Manifest Shipping Co. Ltd. v. Uni-Polaris Shipping

Under section 39(5) of the Marine Insurance Act 1906, blind-eye knowledge of unseaworthiness is subjective. It requires a firmly grounded suspicion of the relevant defect and a deliberate decision to avoid obtaining confirmation. Negligence, however serious, does not suffice.

Section 17 has continuing relevance after formation of an insurance contract, but the content of utmost good faith varies with context. At the claims stage, the assured owes a duty of honesty. Non-fraudulent non-disclosure does not permit avoidance. Once hostile litigation begins, procedural rules govern disclosure. A fraudulent claim defeats recovery of the claim, but the House left open whether it retrospectively avoids the policy.

The assured vessel, the Star Sea, became a constructive total loss after an engine-room fire. The underwriters resisted indemnity under sections 39(5) and 17 of the Marine Insurance Act 1906. They alleged that the vessel had been sent to sea unseaworthy with the assured's privity and that material information had not been disclosed during the ensuing claim and litigation.

Tuckey J, [1995] 1 Lloyd's Rep 651, upheld the section 39(5) defence to the constructive-total-loss claim but rejected the section 17 defence. The Court of Appeal, [1997] 1 Lloyd's Rep 360, reversed the finding of privity and entered judgment for the assured for the constructive total loss.

The underwriters appealed. The central questions were what constitutes blind-eye knowledge for section 39(5), and the content and duration of the duty of utmost good faith after an insurance contract has been made.

1. Appeal dismissed unanimously. The Court of Appeal had correctly rejected both statutory defences and its judgment for the assured was affirmed.

2. Section 39(5). Per Lord Hobhouse and Lord Scott, whose reasons were expressly adopted by Lord Steyn and Lord Hoffmann, the defence requires unseaworthiness when the vessel is sent to sea, loss attributable to that unseaworthiness, and the assured's privity. Blind-eye knowledge is subjective. The assured must have a firmly grounded and specific suspicion of the relevant unseaworthiness and must deliberately refrain from inquiry because confirmation is unwanted. Gross negligence, laziness or failure to appreciate the significance of facts does not amount to privity. Lord Clyde adopted the same essential approach.

   The evidence established neither suspicion that the master was incompetent in operating the fire-extinguishing system nor suspicion that the dampers were defective. It also established no deliberate decision to avoid confirmation. The section 39(5) defence therefore failed.

3. Section 17 and post-contract good faith. Per Lord Hobhouse, Lord Scott and Lord Clyde, section 17 of the Marine Insurance Act 1906 remains relevant after formation, but its content varies with the stage and circumstances of the parties' relationship. The extensive pre-contract disclosure obligations cannot be transposed into a general duty to disclose every fact which an insurer might wish to know after the contract has been made.

4. Claims. At the claims stage, the assured's duty is one of honesty. An insurer relying on section 17 must establish that the claim was made or maintained fraudulently. Non-fraudulent failure to disclose privileged reports or other potentially relevant information is insufficient. No fraud was found against the assured, its solicitors or the relevant manager. The section 17 defence therefore failed.

5. Litigation. Per Lord Hobhouse, with whose reasons Lord Steyn and Lord Hoffmann agreed, once hostile litigation begins the procedural rules and court orders govern disclosure. Section 17 does not provide an additional right retrospectively to avoid the insurance contract because of litigation conduct. Lord Clyde reached the same practical conclusion. Lord Scott considered this reasoning powerful but left the precise boundary open because the absence of dishonesty disposed of the case.

6. The rule that a fraudulent claim is irrecoverable was affirmed. The House did not decide whether such fraud permits avoidance of the policy ab initio or recovery of payments made on earlier valid claims. The broader reasoning in The Litsion Pride was disapproved so far as it allowed non-fraudulent culpable conduct to produce the section 17 remedy.

7. The appeal was dismissed with costs. No special costs order concerning the adjourned hearing was made.

1. House of Lords: [2001] UKHL 1 . The underwriters' appeal was dismissed unanimously, and the Court of Appeal's judgment was affirmed.

2. Court of Appeal: [1997] 1 Lloyd's Rep 360. The court dismissed the underwriters' appeal, allowed the assured's appeal, reversed the finding of privity and entered judgment for the assured for the constructive total loss.

3. High Court: [1995] 1 Lloyd's Rep 651. Tuckey J upheld the section 39(5) defence to the constructive-total-loss claim, rejected the section 17 defence and awarded the assured approximately US$1.7 million for the partial loss.