INHERENT VICE IN MARINE INSURANCE LAW:
THE CASE OF THE “BENGAL ENTERPRISE”
By J. Kenrick Sproule, Sproule Faguy
T.M. NOTEN B.V. V. PAUL CHARLES HARDING
(Originally published in Seaports and the Shipping World – September 1990 Issue)
Perhaps one of the most confounding issues in marine insurance law involves the inherent vice exclusion. When goods are insured on all risks basis the usual terms exclude loss, damage or expense proximately caused by inherent vie or nature of the subject matter insured. This means that damage or loss caused by the nature of the thing itself, as opposed to damage from an external occurrence, is not covered. There have been a myriad of cases involving cargo interests suing underwriters who have declined coverage on the grounds that the loss occurred due to inherent vice. While there is no predictable factual pattern many of the cases revolve around spontaneous combustion, disease, decay or fermentation and insufficiency of packing. However, perhaps the most perplexing cases involve moisture condensation resulting in wetting damage. One such case involved a shipment of industrial leather gloves on board the M.V. “BENGAL ENTERPRISE”.
The plaintiffs were Dutch importers of gloves supplied and manufactured in Calcutta. The gloves were wrapped in bundles of 12” draft paper wrappers and then placed in cardboard cartons. The cartons were sealed and ultimately packed into 20 ft. closed-top box containers for carriage to Rotterdam. On out-turn the gloves were found to be wet, stained, mouldy and discoloured. They also stank.
The leather gloves were insured with the Lloyds underwriters under an all risks policy. Underwriters contended that the damage was not proximately caused by an insured peril and fell within the policy exclusion of inherent vice. The defendant named in this case, Paul Charles Harding, was a representative of Lloyds underwriter.
The trial was before Mr. Justice Phillips of the English Queen’s Bench Division (Commercial Court). An important factual issue decided upon by maintained that it emanated directly from the air present in the container when stuffed. Expert evidence, however, established that what occurred was that the leather, being hydroscopic, absorbed moisture from the humid atmosphere in Calcutta as did the cardboard cartons. When the container arrived at Rotterdam the ambient temperature was, of course, much lower than that within the container. This resulted in moisture condensing on the inside of the top of the container ultimately causing water droplets to fall down upon the cartons of gloves below.
Mr. Justice Phillips denied underwriters’ the inherent vice defence thereby requiring Lloyds to compensate cargo interests for an amount that had previously been agreed upon. In siding with the assured, Mr. Justice Phillips said:
“In the present case the insured goods were cardboard cartons of gloves. Under the warehouse to warehouse clause, the insured transit began when they left Artonex’s factory in Calcutta. The insertion into containers formed part of that transit. The damage was caused by the dropping of water from a source external to the insured goods on to those goods. Insofar as the quality of the goods contributed to the casualty, it did so because the goods absorbed moisture before being placed in the container, which moisture escaped subsequently to condense and fall back on the goods.”
Underwriters’ counsel argued that it could still properly be said that it was the natural behaviour of the goods that caused the damage. Mr. Justice Phillips disagreed and characterized the leather gloves case as being one “where the proximate cause of the damage to the goods has been external to the goods, even if a characteristic of the goods has helped to create that external cause”. Essentially, the trial judge decided that the real or dominant cause of the damage was moisture condensed on the container roof. It mattered not that the moisture emanated from the gloves themselves. It is this reasoning that has given at least local Canadian underwriters great cause for concern.
Mr. Justice Phillips’ judgment was appealed and was overturned by the English Court of Appeal (Civil Division) on June 21, 1990. The Court of Appeal decision is as yet unreported but it will appear in Lloyd’s List in October, 1990.
Lloyds underwriters contended in appeal that the trial judge wrongly treated as the proximate cause of the damage that which was merely the immediate cause. In other words, while the direct cause of wetting was moisture from the top of the container that moisture originated from the gloves themselves. As such, it was the nature of the subject matter insured that ultimately caused the loss. Moreover, it was argued that the trial judge erred in finding that the proximate cause was a fortuity when it was not. By this, it was maintained that the process of convection, condensation and wetting was predictable and a natural and ordinary chain of events.
The Court of Appeal approached the appeal as follows. The insured got to first base by satisfying the “good order/bad order” test. The next question then, was what was the real or dominant cause of the damage. Underwriters posited that damage ensued because the gloves were shipped containing excessive moisture. To this, cargo retorted that the damage was caused by water dropping on to the gloves from an external source. The Court of Appeal resolved this debate as follows:
“I do not for my part think that this answer given by the plaintiffs would appeal to the common sense of the business or seafaring man. He would not understand how the water which had caused the damage could be regarded as coming from a source external to the goods, but would on the uncontradicted findings regard the gloves as the obvious and sole source of the water. He would, I think, regard the suggested distinction based on the intermediate migration of moisture to and condensation of moisture on the roves of the containers as owing more to the subtlety of the legal mind than to the common sense of the mercantile. While a measure of diffidence is always called for when ruling how a hypothetical person different from oneself would answer any question, I must say that on the present facts I have very little doubt that the defendant’s answer on the issue of causation is to be preferred.”
Therefore, it was decided in appeal that the proximate cause of the damage was the excessively moist condition of the gloves when shipped. Given this finding as to the factual cause of the damage, the Court of Appeal had absolutely no difficulty in ruling that this cause fell within the inherent vice exclusion.
The Court of Appeal stated that “the goods deteriorated as a result of their own natural behaviour in the ordinary course of the contemplated voyage, without the intervention of any fortuitous external accident or casualty. The damage was caused because the goods were shipped wet.” Ergo, there was no combination of fortuitous events.
Leave to appeal to the House of Lords was refused. Thus ends the cause of the Indian leather gloves. It may serve to clarify the meaning of inherent vice but one must not be too hopeful in this regard. How, for example, would the court have ruled had it been found that the moisture came from the air in the container and not from the gloves!