Manifest Shipping Company Limited v. Uni-Polaris Shipping Company Limited and Others

The House of Lords dismissed the insurers' appeal. Two principal legal points were decided. First, under section 39(5) Marine Insurance Act 1906 a finding of "privity" requires either actual knowledge of the unseaworthiness or a subjective state of mind equivalent to knowledge (so-called "blind-eye" knowledge): there must be a grounded suspicion of the specific unseaworthiness and a deliberate decision to avoid inquiry. Gross negligence or a mere failure to make reasonable enquiries is insufficient. Second, section 17 (the duty of "utmost good faith") does continue to have post-contract relevance, but its content varies by context; at the claim/litigation stage it is confined to honesty in presentation and prosecution of claims (fraudulent claims may be defeated), and it does not impose an unrestricted duty to make full disclosure in litigation or permit insurers generally to avoid the policy for non-fraudulent post-contract omissions.

This was an appeal by representative underwriters against a Court of Appeal decision allowing the owners of the motor vessel Star Sea to recover under a time hull insurance policy following a constructive total loss by fire. The trial judge (Tuckey J) had found that the vessel was unseaworthy in two respects (incompetence of the master in use of the CO2 system and defective funnel dampers) and that the assured had "blind-eye" privity, reducing recovery to a partial loss. The owners appealed and the Court of Appeal allowed them in full; the underwriters appealed to the House of Lords.

The issues for the House of Lords were:

• Whether the judge was entitled to find privity under s.39(5) by imputing "blind-eye" knowledge to the assured; and
• Whether s.17 (utmost good faith) imposes a continuing duty of disclosure in litigation, such that a non-disclosure or misleading conduct in pursuit of a claim (short of actual fraud) permits avoidance of the contract ab initio.

The House of Lords upheld the Court of Appeal. On s.39(5) the Law Lords emphasised the subjective nature of "blind-eye" knowledge: there must be a suspicion well-founded and a deliberate decision not to inquire so as to avoid confirmation. The evidence did not support such a state of mind in relation to either relevant defect. On s.17 the Lords held that the duty of utmost good faith persists after contract formation but its content is context-dependent. At the claim/litigation stage the duty is essentially one of honesty: only fraudulent presentation or prosecution of claims can justify the draconian remedy of defeating the claim (and questions about retrospective avoidance raise disproportionate policy problems). Moreover, once litigation has begun, procedural rules and court remedies govern disclosure and conduct; s.17 does not supplant them.

Practical consequences emphasised include the limited scope of post-contractual avoidance for non-fraudulent conduct and the high threshold for imputing "blind-eye" knowledge under s.39(5).

The appeal was dismissed. The House of Lords held that (1) privity under section 39(5) requires subjective 'blind-eye' knowledge — a grounded suspicion of the specific unseaworthiness and a deliberate decision not to inquire — which was not established on these facts; and (2) section 17's duty of utmost good faith survives contract formation but is context-sensitive: at the claim/litigation stage it is effectively a duty of honesty and does not impose a general duty to disclose all potentially relevant material during litigation or allow avoidance for non-fraudulent omissions.

Trial: Tuckey J ([1995] 1 Lloyd's Rep 651) — found unseaworthiness and privity and reduced recovery to partial loss. Court of Appeal (Leggatt, Henry and Waller LJJ) [1997] 1 Lloyd's Rep 360 — allowed owners' appeal on privity and entered judgment for full CTL recovery. House of Lords [2001] UKHL 1 — appeal dismissed, affirming Court of Appeal.