MARINE INSURANCE

SUE AND LABOUR’: THE ASSURED`S DUTY OF MITIGATION

A GENERAL DUTY AT COMMON LAW OR A CONTRACTUAL OBLIGATION?

PLEASE EXAMINE THIS `DUTY` TO MITIGATE AND CRITICALLY ASSESS THE EXTENT TO WHICH IT IS A DUTY AND ANY POTENTIAL PROBLEMS IN A MARINE INSURANCE CONTAINING A SUE AND LABOUR CLAUSE THAT SUCH A REQUIREMENT, IF NOT TAKEN SERIOUSLY, MIGHT CAUSE.
 

Discussion of the `Sue and Labour` clause

``Sue and Labour` is a clause in the Marine Insurance Act (1906) and its appendixes, the Institute Clauses for hulls and cargo. Although both parties, the insurer and the insured can make an agreement leaving out such a clause from their policy, expenses that fall under the `Sue and Labour` clause could be recoverable. This decision was made in the Australien case, Emperor Goldmining Co v Switzerland General Insurance Co [1964]1 Lloyd’s Rep 348.

The opposite view is held likewise. In the case Integrated Contained Service Inc v British Traders Insurance Co [1981] 2 Lloyd’s Report 460 the judge decided in the contrary way. Hodgesa (1997) concludes, where parties agree to leave out a ‘Sue and Labour’ clause, it is likely that such expenses will be covered only, if a similar clause in the policy states the reimbursement of such costs.
S 78(4) expressly states that it is ‘in all cases’ the duty of the assured to avert or minimise a loss. Does this mean a ‘Sue and Labour’ clause is implemented anyway? The Australian case above indicates that it is not in every circumstance necessary to include an express clause in order to receive reimbursement.
One question resulting from such a decision might be: How will a case be assessed when the assured refrains from doing mitigation in a policy without a sue and labour clause in contrast to a policy with it included?

Even though `Sue and Labour` are extraordinary expenses they do not include charges for general average, salvage or cost which arise from defending or instituting a collision action.
As Lord Hatherby (Hodgesa, p.454) said “The suing and labouring clause was inserted by the underwriters for the purpose of securing the benefit of any pains that the shipowner might be inclined to take in preserving, for their benefit, as much as he possibly could preserve”:
The assured need to be aware of the fact that expenses for averting or minimising loss will only be covered when the subject is insured against such a peril [acc. to section 78(3)]. This is as reasonable as the circumstance that the police covers the nature of the loss (partial or total) likewise.
The `Sue and Labour` clause is not one of those clauses which can be easily identified and applied to a certain case, i.e. in s 78(4) it is stated that only reasonable measures taken by the assured are part of `Sue and Labour`.

 

In cases where the police covers a total (or partial) loss, additional cost by suing and labouring may arise and regarded as legal matter. Thus an insurer must bear the cost for the total loss and for expenses which derive from the trial to minimise loss. The latter however can not exceed the value of the insured vessel and therefore insurer are limited in their liability, i.e. maximum twice the insured value of the vessel.

Breach of Duty to Sue and Labour

Section 11(1) of ITCH (95) states:

In case of any loss or misfortune it is the duty of the Assured and their servant and agents to take such measures as may be reasonable for the purpose of averting or minimising a loss which would be recoverable under this insurance.

The duty is expressed in round terms but what will be the consequences if the assured or their servant and agents fail to do so?
Whether The Marine Insurance Act (1906) nor the ITCH (95) give an explicit answer to such a question. Formulating it trivial, it is a matter of good seamanship and ‘utmost good faith’ to minimise loss. An insurer might avoid a contract in advance when he is convinced that the insured partners can not guarantee both rules. “By s 55 (2) (a), an insurer is not liable for any loss ‘attributable’ to the wilful misconduct of the assured (Hodges, p.465).”
Nevertheless, one should distinguish between cases where the Assured is accused of negligence and where the vessel’s crew can be held liable for wilful misconduct. The term ‘proximate cause’ plays a main role when it comes to recoverable losses. If the court comes to the conclusion that negligence or wilful misconduct of the assured was the proximate cause for a loss, the insurer is not forced to pay anything. An exception would be a loss, which would have happen anyway, regardless the fact of taken action, or not. But it is unlikely that such a case will be regarded as the ‘proximate cause ‘. Here, one must mention the fact that according to cl 6.2.2 of the ITCH (95) negligence of pilots, masters and crew is not restricted on the term ‘proximate loss’.

An example case is Currie and Co v The Bombay Native insurance Co (Hodgesa, p.464) where a captain and uninsured part-owner failed to minimise the loss of cargo. The vessel was insured for a total loss only and the cunning captain disregarded any advice from surveyors to save the cargo or part of it. Thus it is not surprising that the judge decided against the assured who claimed for total loss. In the statement delivered by the court it was stated that:

This omission of the captain to take any steps towards saving the cargo, at a time when it was probable that this endeavours would be successful, in their Lordships’ judgement, precludes the assured from claiming for a total loss of the cargo into whatever condition it might have been brought afterwards(cited in Hodgesa, p. 464).


Thus one possible consequence of breaching the duty of sue and labour the assured looses the right of recovery although according to Hodgesa (1996) it is unclear whether an insured can defend himself by raising the breach of sue and labour against the plaintiff who claims for reimbursement. At least, the assured should know that in cases where he fails to minimise loss for his insured property his claims could be rejected. A clever insurer will try to plead for the breach of such a duty as a defence or counterclaim.

But as one could see from the case of State of The Netherlands v Youell [1998] 1 Lloyd’s Rep 236, CA Underwriters can be held liable even if a breach of contract occurs. Phillips LJ declared:
“...the section [78(4)] does not impose a conventional contractual duty which displaces, after a casualty has occurred, the general principle embodied in s 55(2) (a) (Hodgesb, p. 783).”


Difficulties with ‘Sue and Labour’ in Marine Insurance


Difficulties may arise when ‘Sue and Labour’ comes in conflict with other clauses of the Marine Insurance Act and ITCH (95). An outstanding example is The Gold Sky. The vessel sank and the insurer counsel found the Master guilty who refused to take tug’s assistance and continued the regular voyage. The master should have known that his vessel, which collided with a rock, was in danger and should have approached a port of refuge for repair. The former argued that this was a breach of the duty to sue and labour and moreover the case was referred to s 78(4) where it is a general duty of the assured to minimise loss. On the other hand s 55(2) (a) states that the insurer is liable when the loss is proximately caused by a peril insured against. It does not matter whether the master or crew acts with negligence or wilful misconduct.

The judge decided on s 55(2) (a) and stressed the circumstance that the assured shipowner can not be held liable for the negligence of “his” master.
Arnould (Hodgesa, p. 467) tried to solve this problem by drawing a line between negligence before and after a casualty. To contribute to s 78(4) assured would get benefit from s 55 (2) (a) only before an accident occurs.
But not only 78(4) and 55(2) (a) interact with ‘Sue and Labour’. Clause 6.2.2 of the ITCH (95) gives no restriction at all for its application or in other words:
This clause does not imply any constraint, e.g. the duty to minimise a loss or exclusion for misconduct before or after a casualty. Arnould (Hodgesa, p.468) sees no conflict between clauses 6.2.2 and 55 (2) (a) and 78 (4) since the former does not refer to a casualty at all. It is a general rule, which frees the master and crew in any case of negligence whether performed before or after an accident. This proposition however takes for granted that 6.2.2 prevails over 78 (4).
Summarising the facts that are given above, there are 3 clauses in the Act and the ITCH (95) which interact very intensive with `Sue and Labour` and therefore cause difficulties in interpreting a case:

s 55 (2) (a)
“… insurer is liable for any loss proximately caused by a peril insured against , even though the loss would have happened but for the misconduct or negligence of the master or crew

s 78(4)
“It is the duty of the assured and his agents, in all cases, to take such measures as may be reasonable for the purpose of averting or minimising a loss.

ITCH (95)
“6.2 This insurance covers loss of or damage to the subject matter insured caused by:
6.2.2 negligence of Master Officers or Crew or Pilots”


‘Sue and Labour’ Expenses: Common Law or contract ?


The case

MacMillan Bloedel Ltd and Canadian Transport Co. Ltd. v. John
Richard Ludbrook Youell and Others (1993) 79 B.C.L.R. (2d) 326,
supplementary reasons (1994) 95 B.C.L.R. (2d) 130, leave to appeal to the
Supreme Court of Canada refused (1994) 91 B.C.L.R. (2d) XXXVI; [1993] ILR
I-2980 reversing [1991] ILR I-2722, 2 CCLT (2d) 241

is one example where the question of common law or contract was decided by the British Columbia Court of Appeal. A short summary of the case is intended to make the facts of the case clear:

The MacMillan subsidiary Canadian Transport Co. Ltd (CTCO) was a time charterer of MV Warschau and agreed with the owner to carry coal from New Orleans to Taiwan.
On the voyage it was noticed that the cargo was subject to spontaneous combustion and therefore discharged in Long Beach. The Warschau was directed to another port and several days later MV Dresden carried the coal from Long Beach to Taiwan.
The Shipper claimed against CTCO and the Owners for reloading costs and damage to the coal whereas the latter initiated arbitration in London against CTCO to determine responsibilities regarding the claims of the Shipper. The time charterer found liable for the costs the Owners had to bear before and the case went on in British Columbia. Thus the three parties involved were the Shipper, CTCO and the owner of the vessel Warschau.
CTCO tried to recover their cost amounts from the Underwriters, who agreed to bear costs which are not covered by ‘sue and Labour’ (damage to the Warschau, Owner’s portion of loss and damage to the coal) but refused to take liability for sue and labour expenses. Two policies existed whereas one was on the standard S&G

(ship and goods) form and the other standard hull form. The standard printed wording was recognised as sue and labour although not explicitly titled.
CTCO argued that the policies were perils of the sea policies and due to the above mentioned supplement documents, which ensures that the Underwriter cover ‘sue and Labour’ expenses.
CTCO referred furthermore to the circumstance that ‘Sue and Labour’ costs are recoverable at common law, regardless of such a clause.
The Underwriter however, expressed that risk was not covered by these policies and ‘Sue and Labour’ expenses are not subject of common law right.
For the trial judge, CTCO was not entitled to claim for sue and labour as a matter of contract even though this clause was included in the liability policies. The judge concluded that risk was not a component in sue and labour. Nevertheless, the trial judge stressed that:

...’sue and labour’ expenses were, nevertheless, recoverable at common law under the doctrine of ‘imminent peril’ (cited in .

Walton J ‘s decision in Cunard Steamship Company v Marten (cited in Clemens & Swanson) was the basis for the British Columbia Court of Appeal where the Underwriter tried to revise the decision mentioned above.

The difficulty of determining whether the suing and labouring clause forms part of the contract of insurance in this case arises (as so frequently happens in questions of marine insurance) from the very peculiar way in which contracts of marine insurance are expressed. [...] In almost all cases certain parts of the printed form have no application to the risk described by the written words.
The Court of Appeal concluded that CTCO could not contractually rely on the ‘sue and labour’ clause in terms of expenses related in minimising loss and reversed the trial judge’s finding that ‘sue and labour’ type expenses were recoverable at common law:
The following rhetorically question was asked:

Is a person insured under a policy covering his liability at law to third persons entitled to recover from his insurer as a matter of law expenses which he incurs to minimise the amount of liability when his breach of contract or tortious act has occurred and damage to a third person is occurring (cited in Clemens & Swanson)?
Southin Ja concluded that duties derived from a contract have their fundaments in the contract itself and a claim based on common law will not succeed. The judge even refused to accept that expenses were proximately caused by the perils insured against.

Excursion to the world of contractual law

A breach of contract represents an infringement of contractual rights and it is a right to proceed against the contract-breaker. There is however a difference between primary and secondary obligations in contractual law. For marine insurance policies it would mean that the insurer would pay for the loss an assured is insured against.

Secondary obligations on the other hand are substitutes when a breach of contract has been committed, i.e. compensation for damages.
When it is clear who did the repudiation then the opposite party has different remedies to get satisfaction applying legal rights.

Sue for unliquidated damages
? Judge assesses the money value of the sustained loss and credit this sum to the victim-party

Sue for liquidated damages
? Contracting partners make a reasonable pre-assessment of the loss which is expected if a party breaches the contract in a particular way. The contract breaker must pay the calculated amount. One distinguishes from the former a penalty, i.e. a sum payable as a kind of punishment for breaching the contract.

Sue for quantum meruit
? The plaintiff sues the breaker for a service provided and wants to get paid for it

In contractual law one distinguishes moreover between fundamental breach and breach of condition. The consequences in both cases vary. A contract-breaker may be agree to pay a penalty or in the worst case the innocent party terminates performance of the contract. It is recognised that the consequences depend on how strict the terms are formulated in a contract.
But when it comes to the ‘duty’ to mitigate a loss, one should be aware that it is

... technically incorrect to state that the plaintiff is under a ‘duty’ to mitigate his loss because he does not incur any liability if he fails to mitigate his loss.[...] ... but, if he [the plaintiff] fails to mitigate his loss, he will be unable to recover that portion of his loss which is attributable to his failure to mitigate (McKendrick, p.314).

 

Summary and conclusion:


The case of CTCO does not describe the relationship between the ‘duty’ to sue and labour and possible consequences for failure to minimise loss. However, here one gets an impression of the difficulties in Marine Insurance policies when it comes to the question whether ‘Sue and Labour’ is common law or contractual obligation. The Canadian court of Appeal regards ‘Sue and Labour’ not as common law when it comes to the assured’s claim for recovering expenses incurred to avert insurer’s liability. At the beginning of this essay it is said that a contract without a ‘Sue and Labour’ clause is ambiguous in terms of reimbursement of such expenses. Leaving out sue and labour from a policy may result in the fact that an assured will not get recompenses from an insurer or at least, it is according to Hodges (1996) the preponderant British point of view.


This however, leads to the conclusion that ‘Sue and Labour’ might have elements of contractual law.
Ivamy (1993, p. 128) concluded that:
“The continental codes embody the conditions of the ‘sue and labour’ clause so that under those codes the liability of the insurer is determined by law, whereas in England it rests on contract.”
Contractual law has a doctrine of mitigation of loss and the established view on the ‘duty’ to mitigate is according to Bennett (1997, p. 387) rather a kind of liberty than obligation and confirms the statement given above where `contract law´ was briefly described.

Again, ‘Sue and Labour’ should not be left out in the assumption that it is subject of common law and will apply automatically when sue and labour expenses occur. The past has shown that this is might be the case but not the rule. A ‘duty’ to mitigate is therefore not indisputable related with common law, as far as Marine Insurance is concerned. If the assured acts against s 78(4) it is contravention to
“... a condition attached to the right to claim damages.(cited in Bennet, p.387).”
Hence:
Mitigation is not a duty but a liberty or privilege, and the innocent party enjoys the freedom not to mitigate, albeit not at the expense of the contract breaker (Bennett, p.387).
According to Bennett (1996) the duty to sue and labour is a duty without ‘sharp teeth’ and can not be entirely classified as common law or contractual law.
The effect of such a breach might be different and dependent on the individual case. Everleigh LJ made an effort to clear that matter and said:

While it is not possible to state with certainty all the adverse consequences which will be suffered by an assured who fails to perform his duty under the sue and labour clause, there is no doubt that he incurs a risk of his claim for loss and damage being rejected in whole or in part if it can be shown that he failed to act when he should have done (Hodgesb, p.783).

The rule 30(2) of the Britannia P&I club supports this view by stating that it is the discretion of the Committee [of the Britannia P & I club] to
“... reject a claim or reduce the amount payable (Bennett, p.386).”

This essay has highlighted different opinions and results related with `Sue and Labour` as an important clause of Marine Insurance Policies. In my opinion the `duty´ to minimise a loss is in most cases of importance for the assured too, who would risk their claims to be rejected when they fail to avert or minimise a loss, whether a `Sue and Labour` clause is included in the policy or not. In most examples I read the view is held that the `duty` to mitigate relates to contractual law and the contract-breaking party has to bear the consequences for its breach.

 

Reference List:

Bennett, H. (1996). The Law of Marine Insurance. First Edition). Oxford University Press Inc. New York

Clement and Swanson. (1995). `Sue and Labour` expenses: Common law or contract?. sent by FAX

Hodges, S. (1996). Law of Marine Insurance. (First Edition). Cavendish Publishing Ltd, London

Hodges, S. (1999). Cases and Materials on Marine Insurance Law. (First Edition). Cavendish Publishing Ltd, London

Ivamy, H. (1993). Chalmers’ Marine Insurance Act 1906. (Tenth Edition). Butterworth & Co, London

Major, W.T. (1988). Law of contract. (Seventh Edition).Pitman Publishing, London

McKendrick, E. (1994). Contract Law. (Second Edition). the MacMillan Press Ltd, Hampshire and London

*Note:
A full reference to the cases cited in Hodgesa, Hodgesb and Bennet can not be given here since due to the high demand only copies of the relevant book-pages were available.

 

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