International Business Law: Insurance Contract - Coursework Example

?International Law Question When Linda insured her cargo under Lloyd’s Marine Policy and Institute Cargo Clauses A she created an insurance contract between her and the insurer. An insurance contract is contract that binds the insurer to compensate the insured upon “the occurrence of a future uncertain event” or for a specific occurrence on an “uncertain date” if the insured “has an interest in that event” and the insurer has no control over that event.1 Linda’s insurance contract is by definition a marine insurance which in general terms has the same legally binding premise of an ordinary insurance contract.2 Since Linda’s insurance contract incorporates Lloyd’s Marine Policy it is a marine insurance contract and thus it is governed by the Marine Insurance Act 1906.3 As a result, Linda has a “contract of indemnity” which essentially entitles her to expect to have or to acquire an insurable interest the property insured.4 In this regard, an insurable interest is conferred upon any individual with an interest in a marine adventure.5 In turn an individual has an interest in a marine adventure when: ...he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.6 Pursuant to Section 6(1) of the Marine Insurance Act, interest will attach when the insured has an interest in the “subject-matter insured at the time of the loss”.7 The interest need now exist at the time the insurance contract is formed.8 Therefore as long as the insured has an interest in the subject-matter at the time of the marine adventure, the insured is entitled to claim damages. It therefore follows that Linda has an insurable interest since the insurance contract was specifically underwritten to protect her against damages to her cargo. Since Linda’s insurance policy applies the Institute Cargo Clause A, “all risks of loss or damage to the subject-matter” is insured.9 All risks is a potentially broad phrase and can include any loss that the insured can prove was a result of an accident of an event without having to proves the particular of the accident of event resulting in the loss.10 It is sufficient for the insured to demonstrate on a balance of probabilities that the damages were a result of perils at sea that are not ordinarily experienced.11 This is important because all Cargo Clauses contain an exclusionary clause which prohibits recovery of damages in circumstances where damages are caused by ordinary perils at sea.12 Another feature of the Cargo Clause A as well as Cargo Clauses B and C is the transit clause. The transit clause covers all damages surrounding the voyage at sea which includes transfer from the warehouse, loading and all interim transport of the goods until they reach their final destination.13 Thus far, it would appear that Linda has full coverage since she adopted the Cargo Institute Clause A. However, there is one problem that might undermine, Linda’s ability to enforce the insurance contract. Clause A, like Clauses B and C contains a War Exclusion Clause and unless removed, Linda is bound by the War Exclusion Clause.14 When war clauses provide coverage in a marine insurance contract damages can be recovered for: War, civil war, insurrections, revolutions, rebellions, civil strife related to any of these situations, hostile episodes relative to a hostile authority. Capture, arrest, restraint, seizure, detention (relative to risks associated with war or categories of war) or attempts to commit any of these acts. Torpedoes, mines, bombs or other military weapons.15 Based on the facts for discussion it is uncertain whether or not Linda’s marine insurance policy specifically covers war and the incidents typically included when an exclusionary War Clause is deleted from the Institute Cargo Clause A. However, marine adventure as provided for in Section 3 of the Marine Insurance Act 1906 is broad enough to cover the hijacking incident at sea. To this end Section 3 of the Marine Insurance Act 1906 that all “lawful marine adventure may be the subject of a contract of marine insurance.”16 For this purpose a marine adventure exists when: (a) Any ship, goods, or other movables are exposed to marine perils. Such property is in this Act referred to as ‘insurable property’. (b) The earning or acquisition of any freight, passage money, commission, profit or other pecuniary benefit or the security for any advances, loan or disbursements is endangered by the exposure of insurable property to maritime perils. (c) Any liability to a third party may be incurred by the owner of or other person interested in or responsible for, insurable property, by reason of maritime perils.17 Section 3 of the Marine Insurance Act 1906 goes on to describe in more detail what a marine peril is. Maritime perils are thus any peril that arises out of the journey at sea including sea perils, fires, wars, pirates, captures, seizures, restraints, detainments, barratry, jettisons, rovers, thieves restraints and “any other perils, either of the like or kind or which may be designated by the policy.”18 Again, Section 3 contemplates that marine adventure as defined therein may be provided for in the relevant insurance policy. Therefore, in order for Linda to claim damages to her cargo as a result of the hijacking incident, marine adventure would have had to have been deliberately included in the contract of insurance. Marine adventure is not an implied warranty. Seaworthiness however is an implied warranty,19 but it is doubtful that marine adventure would qualify as coverage under seaworthiness. According to Section 39(4) of the Marine Insurance Act 1906: A ship is deemed to be seaworthy when she is reasonably fit in all respects to encounter the ordinary perils of the seas of the adventure insured.20 It is therefore only necessary for the ship to be able to weather the ordinary perils of the voyage. In general, seaworthiness covers weather and a ship is typically seaworthy when it is capable of weather reasonably foreseeable bad weather and can survive in fair weather conditions.21 Channel J however, expounded on the definition of seaworthiness and determined that a ship is characterized as seaworthy when the ship has the: Degree of fitness which an ordinary, careful and prudent owner would require his vessel to have at the commencement of her voyage, having regard to all the probable circumstances of it.22 In Gibson v Small the court effectively tied together the common law and statutory definitions of seaworthiness so that it is generally expected that ship will be deemed sea worthy if prior to starting the sea voyage, a “prudent” and “uninsured” owner would take all steps to ensure that the ship is able to: Meet the perils of the service it is then engaged in, and would continue so during the voyage unless it met with extraordinary damage.23 It therefore follows that unless Linda can prove that the hijacking was a reasonably foreseeable incident that the ship owners or navigators should have contemplated and prepared for, she will not be able to use the implied warranty of seaworthiness. The implied warranty of seaworthiness contemplates that ships are not perfect and cannot withstand all marine adventures. However, if in the circumstances an extraordinary marine adventure is contemplated and the ship sets sail nonetheless, it is expected that the ship will be prepared to safeguard against these extraordinary adventures and/or events. Certainly a ship can only take limited physical precautions against the incidents of hijacking on the high seas or in any port. It would appear that regardless of equipment or construction of a ship, there is little else in the construction of a ship that can prevent its being hijacked if rebels are intent on hijacking the ship. Much would depend on the ship’s crews’ ability to prevent a hijacking or to salvage the cargo in the event of a hijacking. To this end, the implied warranty of seaworthiness in this instance must be tested against the ship’s crew. As Soyer informs: The human factor plays a vital role in seaworthiness of any vessel. It has been submitted that, while a good master may save a poor ship, a poor master may lose a good one.24 In this regard, a ship is only seaworthy, regardless of the quality of its construction if it has sufficient crew members with the necessary skills to navigate the ship during and throughout the journey chartered.25 At the end of the day, if the ship’s crew was incompetent or largely inefficient and this inefficiency or incompetency somehow resulted in or facilitated the hijacking, Linda may rely on the implied warranty of seaworthiness. If Linda cannot establish that the ship was unseaworthy in that the hijacking was within the reasonable contemplation of the ship’s navigators and they failed to prepare properly for it, or that the ship’s crew were incompetent or inefficient in its response to the hijacking, Linda will not be able to recover the damages. However, if the war clauses exclusion is not a part of Linda’s insurance policy under the Cargo Institute Clause A, Linda will be able to fully claim damages pursuant to the definition of war and marine adventure. In both cases, the hijacking would amount to war and misadventure as defined by statute (Marine Insurance Act 1906 and the Cargo Institute Clause A). Question 2 With the signing of contracts between Mega Branch Industry (MBI) with firms in various jurisdictions it is advisable that the contracts incorporate the United Nations Convention on Contracts for the International Sale of Goods 1980 (CISG). CISG can be very useful for determining with minimum tension, what should be the governing law of the contracts in the event a legal issue arises. CISG was specifically implemented to harmonize the rules and the law that regulate international commercial contracts and thus remove, or at the very least reduce the uncertainties that typically arise in international commercial contracts.26 If MBI and all of the firms with whom MBI is contracting are located in countries that are signatories to the CISG, the CISG will apply by default if it is not specifically included in the individual contracts.27 According to Article 1(1)(a) of CSIG, where a contract for the sale of goods involves businesses that are located in states that are signatories to CISG, the CISG will apply automatically.28 The consequences of the applicability of CISG are significant for avoiding one jurisdiction applying its law to a contractual dispute on another party from a different jurisdiction. For example, if there is dispute between MBI and the firm in Russia and the Russian firm initiates an action in Russia against MBI, Russian law would not automatically determine the rights and obligations of the parties. Although the Russian court will have jurisdiction over the matter, it will be bound to apply the provisions of the CISG. Russia is a signatory to the CISG.29 The same would be true if the dispute is filed in Nigeria who is also a signatory to CISG.30 Since the UK is not a signatory to the CISG,31 it is advisable that the contracts specifically choose the CISG as the governing law of the contract. With CISG governing the various contracts, any court seized of the matter will be compelled to look to Part II of CISG to ascertain first and foremost if the parties to the dispute have a contract to which CISG is applicable. Once the court is satisfied that the disputants have a contract to which CISG applies, the court will then look to Part III of CISG to ascertain the disputants’ duties, rights and remedies for a number of issues including issues relative to breach of contract and “the passing of risk.”32 Even where only one of the parties to dispute is a signatory to the CISG and the court seized of the matter is in a jurisdiction which is a party to the CISG is at liberty to apply CISG to the determination of the issues giving rise to the dispute.33 In fact, it is even possible for a court in the UK to apply the CISG despite the fact that the UK is not a party to the CISG.34 If the UK wishes to avoid the application of the CSIG to the contracts, it will be necessary to specifically state that the CISG will not apply to the contract. This is facilitated by Article 6 of CISG which provides as follows: The parties may exclude the application or, subject to Article 12, derogate from or vary the effect of any of its provisions.35 Article 12 of CISG refers to the formal requirements of a contract and permits parties to exclude the formal requirements evidencing a contract formation if the formal requirements of the CISG are inconsistent with the contracting state’s formal requirements. Since the contracts to which MBI will sign are going to be in writing, derogation will not be an issue. Article 11 of CISG does not require that a contract be proved in writing. A contract will be valid if it is proved by other means “including witnesses”.36 The main question is whether or not MBI wants to have CISG apply to the contract. It would appear that since China, Russia and Nigeria are all contracting states and the UK is not, the UK could find that any issue arising between MBI and any of the other states may be subjected to CISG by default. Thus, if MBI does not want CISG to apply to the contracts, it will have to specifically draft an exclusion clause in the body of the contracts pursuant to Article 6 of CISG. In the event MBI decides that CISG applies to the contracts, it will be the substantive law governing the contract. However, there may be some difficulties when issues arise under the contract that are not covered by CISG.37 CISG does not apply to consumer contracts, auction, sales conducted by “authority of law”, the sale of aircraft or sea vessels, or the sale of electricity.38 Additionally, contracts for services such as labour will not be covered by CISG.39 It is also important to note that CISG does not apply to determining the validity of contracts or the “the effect which the contract may have on property in the goods sold”40. Article 5 of CISG goes further to provide that: The Convention does not apply to the liability of the seller for death or personal injury caused by the goods to any person.41 It would therefore appear that in the event, MBI decides to choose the CISG as the applicable law a number of substantive issues may arise that are not covered by CISG and the court seized of the matter will be required to resolve those issues by identifying and applying the law. In this regard, unless specific parts of the contract are specifically governed by a choice of law CISG rules of determining the applicable law will be applied to the substantive issues that are not covered by CISG. In this regard, Article 7(2) provides valuable guidance as to how and when the applicable law will be determined. Accordingly, any matters that are not “expressly settled” in the Convention will be “settled in conformity with the general principles on which” the Convention “is based, or in the absence of such principles, in conformity with the law applicable by virtue of the rules of private international law”.42 Thus where the parties to an international contract for the sale of goods are subject to CISG and some issues arising under the contract are not expressly covered by CISG, the courts will look to private international law, specifically the rules applicable to conflict of law or the choice of law rules for determining the applicable law.43 The court may also look to the national laws of one of the states’ for applying the choice of law rules to determine what law should govern the specific issue that is not covered by CISG.44 This may be problematic for MBI if a law suit is taken out by one of the parties in China, Russia of Nigeria. Perhaps the choice of law rules there are no different from the choice of law rules in MBI’s country of residence. Or they may be quite different. More importantly, the substantive laws that are applicable to the issues not covered by the CISG may be quite different from the substantive laws of MBI’s country of residence. In the event the courts of either Nigeria, Russia or China determine that that applicable law is that of one of these three states, MBI may be at a tactical disadvantage unless it can hire attorneys that are experts in the applicable law. Even so, the substantive laws may be unfavourable to MBI or conceivably unjust. In order to ensure that MBI obtains a result that it would regard as fair regardless of the outcome, all efforts should be made to negotiate a choice of law clause for substantive law that MBI and the other parties to the contract are equally comfortable with. While there is some assistance elsewhere in CSIG for filling in the gaps where CISG does not apply and no choice of substantive law is made, MBI cannot be assured that the applicable substantive law will be one that it has confidence in. In any event, where the parties to the contract have not specifically chosen the law to deal with issues not covered by contract, Article 8 seeks to fill in the gap by providing that regard must be had to the intention of the parties.45 In looking to the parties’ intention the courts will determine whether or not the parties intended to apply the CISG to their contract or some other law.46 In this regard, the courts will take full account of the all the circumstances of the case including the pre-negotiation process, the common practices of the parties and any other relevant fact that could be reasonably inform the general understanding and intentions of the parties.47 Jurisdiction under the CISG may also be interpreted by reference to Articles 31 and 57 of CISG. 48 Both of these Articles take account of the place where performance of the sale of goods are to be completed and thus relate directly to the facts and circumstances used for determining the parties’ intention relative to the applicable substantive or governing law of some parts of the contract not specifically covered by CISG.49 Article 57 in in particular can be problematic for MBI, assuming it is situated in the UK and thus bound by the Brussels Convention applicable to contracts sales within the EU and between EU member states and other parties. Article 57 designates the place of delivery as a key factor in determining the parties intention. According to Aquafi li Textile Yarns S.P.A. v Updeals Ltd. Tribunal di Roverto Italy 28 August 2004, the rules under the Brussels Convention will prevail over CSIG.50 However, MBI will only obtain this result if the case is tried before a court in an EU member state. If the case is tried in any of residents of the other parties with whom MBI is contracting, EU law will not apply unless specifically provided for under the contract or unless the other court determines that MBI’s domestic laws are the laws applicable to the issues arising under the contracts that are not provided for under CISG. Another issue that should concern MBI relates to the interpretation of the provisions under the CISG. Moreover, Article 7(1) provides that: In the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade.51 Notably, MBI is entering into contracts with jurisdictions that are both common law and civil law jurisdictions. Article 7 (1) has resulted in different interpretative approaches to CISG by common law and civil law jurisdictions.52 According to Lutz, common law jurisdictions tend to look to ignore “the preparatory materials” or the “genesis of a statute and its rules” because the legislative must be interpreted by reference to “the words of the statute according to the ‘literal rule’”.53 Civil law jurisdictions on the other hand are quite different in their approaches to interpreting the CISG. According to Lutz, civil law judges commonly rely on the “legislative history to resolve an interpretative problem”.54 Thus from MBI’s perspective, any issue arising under the contract that is not covered by the CISG could fall to be interpreted very narrowly if it ends up before a common law jurisdiction, such as Nigeria. Obviously, in international disputes, there must be some flexibility and certainly Article 7(1) intends there to be some flexibility so that CISG is broadly interpreted to ensure uniformity of international sales of goods law. Since there are several laws, culture, policies and practices coming together, a narrow interpretative approach may not have just and fair results. Article 7(1) of CISG specifically directs courts and arbitrators to have regard to the “international character of the Convention” and the “need to promote uniformity in its application and the observance of good faith in international trade”.55 It would therefore appear that the civil law jurisdiction’s propensity for looking to the legislative history of the Convention is entirely necessary and desirable to bring about a just result between the parties. A literal interpretative rule is obviously inconsistent with and even incompatible with the wording contained in Article 7(1) of CISG as Article 7(1) specifically directs attention elsewhere: the international character of the Convention. Thus in interpreting the CISG, judges will have to look at the legislative history of the CISG and specifically, the growing need to harmonize the rules of law governing the sale of goods across borders and involving different jurisdictions. Having regards to the issues discussed herein, MBI has two options. First, it may wish to adopt the CISG in each of the contracts between MBI and firms in Nigeria, China and Russia. By taking this approach, CISG will be the applicable law in any of the four states in which a dispute is filed. This will overcome any problems that any of the parties may have with the application of the law of foreign jurisdiction to its contract. However, it is important to note that CISG does not contemplate or apply to all potential issues that might arise. If an issue arises that is not covered by CISG, the court seized of the matter has a number of options for choosing the applicable law. This may not be convenient to any of the parties as the law applied to issues that are not covered by CISG could be a law that either or both parties to the dispute are uncomfortable with. To avoid this uncertainty, it is best for the parties to either negotiate out of the application of CISG or to contemplate the potential issues and to designate an applicable substantive law to each of these issues in the contract. Bibliography Aquafi li Textile Yarns S.P.A. v Updeals Ltd. Tribunal di Roverto Italy 28 August 2004 cited in Brand, R. A. (2005-06). “CISG Article 31: When Substantive Law Rules Affect Jurisdictional Results,” Journal of Law and Commerce, Vol. 25, 181-202. Birds, J. (2010) Insurance Law in the United Kingdom. The Netherlands: Kluwer Law International. Brand, R. A. (2005-06). “CISG Article 31: When Substantive Law Rules Affect Jurisdictional Results,” Journal of Law and Commerce, Vol. 25, 181-202. British and Foreign Insurance Co. Ltd. V Gaunt [1921] 2 AC 41. Carr, I. and Stone, P. (2010). International Trade Law, Oxon, UK: Routeledge-Cavendish. CISG: Table of Contracting States (August 2011). http://www.cisg.law.pace.edu/cisg/countries/cntries.html (Retrieved 14 December 2011). De Ly, F. (2005-06). “Sources of International Sales Law: An Eclectic Model.” Journal of Law and Commerce, Vol. 25:1-12. Gibson v Small [1853] 4 HL Cas 353. Grebler, E. (March 28-31 2007). “Fundamental Breach of Contract Under the CISG: A Controversial Rule.” Proceedings of the Annual Meeting (American Society of International Law) Vol. 101: 407-413. Holdsworth v Wise [1822] 7 B&C 794. JJ Lloyd’s Instrument Ltd. v Northern Star Insurance Co. (The Miss Jay Jay) [1985] 1 Lloyd’s Rep. 264. Kouladis, N. (2006). Principles of Law Relating to International Trade. New York, NY: Springer. Lando, O. (Spring 2005). “CISG and Its Followers: A Proposal to Adopt Some International Principles of Contract Law.” The American Journal of Comparative Law, Vol. 53(2): 379-401. Loobofsky, J. (2008). Understanding the CISG. The Netherlands: Kluwer Law International. Lucena v Craufurd [1806] 2 B&PNR 269. Lutz, H. (2004). “The CISG and Common Law Courts: Is there Really a Problem?” VUWLR, Vol. 35: 711-733. Marine Insurance Act 1906. Mather, H. (Spring 2001). “Choice of Law for International Sales Issues Not Resolved by the CISG”. Journal of Law and Commerce, Vol. 20: 155-208. McFadden v Blue Star Line [1905] 1 KB 697. Soyer, B.(2006). Warranties in Marine Insurance, London, UK: Cavendish Publishing Limited. Schlechtriem, P. and Butler, (2009). UN Law on International Sales: the UN Convention on the International Sale of Goods, Berlin: Springer. Theodorou v Chester [1951] 1 Lloyd’s Rep. 204. United Nations Convention on Contracts for the International Sale of Goods 1980. Wedderburn v Bell [1807] 1 Camp. 1. Read More