FACULTY OF LAWLund University

Ognyan Savov

Contentious issues in sue and labour

JASN10 Essay

Master´s Programme in Maritime Law

Maritime Insurance

TABLE OF CONTENTS

1. INTRODUCTION 1

2. SECTION 78 OF MARINE INSURANCE ACT OF 1906. 1

2.1 RELATIONSHIP BETWEEN SUBSECTIONS

78(1) AND 78(4). 2

2.2 SECTIONS 55 AND 78. 2

2.3. SUE AND LABOUR AND SALVAGE 3

2.4. UPPER LIMIT ON THE SUE AND LABOUR CLAIM 5

2.5. SUE AND LABOUR AND PIRACY 6

3. CONCLUSION 8

4. BIBLIOGRAPHY 9

1. INTRODUCTION

Sue and labour is defined as a contract between the insurer and the assured in terms of

which the former agrees to pay the latter the expenses he incurs in an attempt to avert

and minimize a loss occurring as a result of an insured risk.1 In order the claim for the

incurred expenses to be successful, the assured has to prove that the damage was

inadvertent and the actions were undertaken after the risk had appeared. 2 This essay

investigates the interpretation of and recent application of the sue and labour clause

(hereinafter referred to as SLC) by the English courts and discusses the contentious

issues as regards SLC.

In Lohre v Aitchison3 the House of the Lords was concerned with the problem whether

money paid for repairing a ship could be claimed as sue and labour. In that case the ship

was damaged and after she was salved, the owner repaired her and claimed the incurred

repair expenses from the insurer. Could this claim be upheld? Answering in the

negative, Lord Blackburn stated that the actions for the preservation of the ship must

have occurred before and not after the event.4 Furthermore, the link between the

attempts of the labouring party to avoid the accident from happening and the damage of

the insured object must be direct and running in that order.

2. SECTION 78 OF MARINE INSURANCE ACT OF 1906.

Nowadays, the sue and labour expenses are regulated by section 78 of the Marine

Insurance Act of 1906 (hereinafter referred to as MIA). In terms of this section, 5 if the

SLC has been made a part of the insurance contract, the underwriter agrees to pay the

assured the expenses he may reasonably and properly incur in preventing a loss which, if

it occurred, would fall on the underwriter under the other clauses in the policy. 6

Subsection 78(4) goes even further than 78(1) in being written in compulsory terms –

the assured and his agents are, at all times, obliged to take all the necessary steps in order to

avert or minimise a loss.

1 Johnston v The Salvage Association and McKiver [1887] L R 19 Q B D 458.2 National Oilwell(UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyds Rep 582.3 (1878-79) LR 4 App. Cas. 755, HL.4 At 765.5 Ss 78(1).6 Johnston v The Salvage Association and McKiver [1887] L R 19 Q B D 458.

2.1 RELATIONSHIP BETWEEN SUBSECTIONS 78(1) AND 78(4).

It appears from the above paragraph that subsections 78(1) and 78(4) are in conflict.

While the former is advisory, the latter is compulsoty. It is uncertain how to reconcile

these provisions. If they are to stand like that, it would mean too high a burden on the

assured and minimal duty on the insurer to meet his obligations. However, the principle

relating to the assured –”act as a prudent uninsured” – is always in force and should be

adhered to. Therefore and in accordance with this rule, the better interpretation is that

the obligation of the assured as well as the duty of the insurer to compensate such

expenses be mandatory, that is the whole wording of section 78 be formulated in strict

terms. In support of this statement is the wording of the SLC in the Institute Clauses7

which is termed similarly – the assured should not derogate from his duty to take

positive actions in avoiding the accident when its occurrence is inevitable.8 That is, by

not including anything concerning the rights of the insurer, the duty upon him to

compensate for sue and labour is made strict.

2.2. SECTIONS 55 AND 78.

The above reasoning seems to be supported by State of Netherlands v Youell.9 In that

case the Court of Appeal held that the right to sue and labour arises only after an insured

peril has occurred. Furthermore, the court continued, the only time when SLC is

unenforceable is in cases where the assured's failure to prevent/ decrease the effect of the

peril is the prevalent cause of liability. In addition, failure to act could not only prevent

the assured from claiming sue and labour expenses, but could also be equated to a wilful

misconduct and thus trigger section 55(2) of MIA so that the assured be estopped from

claiming insurance. That is, the assured may risk being barred from claiming

compensation for insured risks due to his failure to minimise his loss. On the other hand,

should the parties not put into their contract SLC, the insurer may be free of any liability

relating to sue and labour. Too strange and unfair an outcome should we prefer to argue

that the two provisions of section 78 are independent. Therefore it might be right to infer

that whenever the presence of 78(4) is an issue, the insurer’s duty to recover the sue and

labour expenses be compulsory.

7 Introduced by the Institute of London Underwriters.8 S 11 of Institute Time Clauses - Hulls (available at

http://agency-recovery.com/documents/ITC_CL_289_83.pdf , accessed 23.11.2010); see also s 16 of Institute Cargo clauses (available at http://www.uio.no , accessed 23.11.2010).

9 [1998] 1 LLR 236 (CA) at 241.

It would seem that when there is a failure to act, the insurer could always argue wilful

misconduct – too onerous an issue for the assured claiming sue and labour. Because the

mere failure of the assured to mitigate the loss could be as a result of either negligence

or inability to act under the circumstances or that mere action would endanger the lives

of the assured or his agents.

However, the purpose of insurance is to protect the assured against his own actions or

inactivity. 10 In Youell v Bland Welch & Co Ltd (No.2)11 the court distinguished

negligence from failure to mitigate consequences. The judges held that negligence

debars recovery in cases where the assured deliberately acted unreasonably. In addition,

where it is without any doubt that the failure to act amounts to a wilful misconduct, the

insurer could avail himself to the defence of section 55(2) of MIA.

2.3. SUE AND LABOUR AND SALVAGE

It has been stated by courts that there is no legal duty upon the insurer to reimburse the

assured for expenses incurred in minimising the loss for which the insurer might be held

liable.12 Such an “obligation” cannot be said to be an implied term in a contract of

insurance and therefore if not included in the contract, it is excluded.13 Such a statement

is in unison with the SLC of MIA. However, the argument against it is twofold. Firstly,

it is contrary to the interpretation of section 78 as has been discussed elsewhere.14 And

secondly, if one compares SLC with salvage, the both activities are very similar in terms

of their scope of application.

In order the SLC to be enforceable, it must be put in the insurance contract.15 On the

other hand, different rules apply to salvage. In Royal Boskalis Westminster 16 Phillips LJ,

after a long review of Lohre v Aitchinson,17 stated that that the relationship between

salvage and insurance could be viewed in two different ways. The first occurs when

there is a signed contract between the salvor and the assured. In terms of MIA the latter

could compensate the salvage expenses under section 78.18

10 J. Hill and C. Henley, ‘Post loss insurance obligations’ (available at http://www.inhouselawyer.co.uk/index.php/insurance/7938-post-loss-insurance-obligations , accessed 25.11.2010).

11 ? [1990] 2 Lloyd's Rep 423.12 Yorkshire Water Services Ltd v Sun Alliance and London Assurance [1997]2 LLR 21 (CA).13 The Netherlands Ins Co Ltd v Karl Ljunberg [1986] 2 LLR 19 (PC) at 23; it is in accordance with the wording

of s 78(1) of MIA.14 See the relationship between ss 78(1) and 78(4) discussed on pp1-2.15 S 78(1) MIA 1906.16 Royal Boskalis Westminster N.V. and Others v. Mountain and Others [1999] Q.B. 674.17 (1878-79) LR 4 App. Cas. 755, HL.18 Royal Boskalis (n 17) at 715.

The second comes into play when there is no contractual relationship. In such a case the

salvor renders his services voluntarily on a ‘no cure, no pay’ principle meaning that

should he be successful in his endeavour, by operation of law he has the right to claim

from the insured a lien on the saved property.19 However, the insurer is absolved from

the duty to compensate the insured for the expenses he has incurred in paying the

successful salvor. The reason for this outcome is because the salvor is viewed as the

good Samaritan and not as an agent of the insured so that to fall under the definition of

the section 78.20

Why is the relationship between sue and labour and salvage of relevance? It is because

the both are related towards decreasing the risks against insured losses of the endangered

subject-matter. If the insured is not covered by the SLC, he is not motivated to take

efforts towards minimizing the loss even though violating the principle of the ‘prudent

uninsured’ since his attempts will not be compensated while his insured loss will be

reimbursed, subject to very few exceptions.21

Should salvors succeed in their rescue they could exercise their rights under either the

contract of salvage or the lien. Unlike the first scenario where the salvors get

compensated even unsuccessful in rescuing the insured subject-matter, in the second the

insurer is absolved from its duties to compensate the salvors for voluntarily risking their

lives if unsuccessful in saving the property.22 And the injustice done by the law is

obvious even to the layman – the insurer gets everything (in the form of the rescued

property) while giving very little in exchange to those who deserve much more: the

salvors and the insured.

2.4. UPPER LIMIT ON THE SUE AND LABOUR CLAIM

19 Lohre v Aitchinson (n 7) at 765; see also International Salvage Convention (1995) Art. 12.20 S 78(4).21 See the discussion on p.2.22 Lohre v Aitchinson (n 7) at 760.

Although the case to be discussed next dealt with airplane insurance, it is of relevance to

the present discussion. In Kuwait Airways 23the court had to decide whether sue and

labour expenses could be included in computing the losses to a maximum sum of US

300 mln. In 1990 when Iraq invaded Kuwait, the Iraqi forces appropriated the aircraft,

spares and equipment of the plaintiff at Kuwait Airport. When the insurer paid the

maximum amount of money recoverable by the insurance policy, it claimed that any

extra sue and labour efforts of the insured were at its own expense.

After reviewing the relevant law and citing MIA, Lord Hobhouse stated that the

legislation was favouring the plaintiff.24 However, the contract contained a proviso 25

which had to be read together with MIA and relevant interpretation had to be given force

to. His Lordship gave the ordinary meaning of the words. Thus he concluded that the

intention of the parties had been to put an upper limit of the claim. He considered that

the contract did not go against the law because the sue and labour expenses were still

claimable in those cases where the claim was below the contractual limit.

The language of section 78(1) is not in obligatory terms but is a guideline as to how the

parties could regulate their sue and labour relations. However, if one considers the

wording that “the assured may recover from the insurer any expenses…, notwithstanding that

the insurer may have paid for a total loss”26 (emphasis added), it becomes clear that whatever the

contract of insurance may state, the insurer is always obliged to recover any reasonable sue and

labour disbursements. As such the interpretation of the contract by the House of the Lords goes

against the meaning and purpose of MIA.

One could probably support the decision of the Kuwait Airways if he considers that the property

was insured under the terms of War Risk policy and therefore, in order the parties to be sure of

their rights and duties included additional terms in it. However, such an argument is of little

support. War risks are included because of the probability that the property would be damaged

during the occurrence of similar events. In addition, insurance policy is signed in order to

reimburse the insured when his property is lost or damaged during the occurrence of an insured

event. People insure not because they are sure that an event will happen, but because they are not

sure whether and when it would happen and what the effect on their property would be. The

insurers charge premiums so that if an insured event happens, they compensate the victim. On

the other hand, should an event not occur, they keep the premium to themselves. It is their profit

in the uncertain business they practise.

23 Kuwait Airways Corp v Kuwait Insurance [1999] 1 Lloyd's Rep. 803.24 At 818.25 The proviso is mentioned in the upper paragraph of the essay.26 S 78(1) MIA.

2.5. SUE AND LABOUR AND PIRACY

The interrelationship between SLC and piracy is another contentious issue worth

mentioning. In Royal Boskalis the court of appeal had to adjudicate upon the questions

whether money paid to the state of Iraq could be compensated as sue and labour

expenses. The assured paid Iraqi officials in order the latter to allow the former to

demobilise their fleet and repatriate their employees pursuant to an agreement in terms

of which the insured also agreed to waive all their rights under the contracts they had

with Iraq.27 The judges unanimously agreed, although everyone separately brought his

speech, that expenditure in the form of either a cash payment or waiver of valuable

contractual claims could be brought within the meaning of section 78 of MIA. In

determining of the validity of the claim, the expenditure should, however, be considered

as necessary by a ‘reasonable man’ at the time when the loss occurred.28

Piracy, similarly to Royal Boskalis, is also concerned with payment of ransom in order

crew and/ or cargo kept in captivity to be released. The only difference with the facts of

the case is that with piracy the aggrieved party is uncertain who he deals with – a state

supported organization or individuals trying to either reach their own ends or collect

funds for terrorist activities. The importance of distinguishing these three scenarios is

that while in the former two the courts are apt to agree that a claim against the insurer

could fall within the definition of a sue and labour claim, in the latter the claim will be

excluded.29 The reason is that under the existing international legal regime, sponsoring

terrorist activity is an illegal act and as such it is a criminal offence.30 31

The argument for broadening the scope of SLC to include piracy ransoms is because

under the auspices of the insurance contract the assured is obliged to undertake an

action, reasonable in the circumstances in order to mitigate his own

27 At 678-79.28 S 78(1) MIA; see alsoKuwait Airways (n 24) at 948. 29 R. Wong ‘Piracy – Does it give rise to a claim for General Average?’ at 3 (available at

http://www.seatransport.org/seaview_doc/SV_87/SV_87%20-%20Piracy%20-%20Does%20it%20give%20rise%20to%20a%20claim%20for%20General%20Average%20(1).pdf ,accessed 25.11.2010).

30 Eg TheUK Terrorism Act 2000; see also Art.5 Council of Europe Convention on the Prevention of Terrorism, 2005.

31 ‘ Pirate ransom payments ‘legal’’ (28.10.2008) Fairplay magazine article, (available at http://www.fairplay.co.uk/login.aspx?reason=denied_empty&script_name=/secure/displayMagArticles.aspx&path_info=/secure/displayMagArticles.aspx&articlename=fpnw20081023011nw , acessed 25.11.2010).

losses.32Furthermore, he has to show that when the ransom has been paid, it has been his

best option to avoid further and additional losses 33 as stated in section 78 of MIA.

However, if one looks on the relationship sue and labour – piracy from another

perspective, he may reach to a completely different conclusion. What will happen if we

consider the claim for ransom as a legal way to encourage piracy rather than fighting

it?34 Then even though trying to diminish and oppose it, those connected with the

transportation at sea, sanction it. Quite bad a result. And against it nothing can be done;

with the exception that the ships should avoid sailing in pirate-infested areas. For

example the routes from Asia to Europe and vice-versa should be made around the

southern tip of Africa rather than passing through the dangerous waters of the Gulf of

Aden en route to the Mediterranean Sea.

What if we consider that ransom payment is a new way of defrauding the insurers. It is

not as difficult to achieve it as it may seem. Firstly, the assured can collude with the

pirates and inform them about a ship to be kidnapped. Secondly, they agree on a

percentage to be given to the pirates. Thirdly, in the area where the pirates are located,

lawless states like Somalia, there are no representatives of the insurers to take care of

their interests. Fourthly, the chance that the ship would be returned back to its owner is

much higher than the conventional ways of defrauding insurers35. Fifthly, and most

importantly, there is no upper limit of the claim brought under the sue and labour

definition as long as it can be shown that the payment of the ransom is reasonable and

directed towards limiting the effect of the loss. Issues that seem much easier to cope

with rather than commit an ordinary insurance fraud. It is so because there are very few

cases of bringing pirates before the court36and no international instrument tackling in full

with the issue of piratical activites37 meaning that such fraud would be much easier to

hide, much easier to get the dividends out of it and be sure that its illegality would never

be brought to light.

32 Kneizeh N ‘Piracy under marine insurance policy’, (available at http://www.fichtelegal.com/en/news_article.php?news_id=71 , accessed 26.11.2010).

33 Ibid.34 T. Ricks ’Pirate watch: tumbling dice’ (09.02.2010) Foreign Policy, (available at

http://ricks.foreignpolicy.com/posts/2010/02/09/pirate_watch_tumbling_dice , accessed 25.11.2010).35 eg scuttling.36 Soon several Somali pirates will be brought before the German court for kidnapping a German registered vessel

– M. Gebauer et al ‘First trial of Somali pirates poses headache for Germany’ (20.04.2010) Spiegel online (available at http://www.hiiraan.com/comments2-news-2010-apr-first_trial_of_somali_pirates_poses_headache_for_germany.aspx , accessed 26.11.2010).

37 De Melo Bento L,’“Along Liquid Paths”: The Dualistic Nature of International Maritime Piracy Law’ at 1, (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1682624 , accessed 26.11.2010).

3. CONCLUSION

This essay was concerned with discussing the most relevant problems regarding the

interpretation of the sue and labour clause in the Marine Insurance Act of 1906. It was

argued that once the application of section 78(4) is triggered, the duty on the insurer to

compensate for sue and labour becomes mandatory. In addition, too lenient an

interpretation of the clause could cause bringing of multitude of claims against insurers

under it. However, too strict an interpretation is also not advisable because a lot of

honest claims would not be upheld. Finally, it was argued that when an insurer deals

with ransom claims, he has to be very cautious as the facts of the claim could be

fabricated quite easily without even causing slightest doubt.

 

BIBLIOGRAPHY:

1. CASELAWJohnston v The Salvage Association and McKiver [1887] L R 19 Q B D 458.

Kuwait Airways Corp v Kuwait Insurance [1999] 1 Lloyd's Rep. 803.

Lohre v Aitchison (1878-79) LR 4 App. Cas. 755, HL.

National Oilwell(UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyds Rep 582.

Royal Boskalis Westminster N.V. and Others v. Mountain and Others [1999] Q.B. 674.

State of Netherlands v Youell [1998] 1 LLR 236 (CA).

The Netherlands Ins Co Ltd v Karl Ljunberg [1986] 2 LLR 19 (PC)

Youell v Bland Welch & Co Ltd (No.2) [1990] 2 Lloyd's Rep 423.

Yorkshire Water Services Ltd v Sun Alliance and London Assurance [1997]2 LLR 21

(CA).

2. LEGISLATION

Institute Time Clauses – Hulls, available at

http://agency-recovery.com/documents/ITC_CL_289_83.pdf , accessed 23.11.2010.

Institute Cargo clauses, available at http://www.uio.no , accessed

23.11.2010

International Salvage Convention (1995).

The Council of Europe Convention on the Prevention of Terrorism, 2005.

The UK Terrorism Act 2000.

3. ARTICLES

De Melo Bento L,’“Along Liquid Paths”: The Dualistic Nature of International

Maritime Piracy Law’, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1682624

accessed 26.11.2010.

Jeremy Hill and Christopher Henley, ‘Post loss insurance obligations’, available at

http://www.inhouselawyer.co.uk/index.php/insurance/7938-post-loss-insurance-obligations , accessed

25.11.2010.

Mikael Gebauer et al ‘First trial of Somali pirates poses headache for

Germany’( 20.04.2010) Spiegel online, available at

http://www.hiiraan.com/comments2-news-2010-apr-first_trial_of_somali_pirates_poses_headache_for_germany.aspx

accessed 26.11.2010.

Nicola Kneizeh ‘Piracy under marine insurance policy’

available at http://www.fichtelegal.com/en/news_article.php?news_id=71 , accessed 26.11.2010.

‘Pirate ransom payments ‘legal’’(28.10.2008) Fairplay magazine, available at http://www.fairplay.co.uk/login.aspx?reason=denied_empty&script_name=/secure/

displayMagArticles.aspx&path_info=/secure/displayMagArticles.aspx&articlename=fpnw20081023011nw ,

acccessed 25.11.2010.

Raymond Wong ‘Piracy – Does it give rise to a claim for General Average?’, available

at http://www.seatransport.org/seaview_doc/SV_87/SV_87%20-%20Piracy%20-%20Does%20it%20give%20rise

%20to%20a%20claim%20for%20General%20Average%20(1).pdf , accessed 25.11.2010.

Thomas Ricks ’Pirate watch: tumbling dice’ (09.02.2010) Foreign Policy, available at

http://ricks.foreignpolicy.com/posts/2010/02/09/pirate_watch_tumbling_dice , accessed 25.11.2010.