Beware the literal

Insurers should be wary of reliance on an apparently iron-clad warranty. Context is critical, and the courts will look beyond the mere words to discover the true intentions of the parties.

In Pratt -v- Aigaion Insurance Company [2008] EWCA Civ 1314, the Court of Appeal held that insurers were not entitled to rely on a warranty to decline indemnity. Rather, their Lordships said, one must look to what a reasonable man would have understood the parties to mean by the clause in the situation they were in at the time of the contract.

Mr Pratt owned a trawler which suffered fire damage while berthed. At the time, no crew were on board. The insurance contract with Aigaion warranted

“Owner and/or Owner’s experienced skipper on board and in charge at all times and one experienced crew member”.

Insurers argued that the terms of the warranty were unambiguous, there had been a breach and hence they were entitled to decline cover; the owners said that this interpretation ignored the fact that the clause plainly applied only to periods when the vessel was navigating or working and, if applied literally, would lead to absurd results.

At first instance, Mackie J found in insurers’ favour and refused leave to appeal. Sir Paul Kennedy did give leave, saying “the words ‘at all times’ cannot have been intended to be read literally”.

Sir Anthony Clarke, the Master of the Rolls, noted that “any clause in a contract must be construed having regard to its context within the contract, which must in turn be set out in its surrounding circumstances or factual matrix”, and cited Hoffman LJ’s comments in ICS -v- West Bromwich Building Society [1998] 1 WLR 897: “The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean”.

While there is no conceptual limit to what might be relevant, the emphasis should be on the conventional above the fanciful (Hoffman LJ in BCCI -v- Ali [2001] UKHL 8), and the commercial over the literal (Steyn LJ in Sirius Insurance -v- FAI [2004] UKHL 54). Attention is to be placed on the actual language used, applying the ‘ordinary’ meaning of the words in question while bearing in mind the sometimes inevitable use of specialist vocabulary (Mustill LJ in Charter Re -v- Fagan [1997] AC 313).

Their Lordships found for Mr Pratt. While accepting that the court “must not invent a new bargain for the parties”, Sir Anthony found that “the underlying purpose of the warranty…was to protect the vessel in circumstances in which at least two members of the crew…could be expected to be on board.”

Those circumstances, Sir Anthony held, were probably when the vessel was navigating, manoeuvring and perhaps landing her catch, and this was a necessary qualification to the “at all times” on which insurers pinned their case. How far that qualification went was open to question, but the clause must then be decided contra proferentem, i.e. in this case against insurers.

Reinforcing the main judgment, Stanley Burnton LJ noted that the incorporated trawler wording provided cover in circumstances where it would be unlikely or impossible for any crew to be on board, such as when the vessel was in a shed or being dismantled. That, of itself, indicated that “at all times” cannot have meant “at all times” stricto sensu.

For insurers, the message is clear. While the courts will look to the words of the agreement, they are concerned above all with giving effect to the true intentions of the parties. In a clash between the two, the latter will prevail.