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There are two main methods of mitigating the harsh consequences of a breach of war- ranty: the policy itself may contain special provisions to this effect, or it could be done through judicial interpretation of contractual clauses. For that purpose, the common law courts have adopted two approaches:

(1) Restrictive construction of warranty;

(2) Construction of warranty as other contractual term.

4.2.1.1 Restrictive construction of warranty

For a long time the common law courts have recognized that, due to the severity of the warranty regime, its applicability must be restricted by judicial interpretation: i.e., any ambiguity in a warranty should be construed in accordance with the contra proferentum rule. The essence of this rule in marine insurance context was explicitly formulated in Win-

ter v Employers Fire Insurance Co117: “[…]marine contracts are strictly construed against the insurer and favorably to the insured, and where two interpretations are possible, that which will indemnify the insured will be adopted”.

Supportive principles of restrictive construction may be summarized as follows118: (1) If insurers wish a warranty to have draconian consequences, “then it is up to them to stipulate for it in clear terms”119_;

(2) If the literal wording of a warranty is inconsistent with a reasonable and business- like interpretation, it is likely that the parties have not intended such result;

(3) A literal interpretation of a warranty must not be inconsistent with other policy terms;

(4) Furthermore, a warranty may be construed as being relevant to only some risks covered in the policy. For example, in Printpak v AGF Insurance Ltd120, the policy was divided into different sections; the court found that the warranty to install a burglar alarm referred only to the theft section, but not to fire risks. However, this principle has limited application: in Sugar Hut121, the policy covered four nightclubs. The court stated, obiter, that as four places were the subject matter of one insurance, the breach of warranty in one club would leave all of them uncovered. Therefore, even restrictive construction of warran- ty clauses could not always help the assured.

117 _{Winter v Employers Fire Insurance Co [1962] 2 Lloyd’s Rep 320, 323} 118 _{Based on Consultation paper No204 (2012), s 12.46}

119 _{Hussain v Brown [1996] 1 Lloyd’s Rep 627, 630}

120 _{Printpak v AGF Insurance Ltd [1999] Lloyd’s Rep IR 542}

121 _{Sugar Hut v Great Lakes Reinsurance (UK) Plc [2010] EWHC 2636, [2011] Lloyd's Rep IR}

4.2.1.2 Construction of warranty as suspensive condition

The second method of mitigation adopted by courts is that a clause may be construed not as a warranty, but as other contractual term – namely, a condition descriptive of the risk. Non-compliance with such condition only suspends the insurance cover, which pro- vides the assured with an opportunity to remedy the breach. English courts have applied this reasoning in a number of non-marine insurance cases.122 In the recent Kler Knitwear v

Lombard General Insurance Co Ltd123, the contract expressly stated that an undertaking to have sprinklers inspected in 30 days was a warranty; non-compliance was described as terminating the cover “whether it increases the risk or not”. Despite the fact that the word- ing of the policy was so precise, Mr Justice Morland held that the term was a suspensive condition, because it would “be utterly absurd and make no rational business sense” to con- strue it as a warranty.

Kler Knitwear decision raised considerable criticism.124 _{If the clearest language of the}

policy may be viewed as not indicative of the parties’ intentions, an uncertainty about legal effects of contractual provisions is created. Moreover, limits of application of this method of judicial interpretation are blurred, as demonstrated by two cases: The Newfoundland

Explorer125 and The Resolute126. In both cases, the vessels were warranted crewed “at all times”; the loss occurred while they were either berthed or safely tied up. In The New-

foundland Explorer, the court construed the clause literally, including time at berth; in The Resolute, the warranty was held to refer only to navigation time. Hence, although the courts

have benevolent intentions and try to reach fair outcomes in individual cases, they intro- duce inconsistency into the insurance law.

122 _{See Farr v Motor Traders’ Mutual Insurance Society Ltd [1920] 3 KB 669; Provincial Insur-}

ance Company Ltd v Morgan & Foxton Coal [1933] AC 240

123 _{Kler Knitwear v Lombard General Insurance Co Ltd [2000] Lloyd’s Rep IR 47} 124 _{See, for example, Consultation paper No204 (2012), s 12.50}

125 _{GE Frankona Reinsurance Ltd v CMM Trust No 1400 (The Newfoundland Explorer) [2006]}

EWHC 429

4.2.1.3 Role of courts in other common law jurisdictions

The majority of common law countries share a tendency of “[…]increasingly discard- ing the more extreme features of English law which allow an insurer to avoid liability on grounds which do not relate to the occurrence of the loss”.127 _{Partially, it is due to attempts}

of local courts to ameliorate the “classical” warranty regime.

In Canada, courts are inclined to find a term to be a “true warranty” only in “situa- tions where the warranty is material to the risk and the breach has a bearing on the loss”.128 This is illustrated by The Bamcell II case129, where the policy contained a clause “warrant- ed that a watchman is stationed on board the Bamcell II each night”. The court construed it as a suspensive condition, applicable only at night; so, despite the breach, the insurer was liable for the loss, which occurred during daytime. This practice, however, is criticized on the same footing as Kler Knitwear: as harming a fine line between warranties and other types of policy terms.130

In the USA, a break with the English approach began with Wilburn Boat case131, where The Supreme Court held that marine insurance contracts were governed by state law. As the result, nowadays a status of warranties differs from state to state. For instance, in Texas a causal connection test is adopted, while in New York it is required that warranties must materially affect the risk.132

Overall, judicial authorities throughout the common law world have supported the idea of taking into considerations an immaterial and non-causative character of the breach. It allows to provide justice in individual cases, but on a greater scale, the law becomes more uncertain and unpredictable. Therefore, other ways of amelioration of the warranty regime are required.

127 _{Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd and others (The Star Sea) [2001]1 All}

ER 743, para 79

128 _{Christopher Giaschi, “Warranties in Marine Insurance”, Association of Marine Underwriters of}

British Columbia, Vancouver, 10.04.1997

129 _{Century Insurance Company of Canada v Case Existological Laboratories Ltd (The Bamcell II)}

(1980) 133 DLR (3d) 727

130 _{Baris Soyer, “Warranties in Marine Insurance”, 205} 131 _{Wilburn Boat Co v Fireman’s Fund Ins [1955] AMC 467}

4.2.2 Self-regulation of the industry