underlying claim will not justify avoidance where it makes no difference to the insurer’s liability. Contractual notification obligations are ordinarily governed by the ordinary law of contractual breach.

The appellant’s insured ship repairers were liable to shipowners and had entered liquidation. The shipowners therefore pursued the underwriters as statutory transferees under the Third Parties (Rights against Insurers) Act 1930.

The insured had given notice of the underlying claim, and the underwriters had taken over its defence. The insured later produced a forged document in an attempt to resist English jurisdiction. The underwriters purported to avoid the policy under section 17 of the Marine Insurance Act 1906, alternatively relying on a contractual obligation to keep them fully advised.

Aikens J rejected both defences. The central issues were whether post-contractual fraudulent conduct could justify statutory avoidance and whether the notification breach entitled the underwriters to reject the claim.

1. Appeal dismissed. The underwriters’ contractual and statutory defences failed.
2. The obligation to keep underwriters fully advised required disclosure of matters concerning the jurisdiction agreement and its validity. The forged document breached that obligation. The term was not expressed to be a condition precedent, and its consequences were governed by ordinary contractual principles, including the law of innominate terms.
3. The underwriters could terminate for repudiatory breach only if the breach was sufficiently serious or had sufficiently serious consequences. They could reject the claim under the approach recognised in Alfred McAlpine Plc v BAI (Run-Off) Ltd only if they had suffered sufficiently serious prejudice. The judge’s finding that no such prejudice occurred was upheld.
4. Section 17 may operate after formation of the contract. The court rejected both an unrestricted power to avoid for any post-contract dishonesty and an artificial limitation of section 17 to only specified categories of case. The appropriate approach is to align statutory avoidance with contractual termination.
5. Post-contractual avoidance requires materiality: the fraud must be relevant to the insurer’s ultimate liability or to a defence under the policy. It must also be sufficiently grave to justify termination for breach. The requirements reflect, with appropriate adjustment, the materiality and inducement requirements applicable to pre-contract avoidance.
6. The fraud concerned the forum and governing law of the underlying claim. English and Trinidadian law were in substance the same, and the forum did not affect the underwriters’ liability. The fraud therefore lacked materiality and could not justify avoidance. The appeal was dismissed with costs, and permission to appeal to the House of Lords was refused.

• Court of Appeal (Civil Division): dismissed the appeal from the decision of Aikens J in the Queen’s Bench Division, with costs.
• High Court of Justice, Queen’s Bench Division: held that section 17 did not permit avoidance on the facts, that the fraud was immaterial to the underwriters’ liability, and that the notification breach caused no sufficiently serious prejudice.