In Global Process Systems Inc v Syarikat Takaful Malaysia Berhad [2011] UKSC 5, the Supreme Court unanimously upheld the Court of Appeal's decision (previously reported here) that the appellant insurer was not entitled to rely on an exclusion for inherent vice contained within the contract as the proximate cause of the loss in question was a "peril of the sea", not the nature of the subject matter insured.

In reaching its decision, the Supreme Court held that Mr Justice Blair, at first instance, had incorrectly formulated the test to be applied in the circumstances. Blair J's test, based on an earlier judgment of Moore-Bick J in Mayban General Insurance v Alstom Power Plants Ltd [2004] 2 Lloyd's Rep 609, stated that if the perils of the sea in question were no more than could reasonably be expected, then inherent vice must be the proximate cause.

Lord Saville stated that Blair J had given the phrase inherent vice too wide a meaning, a fortuity which was unexceptional or foreseeable was still a fortuity. He stated "all goods are susceptible to loss or damage from the fortuities of the weather on the voyage; this does not mean that such loss or damage arises from the nature of the goods; it arises from the fact that the goods have encountered one of the perils of the seas". Lord Mance agreed, stating that on an analysis of the authorities, anything which could be considered as a fortuitous external accident (including a peril of the sea) would suffice to prevent a loss being attributed to inherent vice. Although a peril of the sea was defined as not including "the ordinary action of the winds and waves", this simply meant that the proper question was whether the winds and waves had an extraordinary effect, rather than whether they were extraordinary in themselves. On the basis of this test, Lord Mance found that the weather conditions experienced in the present case and the final wave which caused the leg of the rig to fail, were sufficient to constitute a fortuitous external accident, such that there was no inherent vice.

The decision of the Supreme Court affirms the decision of the Court of Appeal and thus narrows the test for inherent vice, although the Supreme Court came to the same conclusion for slightly different reasons. Nonetheless, the effect of the judgment is that it will now be more difficult for insurers to rely on inherent vice exclusions where there are other fortuitous external events which may have caused the loss in question.

If you would like to know more about the factual background to this decision, please click here to read our article on the Court of Appeal decision in the March 2010 edition of Insurance and Reinsurance Review.