Textualism in interpretation of law making a come back

After several years in which the contextualist approach to the interpretation of the law seemed to be holding sway, recent rulings, including one by Lord Mance, have indicated that textualism is making a bit of a comeback, according to Guy Blackwood, QC, who was speaking at Quadrant Chambers morning forum this week on marine insurance – part of London International Shipping Week and hosted by Kennedys Law.

Speaking on the topic of “Marine Insurance – What is the direction of travel of Construction and Concurrent causation?”, Mr Blackwood said that there were two ways of construing any clause, “and, given that insurers like to be minimalists, no broker will ever overwrite an insurance policy”.

He said that in textualism, “the words mean what they say”, while in contextualism “the words do not necessarily mean what they say. You look at everything and the surrounding circumstances, and you are free to come to an alternative view”. Blackwood said that a major force in this latter approach had been Lord Hoffman who gave the leading judgment in Investors Compensation Scheme Ltd v West Bromwich Building Society (1998), in which he set out five principles for interpreting contracts. Blackwood said that he saw the fourth principle as the most radical (the words used in a contract do not have to be taken literally). Contextualism allows you, by reference to the factual matrix, to take the view that you do not have to choose between possible meanings of words, but you can conclude that the parties have used the wrong words. Knowledge of the admissible background facts allows the court to determine that, while a reasonable person would interpret the contract and the parties’ intentions one way, the parties used the wrong word(s) to convey their actual intentions.

Blackwood said that if you were a practical lawyer, that made life very difficult. “You can’t just look at a clause and say ‘what does that mean?’. You have to look at everything.” The problem is that the only direct evidence of what the parties intended is the words that they used in their contract. “Which makes it, I think, an inappropriate exercise to start looking at everything else”.

Blackwood noted that this had continued until relatively recently and that a striking example was Lord Clarke in the 2011 case Rainy Sky v Kookmin Bank, about refund guarantees in shipbuilding. “The wording of the guarantee suggested, at least to me, quite clearly that all that was intended was a partial guarantee, not a guarantee for the whole of the amount”. But the Supreme Court, led by Lord Clarke, found that, in the absence of any explanation, the Court thought it objectively more reasonable that there should be a full guarantee.

However, Blackwood observed that, as a practical lawyer, he was delighted to say that “the tide has turned”. One case cited in insurance was Wood v Capital Insurance Services (2017). That involved the sale of an insurance company and an indemnity was given for misselling by old management. “If you looked at the language of the indemnity there appeared to be an arbitrary distinction between compensation following a customer’s complaint, and compensation payable following a ruling by regulators”. Blackwood was confident that if Lord Clarke had been presiding he would have found, consistent with Rainy Sky, that there was a full indemnity for both, “notwithstanding the language”, because there was no objectively reasonable basis for this distinction. However the court held, Lord Hodge in particular, that the language said what it meant, and ought to be upheld. He found that most commercial contracts were not perfect logical instruments, but matters of compromise between the parties, and therefore one should not try to look for an overall commercial rationale.  

In the B Atlantic case, one of the main arguments from the other side, which Blackwood said that he had found extraordinary, was that the then Venezuelan President Hugo Chavez wanted to become a shipowner and that this had been one motive in the arrest of the ship and some of its crew (when a large amount of cocaine was found strapped to the hull). More extraordinarily, it was claimed that Chavez wanted the cargo of coal, “notwithstanding the fact that a huge amount of coal is exported from Venezuela”.

The real issue was about the cocaine strapped to the hull, bound for Italy. The crew were arrested, with the master and second officer spending about seven or eight years under house arrest, albeit in considerable comfort. The court ordered the final confiscation of the vessel. Blackwood suspected that the Venezuelan judiciary were scared to release the vessel because they were scared about what might happen”. The vessel was subsequently scrapped, and there was a claim for a constructive total loss (CTL) under a detainment claim.

In order for a vessel to be a CTL it must be so as of the day of notice of abandonment (NOA) and as of the day you issue the claim form. “That is why everybody in the market asks for a writ clause. Customarily an underwriter will decline an NOA, but will agree to put the assured in the position he would have been in, had a claim form been issued that day”.

“Anybody sensible acting for an assured will ask for one of those, because if the vessel is subsequently released, you will be very red-faced if you don’t”.

This brings one to the Institute War And Strikes Clauses (1983 version) and the phrase “any terrorist or person acting maliciously or from a political motive”, in clause 1.5 was the main clause that the assured relied on in the B Atlantic. They also relied on 1.2, “capture seizure arrest restraint or detainment, and the consequences thereof or any attempt thereat” and 1.6, “confiscation or expropriation”.

The detainment clause is intended to provide certainty to let the assured know how long a vessel needs to be confiscated before becoming a total loss. The standard clause applies for 12 months but almost always the 12 months is reduced to a period of six months.

However, 4.15 excludes from 1.2 any situation “by reason of infringement of any customs or trading regulations”, which is what the insurer relied upon.

However, Blackwood recounted that “we thought that this was quite a strong defence, but of course we were textualists, and we came up against Julian Flaux at first instance.”

The counter argument was that there was a “canon of construction” based on “mere manifestation”. It was argued that you ought to read into the exclusion clause 4.1.5 that there was an “implied proviso”, or a qualifying criteria. What was said was that the infringement had to be more than a mere manifestation of an insured peril (malicious acts). The affixing of the drugs to the bottom of the ship was a criminal offence. It was also the malicious act (arguably). And it was said that this qualification had to be read so that, where somebody attached drugs, that was the malicious act, and also the criminal offence, we could not rely on the exclusion. Blackwood said that “that is obviously contextualism. Those words do not appear. We said that was completely illegitimate, but we lost. In the first instance. And it was a real surprise”.

The case went to the Court of Appeal and all three judges disagreed with Mr Justice Flaux. And in the Supreme Court unanimously affirmed the ruling in the Court of Appeal. Lord Mance, who gave the SC judgment, said that “neither as a matter of construction more as a matter of causation is there in my view any basis for treating Clause 4.1.5 as inapplicable to the present loss … the malicious act is the infringement of the customs regulations. There is …. no distinction between them.”

He also noted that the role of clause 4.1.5 was to cut back on cover in respect of loss caused by perils otherwise insured. Blackwood observed that this was what one should expect. “You have a broad circle of insured perils. And out of that circle are taken certain, more limited, circumstances”.

Blackwood said that if you wanted to read in words such as the “mere manifestation” type wording, you need a very clear reason for doing so; not merely that there would be a ‘gap in cover’ … or what would the shipowner expect?” Blackwood believed that unless there was a genuine absurdity, one should read in insurance contracts the words to mean what they say they mean, and Lord Mance agreed”.

Blackwood did observe that “some of the newer judges are, regretfully, contextualists”. He reported the case of The Panamax Trader (2019), a CTL case where the vessel hit a reef. We said as insurers that the owner scuttled the ship deliberately. (Ultimately the case settled.). “At one of the interlocutory hearings I tried to argue that we the insurers ought to be entitled to approach directly the vessel’s class for certain documentation.”  Clause 4.4 of the Institute Time Clauses (ITC) says that “should the underwriters wish to approach the Classification Society directly for information and/or documents, the Assured will provide the necessary authorization”.

Jacobs J said that the clause was limited in temporal scope to the period of insurance. We disagreed, saying that one of the paradigm circumstances in which we would want to do this was in considering a claim, which was very likely to come after the insurance had expired. Jacobs J required on clause 4.1, which says that “It is the duty of the Assured, Owners and Managers at the inception and throughout the period of this insurance to ensure that: (4.11) the Vessel is classed with a Classification Society agreed by the Underwriters and that her Class within that Society is maintained”.

The judge said that by way of construction and/or implication, the right in clause 4.4 was only available during the currency of the insurance contract. Blackwood said that “we probably would have appealed, had it mattered, but the judge gave us a very similar remedy by another route. However, this may be something underwriters want to consider, because I think the purpose of Clause 4.4 is clearly not intended to be limited to the policy period. But that is now the interpretation that at least one judge has put on that clause”, said Blackwood.

Causation:

Blackwood said that a closely related topic was causation. In the B Atlantic the assured said that they could argue it by way of construction, the “mere manifestation” theory, or by way of causation. That the real dominant or proximate cause of the loss was not an infringement of customs regulations at all. It was the malicious act that was the dominant or proximate cause.

The argument was that the infringement of the customs regulations was if anything just a natural sequence following on from the malicious act.

Blackwood said that this was a very problematic area in law generally, but particularly in insurance, because you can look at causation in one of two ways. You can either try to be very clever and have a jurisprudential “grand scheme of causation”, which almost always does not work for the particular issue you are looking at, or you can say “well it is just a matter of common sense”. Unfortunately “common sense” is a very flexible and uncertain concept.

Blackwood felt that probably, although it was not reported in the case of the B Atlantic, the best approach is really to ask yourself “for what purpose am I asking the causation question?” In the B Atlantic that purpose was to work out the interrelationship between an insured peril and an exclusion. What Lord Mance said was “while the general aim in insurance law is to identify a real, effective or proximate cause of any loss, the correct analysis is in some cases that there are two concurrent causes. This is particularly so where an exceptions clause takes certain perils out of the prima facie cover”.

That then invokes the Wayne Tank principle. Where you have one cause which is an insured peril and another cause which is an exception, the insurer can rely on the exception.  “I tried to find for the Supreme Court instances of where the Wayne Tank had been applied, before the B Atlantic, and despite a very large number of boring hours spent in libraries, there were almost none. There are many many cases where Wayne Tank has been approved and then distinguished. But very very few where it has been applied. The best I could do was the case of a houseboat that had been turned into a restaurant in New Zealand. It was held to be lost partly by woodworm and partly by flooding.

The B Atlantic has now set that straight.

“The other argument was that everything that happened after the drugs were affixed was an inevitable consequence.” Lord Mance disagreed. He said that it was the combination of the excluded peril and the malicious act which led to the loss.