Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd (The Good Luck )

Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd (The Good Luck )

court said that
breach of warranty would put the risk to an end automatically as from the time of breach. This rule has been
held applicable to both marine and non-marine insurance contracts. Breach of warranty is one of the technical
defenses that insurers can use to defeat liability for claims. The unique characteristic of warranty is that
materiality and causation are irrelevant. It is submitted that the rationale of warranty is that the insurer only
accepts the risk provided that the warranty is fulfilled.
In The Good Luck, the ship of that name was insured with the defendant club and mortgaged to the claimant
bank. As required by the mortgage, the benefit of the insurance was assigned to the bank, and the club gave a
letter of undertaking to the bank, whereby the club promised to advise the bank promptly if the club ceased to
insure the ship. The ship was sent to the Arabian Guff in breach of warranty under the insurance, was hit by
Iraqi missiles and became a constructive total loss. Both the club and the bank knew of the loss but, whereas the
club discovered the breach of warranty, the bank did not investigate the possibility. In the mistaken belief that
the loss was covered, the bank made further loans to the ship owners. In view of the breach of warranty, the
insurance could not be enforced, and the bank sued the club for having failed to give prompt notice on the fact
that they had ceased to insure the ship. The trial judge upheld the banks argument that the insureds breach of
warranty had brought the risk to an end automatically and therefore the club was in breach of his contractual
obligation in their letter of undertaking.
However, the Court of Appeal, after reviewing the pre-1906 authorities, reached the conclusion that prior to
1906, breach of warranty did not automatically bring the risk to an end, and the 1906 Act, as a codification of
the case law, had not intended to effect any change to that position.

In the House of Lords, Lord Goff
disapproved with the conclusion of the Court of Appeal. He held that an automatic discharge of liability was
clearly intended in the plain words of MIA 1906, s.33 (3) and the risk came to an end automatically upon the
breach of warranty and the club was therefore in breach of its obligations to notify the bank.
Condition Precedent
As to the nature of a warranty in marine insurance, in the House of Lords, Lord Goff determined to put the law
back on the right path.

He held that If a promissory warranty is not complied with, the insurer is discharged
from liability as from the date of breach of warranty, for the simple reason that fulfillment of the warranty is a
condition precedent to the liability of the insurer.
In the judgment, Lord Goff used the term promissory warranty to refer to insurance warranties, but he was
only referring to those warranties relating to the future of the contract, viz., continuing warranties, of which type
was litigated in the case.

He based his reasoning on the Thomson v Weems case,

where Lord Blackburn held
that compliance with warranties relating to the existing circumstances at the inception of the risk, viz., present
warranties, is a condition precedent to the attaching of the risk. Neither Lord Blackburn in the Thomson v
Weems nor Lord Goff in The Good Luck could have made a complete exposition of the nature of warranty. Due
to the English legal method, they were both constrained to the disputed warranty in their individual case
respectively. Lord Goff used the term condition precedent to formulate his reasoning. He acknowledged that
it is an inveterate practice in marine insurance of using the word warranty signifying a condition precedent.
Then he clarified that in his use of condition precedent, the word condition was used in its classical sense in
English law. The word condition is used here in its contingent sense. Bearing this in mind, what Lord Goff
meant is that insurers liability is contingent upon the insureds compliance of the warranty. Lord Goff gave an
excellent footnote to the MIA 33(3), where the word condition was used without a clarified meaning. The
word condition is used in its contingent sense in the 1906 Act and it is completely different from the concept
of condition in general contract law, which means a major term of contract breach of which entitles the
innocent party to terminate the contract.
Fulfillment of waranty, not the warranty itself, is a condition precedent to the insurers liability. This clarifies
the confusing definition of warranty in Section 33(3) of MIA 1906.

Termination of risk
As to the effect of breach of warranty, Lord Goff started with ss.33 of the Marine Insurance Act 1906 held
that Those words are clear. They show that discharge of the insurer from liability is automatic and is not
dependent upon any decision by the insurer to treat the contract of insurance as at an end.
The word discharge is used in a passive voice in section 33(3). The word discharge was and is still loosely
used in many insurance occasions to mean that the insurer is no longer liable. Indeed, the Court of Appeal
referred to an earlier draft of the 1906 Act which said if it be not so complied with, the insurer may avoid the
contract as from the date of the breach of warranty, but without prejudice to any liability incurred by him before
such date.
Delivering the leading judgment of the court, disagreed with the Court of Appeal on this approach to the
construction of s 33(3). He held that the previous draft was inadmissible as an aid to the construction of the Act.
In his holding, Lord Goff held that s 33(3) was a codification of the common law, and in that way the warranty
rule was treated as having been in existence since 1189

and was codified without change in 1906.
It is well accepted that the MIA 1906 was a codification of English common law on marine insurance. The
approach taken to the interpretation of that type of legislation was established in P Samuel & Co Ltd v Dumas,
where Viscount Finlay stated that:
The law has been codified by such an Act as this, the question is as to the meaning of the code was shown by its
language. It is, of course, legitimate to refer to previous cases to help in the explanation of anything left in doubt
by the code, but, if the code is clear, reference to previous authorities is irrelevant
That said, the meaning of discharge in s 33(3) is indeed ambiguous. House of Lords said in The Good Luck is
to be taken as law until it was overturned by the Parliament or the House of Lords itself should another case turn
on it and the House of Lords can be persuaded that it was plainly wrong in The Good Luck.
Under The Good Luck, breach of warranty discharges the insurer from his liability automatically, as the cover
ceases to be applicable and the risk terminates. What Lord Goff said distinguishes insurance warranty from the
general condition in contract law: the latter, if broken, gives rise to both damages and discharge, but the
discharge occurs only on the election of the aggrieved party, whereas in marine insurance breach of warranty
operates as an event which automatically discharges the insurer, rather than merely giving the insurer the option
to terminate the contract by election. It operates automatically, without any necessity for the insurer to make the
election and let the election known to the insured.
The House of Lords did not list all the effects that an automatic discharge will have on the insurance contract.
The effects he mentioned are only illustrative but not exhaustive. Insurance warranty does not have the normal
effect of breach of contract in the general contract law. It is a peculiar breach of contract: it is neither a
repudiatory breach nor a non-repudiatory breach, and therefore its effect is neither repudiation of the whole
contract, nor does it sound in damages.

Its peculiarity lies in that the rights and obligations between the insurer
and the insured prior to the breach are not affected; the contract is not terminated at the point of the breach,
either, because some parts of the contract are still binding on the parties. The real effect of breach of warranty in
the context of marine insurance is that the insurer is not liable for any loss incurred by the assured after the
breach. The Good Luck case only applies where the risk has incepted and the warranty is subsequently broken; it
does not apply where the warranty relates only to existing circumstances at the inception of the risk. In that case,
the common law rule in Thomson v Weems

should apply instead.














Conclusion
The Good Luck Lord Goff did say that the rationale of warranties in insurance law is that the insurer only
accepts the risk provided that the warranty is fulfilled. This affirmed that the original purpose of the doctrine of
warranty is to build a link between the risk and the warranty. What really matters is how the breach affects the
risk.

That should be the real concern. In this connection, causation and materiality should be relevant. In doing
so, the existence of warranties in marine insurance law will be more justified and the insured will be less
vulnerable to lose his cover for some trivial breach of warranties. Fortunately, the trend of law is already in this
direction, at least in the non-commercial and non-marine insurance contracts.