In Argo Systems FZE v Liberty Insurance PTE and Another (The “Copa Casino”)  EWCA Civ 1572, the Court of Appeal considered whether a failure to raise a breach of warranty defence in a letter declining cover, in relation to a loss under a marine insurance policy, amounted to a waiver of the right to rely on that defence. In addition, it considered whether or not the reservation of rights contained in the letter meant that the insurer could still rely on the breach of warranty defence at a later date.
In March 2003, Argo Systems FZE (Argo) and Liberty Insurance PTE (Liberty) entered into a policy of marine insurance in relation to the towage of a floating casino called the Copa Casino (the Vessel), owned by Argo, from the US Gulf to India (the Policy). The Policy, subject to English law, provided coverage for the total loss of the Vessel due to the “perils of the seas”. It also included the following warranty: “Warranty no release, waivers or ‘hold harmless’ given to Tug and Towers.” (the Warranty).
The contract for the tow of the Vessel was made subject to terms of the “TOWCON” International Towage Agreement (Lump Sum) (the Towage Contract), a standard form towing contract. Clause 18 of the Towage Contract provided for extensive mutual exceptions of liability and cross indemnities between the tug owner and Argo, the hirer of the tug (the Hold Harmless).
On 16 March 2003, the Vessel sank in the Caribbean Sea, thereby becoming an actual total loss under the Policy. Argo made a claim under the Policy in July 2003. In its US lawyers’ letter of 18 July 2003 (the Letter), Liberty denied the claim. It raised a number of defences (including defences of misrepresentation), noting that:
“[the insurer therefore] reserves the right to alter its position in light of discovery of previously undisclosed information which would materially alter the facts and circumstances known… The forgoing is without prejudice to all the remaining terms and conditions of the [P]olicy, along with any other defenses which may be discovered after further investigation”.
Although Liberty had been sent the Towage Contract in June 2003, it did not assert that Argo had breached the Warranty.
Argo brought proceedings against Liberty and its US producing broker, DeWitt Stern (DWS), in the US District Court for the Southern District of Alabama. Proceedings against Liberty were dismissed for lack of jurisdiction but continued against DWS. Argo claimed that DWS had failed to obtain effective insurance coverage for Argo as the Policy erroneously referred to the departure port being “Gulf Port, Mississippi” and the Vessel had actually departed from Alabama. In September 2007, the Alabama Court dismissed Argo’s claim against DWS, and in May 2008, Argo’s appeal of that decision was dismissed by the US 11th Circuit Court of Appeals.
In February 2009, Argo issued proceedings against Liberty in the High Court in England. Liberty’s position was that Argo was in breach of the Warranty due to its agreement to the Hold Harmless, thereby discharging Liberty from all liability under the Policy, pursuant to section 33(3) Marine Insurance Act 1906.
Liberty also submitted a defence of material misrepresentation, which it stated entitled it to avoid the Policy, and in the alternative, counterclaimed damages for misrepresentation under section 2 of the Misrepresentation Act 1967 (MA), equal to its alleged liability to Argo.
Argo’s position was that there had been no breach of the Warranty. In any event, Liberty had waived its right to rely on any breach of the Warranty, and was estopped from being able to rely on any such breach. Argo relied on the fact that Liberty had not raised this breach of warranty defence until 7 years after Argo had initially made its claim, saying nothing in the Letter or during the proceedings before the Alabama Court. Argo further submitted that it had relied on these representations by conduct (i.e. Liberty’s silence) to its detriment as, had the point been raised by Liberty, Argo would have brought a corresponding claim against DWS in the Alabama Court, which it could no longer do.
FIRST INSTANCE DECISION
At first instance, His Honour Judge Mackie QC found that Argo had breached the Warranty but that Liberty had waived its right to rely on that breach and was estopped from doing so. He also found that Liberty had affirmed the Policy and therefore could not avoid it for misrepresentation, nor could it claim damages for misrepresentation.
COURT OF APPEAL DECISION
Argo appealed HHJ Mackie’s decision on waiver and estoppel, and Liberty appealed on its entitlement to damages for misrepresentation. Accordingly, there were three issues before the Court of Appeal:
- Had Liberty made an unequivocal representation to Argo that it would not rely on Argo’s breach of the Warranty?
- If so, had Argo relied on that representation?
- If so, as a matter of principle, could Liberty claim damages for misrepresentations by Argo, relying on section 2 MA?
The Court of Appeal referred to the leading decision of The Good Luck  2 Lloyd’s Rep 191, noting that a breach of warranty by an assured in a marine insurance policy automatically discharges the insurer from further liability under the policy. No other positive action was required to make that discharge of liability effective. As such, the insurer did not need to “elect” whether to terminate the contract or its liability under it, or continue the contract in being. Therefore, when it was alleged that an insurer had “waived” a breach of warranty in a marine policy, that meant that the insurer had waived the breach because it was estopped from relying on it.
The Court noted that establishing waiver by estoppel requires that:
- a party had made an unequivocal representation by words or conduct that it had no intention of enforcing a right against the other party; and
- the other party had relied on the unequivocal representation in such a way that it would be inequitable for the representor to go back on its representation.
Whether or not a representation was unequivocal was an objective legal concept; either there had been such an unequivocal representation or there had not; it did not matter what the person receiving the representation thought was being represented.
In this case, the contents of the Letter were insufficient to establish an unequivocal representation. Liberty’s lawyers’ use of the phrase: “The foregoing is without prejudice to all the remaining terms and conditions of the [P]olicy” was a clear indication that Liberty was reserving the right to rely on any of the terms and conditions of the Policy in the future (including those not expressly referred to in the Letter). As the Court of Appeal stated: “In short, [Liberty’s lawyers] were saying… that the insurers reserved the right to rely on other terms of the [P]olicy in support of its denial of coverage and also reserved the right to rely on any other defences that might be discovered after further investigations”. The fact that Liberty did not rely upon Argo’s breach of the Warranty in the Alabama proceedings was inconsequential, as Liberty’s concern in those proceedings was limited to a question of jurisdiction. Further, the seven year delay from Argo’s initial claim in 2003 could not constitute a representation absent special circumstances capable of turning inaction into an unequivocal representation, which did not exist in this case.
The Court of Appeal concluded that Liberty had not made an unequivocal representation that it would not rely on Argo’s breach of the Warranty. Accordingly, the question of Argo’s reliance on Liberty’s unequivocal representation did not arise as there had been no such representation. The same applied to Liberty’s damages for misrepresentation claim, the Court noting that: “Exploration of that interesting question must await another case”.
Insurers commonly reserve their rights in correspondence with insureds following notice of a loss under the Policy. They will take comfort from this case as, at least in relation to any breach of warranty, the assertion of certain rights by insurers will not preclude their later reliance on a breach of warranty by the insured, even if the insurer was initially aware of its right to rely on such a breach and did not do so. What is required is an unequivocal representation by the insurer as to whether or not it intends to rely on a breach of warranty; silence will not suffice.