Waiver of breach of warranty

Liberty Insurance Pte Ltd & Anr v Argo Systems Fzw [2011] EWCA Civ 1572
Court of Appeal (Laws, Aikens & Tomlinson LLJ), 15 December 2011

Argo’ s claim arose from the actual total loss of a floating casino while under tow in the
Caribbean sea. The voyage policy underwritten by Liberty contained a term, “ warranted no
release, waivers of “ hold harmless”given to Tug and Towers” . However, the standard
towing contract in use for the voyage contained a clause releasing the tug owner from
liability for any loss or damage sustained by the tow.

Four months after the loss Liberty denied coverage for the claim. A variety of defences
were put forward but there was no mention of breach of the hold harmless warranty
(HHW). The denial letter (sent by Liberty’ s US lawyer) concluded with the statement that
Liberty “ reserve[s] the right to alter [its] position in light of discovery of previously
undisclosed information which would materially alter the facts and circumstances
known…The foregoing is without prejudice to all the remaining terms and conditions of the
policy, along with any other defenses which may be discovered after further investigation.”

The following year Argo sued Liberty and the placing brokers in Alabama. Liberty did not
rely on the defence of breach of the HHW (save to the extent that might have been implicit
in its Second Affirmative Defense, which was in general terms) but was successfully
dismissed from the case for lack of jurisdiction. In 2009 Argo commenced proceedings
against Liberty in England. Liberty pleaded breach of the HHW and in reply Argo pleaded
waiver/estoppel. At first instance HHJ Mackie QC held that Argo was in breach of the HHW
but that Liberty was estopped from relying on the breach on the grounds that (1) Liberty
had, from the outset, the material required to take the point and (2) Liberty had
represented by its conduct that it was not relying on it.

The Court of Appeal has now allowed Liberty’

s appeal:

(1) In the case of breach of warranty, the risk terminated automatically so there was
no possibility of waiver by affirmation. The only form of waiver was waiver by
estoppel, which required an unequivocal representation and reliance. Unequivocal
representation was an objective legal concept.

(2) HHJ Mackie had been wrong to hold that the reservation of rights wording in the
letter indicated Argo was being advised by its insurers that other defences would
be relied on only if new information came to light. The words which opened the
second sentence - “ The foregoing is without prejudice to all the remaining terms
and conditions of the policy”- were a clear indication that Liberty was reserving
the right to rely on any of the terms and conditions of the policy in future if
advised to do so. The letter could not be regarded as making any representation,
let alone an unequivocal one, that Liberty was not going to rely in the future on
any legal right it had because of Argo’ s actual, though unstated, breach of the
HHW.

(3) The fact that breach of the HHW was not pleaded in Liberty’ s Answer to Argo’ s
Original Complaint in the US proceedings did not add anything. The focus of the
Answer was on the jurisdictional issue and Liberty’ s Second Affirmative Defense
was in very general terms. If there was any representation at all it was equivocal.

(4) Nor did it matter that Liberty had not raised breach until it served its Defence in
the English proceedings, seven years after the loss. Saying nothing and “ standing
by whilst Argo took the steps it did in the US proceedings”(per HHJ Mackie) were
equivocal actions. There were no special circumstances in this case which were
capable of turning Liberty’ s silence and inaction into an unequivocal representation
to Argo that it did not intend to enforce its strict legal rights based on a breach of
the HHW.
(5) Argo’s position was not improved by taking all three aspects together: the letter,
the US proceedings and the seven year silence/inaction. Together they remained
equivocal in reflecting different possible attitudes by Liberty.

(6) The words of Mustill LJ in Vitol SA v Esso Australia Ltd (“ )1 did not apply
The Wise”
here; the facts in Vitol were very different from this case.

This decision follows Kosmar Villas 2 in holding that only equitable estoppel provides an
answer to breach of a true insurance warranty. Argo failed to show an objectively
unequivocal representation that the breach of warranty would not be relied on. If the
defence had been a breach of utmost good faith, and Argo’ s answer had been affirmation,
that would also have failed because affirmation requires the same unequivocal conduct.
The additional requirement for an equitable estoppel is proof of reliance by the re/insured.
HHJ Mackie found reliance; that was challenged on appeal but left undecided.

One of HHJ Mackie’ s other conclusions went to the question of whether Liberty could get
damages from Argo under s2(1) of the Misrepresentation Act 1967 after (as he had also
found) it had lost by affirmation the right to avoid on a separate misrepresentation point.
He found that no damages could be due but that the issue of the relationship between
avoidance and 1967 Act damages was difficult and should go to the Court of Appeal. The
latter did not, in the event, have to deal with it, Liberty having escaped liability due to the
unwaived breach of warranty.

1
[1989] 2 Lloyd’ s Rep 451. Mustill LJ said that, “explicit reliance on one contention and the absence
of reliance on another, which could have been advanced on facts already known, is capable of being a
tacit representation that the latter would not be relied upon.”
2
[2008] Lloyd’ s Rep IR 489