Mowie Fisheries Pty Ltd v Switzerland Insurance Australia Ltd

[1996] FCA 888

CATCHWORDS

INSURANCE - marine insurance - application for damages - vessel lost in travelling from Eden in New South Wales to Portland in Victoria - which version of the Uniform Shipping Laws Code is applicable - whether there was a breach of warranty - whether vessel "in survey" at time of sinking - whether vessel correctly manned at time of sinking - consideration of the meaning of "propulsion power" within Section 3 of the Uniform Shipping Laws Code - extensive expert evidence in relation to the definition of "propulsion power" - implied warranty under s47 of the Marine Insurance Act 1909 (Cth) - meaning of "port" within s4 of the Marine Act 1976 (Tas) - Waiver - whether there was a waiver of the breach by insurer - whether there is waiver in the absence of election or estoppel - Commonwealth v Verwayen (1990) 170 CLR 394 considered and discussed - whether breach of duty of utmost good faith.

Marine Act 1988 (Vic) s 3, s 105, s 94(3)

Marine (Vessels) Regulations 1988 (Vic) regs 402, 103(4)

Uniform Shipping Laws Code, Sections 3, 9 and 14

Marine Insurance Act 1909 (Cth) ss 47, 39, 40

Marine Act 1976 (Tas) s 4, s 142(3) and s 155

Marine (Safety Manning) Regulations 1992 (Tas)

Doak v Weekes (1986) 4 ANZ Ins Cas 60-697, cited

Bank of Novia Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd ("The Good Luck") [1992] 1 AC 233, considered

Craine v Colonial Mutual Fire Insurance Co Ltd (1920)
28 CLR 305, considered

Commonwealth v Verwayen (1990) 170 CLR 394, applied

State Trading Corporation of India Ltd v Golodetz Ltd [1989]
2 LLR 277, cited

Financiere De La Cite SA v Westgate Insurance Co Ltd [1991]
2 AC 249, considered

Carter v Boehm (1766) 3 Burr 1905, cited

Freshmark Limited v Mercantile Mutual Insurance (Australia) Limited [1994] 2 QdR 390, cited

Sullivan E, The Marine Encyclopaedic Dictionary (1995) 4th ed.

Hydrographer of the Navy, Australian Pilot, volume II (1982) 6th ed.

Arnould, The Law of Marine Insurance, (1981) 16th ed.

Greig and Davis, The Law of Contract, (1987)

Hill J, O'May on Marine Insurance (1993)

MacGillivray & Parkington on Insurance Law (1988) 8th ed.

Howe K, "The Applicability of Waiver and Estoppel to Insurance Policies" February 1996, Queensland Law Society Journal, 63.

MOWIE FISHERIES PTY LIMITED v
SWITZERLAND INSURANCE AUSTRALIA LIMITED
No NG750 of 1994

Tamberlin J
Sydney
11 October 1996

IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY )    No. NG 750 of 1994
GENERAL DIVISION                 )

BETWEEN:          MOWIE FISHERIES PTY LIMITED
  Applicant

AND:              SWITZERLAND INSURANCE
  AUSTRALIA LIMITED
  Respondent

CORAM:       TAMBERLIN J
PLACE:       SYDNEY
DATED:       11 OCTOBER 1996

REASONS FOR JUDGMENT

TAMBERLIN J:

The applicant seeks a declaration entitling it, as against the respondent, to an indemnity for loss of its fishing vessel, "Pacific Queen" ("the vessel"), which sank off the Victorian coast on 18 March 1994.  The amount claimed is $640,000 together with interest and costs.

The Nature of the Dispute

The applicant was the insured under a marine hull policy with the respondent as insurer. The respondent was acquired by MMI Limited in 1993, and as a result all relevant discussions and correspondence is with officers of MMI Limited and its subsidiaries.

The policy was renewed from time to time and was relevantly expressed to operate from 31 March 1993 to 31 March 1994. The respondent agreed to provide hull and machinery cover at the agreed value  of $640,000. The applicant duly paid the premium for that period.

On 18 March 1994 the vessel was lost, by reason of an insured peril, approximately 45 nautical miles south of the coastal town of Portland in Victoria.

The applicant alleges that the respondent breached the policy in refusing to meet the applicant's claim for the insured sum.

In its amended defence, the respondent relies on two warranties in the policy which read:

"(1)That the vessel is in survey and will remain in survey with the appropriate governmental authority of the State of registration at all times during the  currency of the policy.

(2)That the vessel will be skippered, manned, crewed, operated and licensed in accordance with the regulations and by-laws and all other applicable laws of the appropriate governmental authorities of the State of registration at all times during the currency of the policy."'

The respondent alleges that the applicant breached the warranties and formulates its claim as follows. Victoria was the state of registration. The Marine Board of Victoria was the appropriate governmental authority. Under reg 402 of the Marine (Vessels) Regulations 1988 (Vic) ("the Regulations"), made pursuant to the Marine Act 1988 (Vic), there was a requirement that a fishing vessel of less than thirty-five metres in length must be crewed with at least one crew member who holds appropriate certificates in accordance with Schedules I-IV of Section 3 of the Uniform Shipping Laws Code ("the USL Code"). Under Section 3 of the USL Code, as in force at the time of the coming into operation of the  regulation, the vessel was required to have a Marine Engine Driver grade 2 (MED2) on board for operations more than fifteen nautical miles from the coast. In breach of this regulation the vessel did not during the period 16 to 18 March 1994 have the services of a MED2 crew member. There was therefore a breach of Warranty (2).

The survey certificate for the vessel, issued by the Marine Board of Victoria on 16 April 1993, was subject to a condition, which reads:

"Vessel to carry a minimum safety manning as follows:

TWO/THREE CREW:

3 CREW MASTER 5(F) + MED2 + IGP OR 2 CREW IF MASTER 5 ALSO HOLDS MED2 CERTIFICATE."

As the vessel did not have a MED2 on board during the voyage, the respondent says that it was not in survey and therefore there was a breach of Warranty (1).

The survey certificate, provided that the certificate remained in force unless "previously cancelled or revoked" and was  also expressed to be subject to compliance with the condition set out above.

In the alternative, the respondent argues that the warranties were breached because the applicable manning provisions were those of Section 3 of the USL Code as amended from time to time and not in the form at the time when the regulation came into effect in 1988. The provisions of the USL Code as amended required that a vessel with "propulsion power" of 250 Kw and over but less than 500 Kw must have a MED2 crew member for operations beyond fifteen nautical miles from the coast up to 200 nautical miles.  The respondent submits that the "propulsion power" of the vessel was 250 kW or more, and as the vessel was operating more than 15 nautical miles from the coast, at the time when it sank without a MED2 crew member, there was a breach of the USL Code. Therefore, it is said, as a result of the breaches of the warranties, the insurance policy was discharged on and from the time of breach.

A second defence raised is that the applicant contravened s47 of the Marine Insurance Act 1909 (Cth) ("the Commonwealth Act"), which in substance provides that there is an implied warranty in policies of marine insurance that, so far as the insured can control the matter, the adventure shall be carried out in a lawful manner.

In the relevant period it is said that, to the knowledge of the applicant, the vessel was engaged in operations more than 15 nautical miles from the coast of both Victoria and Tasmania without the services of a MED2 crew member and that therefore the adventure was not carried out in a lawful manner.

The respondent also relies on a breach of Tasmanian law. It says that on 16 March 1994, the vessel anchored off Boulder Point, on the coastline of King Island and that this location was a "place of resort for shipping" and therefore a "port" within the jurisdiction of the Tasmanian Authority pursuant to the Marine Act 1976 (Tas) (the "Tasmanian Act"). It is then said that s119 of the Tasmanian Act applied to the vessel. Relevantly this provides that a vessel when plying seaward from any "port" within the jurisdiction of the Authority must be provided with a duly certificated master and the prescribed complement of officers and crew. Pursuant to subs (2) of s119 the required complement of officers and crew were as prescribed in the regulations. Under the relevant regulations known as the Marine (Safety Manning) Regulations 1992 (Tas) it was required that the vessel have a person certificated as a MED2 on board for off-shore operations. On 17 March 1994, it is alleged that the vessel plyed seaward from Boulder Point without any person holding a MED2 crew member in breach of s119 and for this reason the voyage was unlawful.

Alternatively, reliance is placed by the respondent on s142(3) of the Tasmanian Act which provides that a person who employs a vessel in contravention of any conditions specified in a subsisting certificate of survey is liable to a penalty as if no subsisting certificate of survey had been issued.

Further, reliance is placed by the respondent on s155 of the Tasmanian Act which provides that an owner or master of the vessel, must not permit the use of a vessel in navigation unless there is in force a certificate of survey appropriate to its classification. The definition of certificate of survey is "a valid and unexpired certificate issued by a competent authority of an Australian State" which would include the Marine Board of Victoria.

In its further amended reply, the applicant contends that the respondent waived any technical breach by the applicant in relation to manning requirements as pleaded in the defence. It further relies on a breach of the obligation of utmost good faith by the respondent and alleges a representation on behalf of the respondent, following the sinking of the vessel, that technical breaches in the nature of non-compliance with crewing requirements, would not be relied on by the respondent. Additionally, to support the allegation of a breach of good faith it is submitted that the respondent acted on unsubstantiated rumours in declining to pay the claim, in engaging an investigator who acted improperly in investigating the claim, and in pursuing the defences raised in the proceedings.

The Issues

The issues which emerge from the pleadings are as follows:

•whether the USL Code as amended from time to time applied, or whether the Code in force as at December 1988 applied;

•the meaning and effect of the warranties;

•whether the propulsion power of the vessel was equal to or greater than 250 kW within the meaning of para 24 of Section 3 of Part 4 of the USL Code, so as to require a MED2 on board;

•whether there was a breach of s47 of the Marine Insurance Act (1909) (Cth);

•whether the location at which the vessel anchored on 16 March 1994, for a period of approximately three hours, was a port, so as to attract the Tasmanian law;

•whether there was a waiver by the respondent of the alleged non-compliance with crewing requirements; and

•whether there was a breach of the duty of good faith owed by the respondent to the applicant.

Factual Background

The applicant is owned and controlled by Mr Jack Lucas and his wife. Mr Lucas has been in the fishing industry for more than 45 years.

The vessel was first registered on 30 April 1973. It is a 19.28 metre steel fishing trawler.

In November and December 1989 finance was sought and obtained from the Commonwealth Development Bank of Australia for the purchase of the vessel by the applicant.

The relevant voyage from Eden in New South Wales to Portland in Victoria, was to participate in a joint venture fishing arrangement between the applicant and a Mr Stevens, of Le Capitain Fisheries Pty Limited of Portland, in the south-east fishery area.

At the commencement of the voyage on 14 March 1994 the vessel was covered by a survey certificate, valid until 23 March 1994, which was issued by the Marine Board of Victoria, the State in which the vessel was registered. Prior to the voyage there were inspections, fittings and repairs carried out to prepare and upgrade the vessel for the purpose of the joint venture.

The crew on the voyage included Mr Ray Wicks, the master, who held a MED3 qualification and Mr Lucas who served as the engineer. He had a MED3 qualification. There was no MED2 crew member.

As set out earlier, it was a condition of the survey certificate that the vessel was only entitled to operate with a minimum safety manning crew which included a MED2 member.

The applicant says that the survey certificate was incorrect in requiring a MED2 because, in fact, the propulsion power of the vessel was less than 250 kW so that a crew which included two MED3 members complied with the USL Code. The Marine Board of Victoria had a practice of requiring compliance with the USL Code as amended from time to time and not as frozen.

Before departure from Eden, the applicant informed the respondent of the joint venture and sought approval to extend the policy due to expire on 31 March 1994 to enable the vessel to fish out of Eden, Portland, and areas on the eastern and western coasts of Tasmania. This extension was approved.

Before departure the applicant knew that a MED2 crew member was unavailable. It was decided that Mr Lucas would be the engineer on the voyage to Portland. The intention, at all times, it is said, was to sail the vessel to Portland keeping within 15 nautical miles of the coast as permitted under the USL Code if there was a MED3 officer on board.

The vessel departed Eden on 14 March 1994 at about 4.00 pm. On 16 March at around 1.00 am the vessel rounded Wilsons Promontory. It travelled in a westerly direction and continued to stay within 15 nautical miles of the coast. Mr Lucas became alarmed about the amount of fuel being used and suspected a serious fuel leak. He considered that in the sea conditions it would be impractical to dip the tanks in the open sea. In order to avoid pollution of Victorian ports and to get way from a lee shore and worsening weather conditions the vessel headed for Kind Island where it dropped anchor at a position in the vicinity of Boulder Point. This was suggested by Mr Wicks who was the master of the vessel.

The vessel dropped anchor off Boulder Point at about 6.30 pm on 16 March. Mr Lucas verified the fuel level and found the vessel had a faulty gauge but did not detect a fuel leak.

The vessel remained off Boulder Point until about 9.15 pm that evening when it resumed its voyage.

At about 11.15 pm Mr Lucas went down to the engine room to check the bilges and found that a low level warning light had come on. He pumped the bilges dry and manually shut down a non-return valve to ensure that there was no further increase in the bilge level. The following day Mr Lucas put the non-return valve back into operation and checked the rudder compartment and the anchor well for possible causes of leaks. He found none.
On 17 March 1994 the crew made several fishing shots in order to test the fishing equipment and in the course of this operation fish were caught. These activities occupied most of that day and the vessel did not make any significant progress in the direction of Portland.

On 18 March at around 11.30 am, Mr Wicks went down to the engine room and started the motor which drove the hydraulic winches and the vessel resumed trawling operations. At that time the bilges were dry. Around 1.00 pm Mr Lucas noticed that lights were out in the galley. On going into the engine room to check the generator and motor he discovered heavy flooding in the engine room. The main alternator had cut out and there was no power to operate the water pump. Mr Lucas immediately tried to switch on the stand-by alternator but was unable to get power. The master radioed their position and requested assistance. Water continued to rise in the engine room. No cause was found. Mr Lucas tried many times to shut down the seawater valve. The attempts were unsuccessful. The generator motor would not restart and the water level kept rising.

At around 2.20 pm the master made a call to his brother, Mr Gavin Wicks, who was the master on another vessel which was fishing about 40 miles away. He requested assistance. Mr G Wicks requested pumps urgently from Portland. At around 2.30 pm the radio on the vessel failed when the main battery tanks were submerged. A rescue boat, the "Bow River" steamed to the "Pacific Queen's" assistance. At around 3.30 pm the "Bow River" arrived and a tow line was attached . At around 3.40 pm the master arranged for a "vessel in distress" call to Portland seeking urgent provision of pumps by a fast boat. At about 4.50 pm the "Bow River" ceased the tow and the vessel sank at a point 45 nautical miles from Portland.

On 22 March 1994 an insurance claim for loss of the vessel was lodged with the respondent. An assessor, Mr Peel of Jervis Bay Maritime Consultants was appointed. He furnished a report on 11 April 1994 ("the Peel report"). The respondent received this report on 15 April. The opinion stated in the Peel report was that on the evidence available at that time, the deliberate sinking of the vessel was excluded and that the loss resulted from a latent defect probably electrolysis or some other form of deterioration in the bilge pumping system.

On 20 April 1994 the Claims Manager of the respondents, Mr John Dawes received a telephone call from a Constable Williams stationed at Eden, which referred to rumours that the loss may not have been accidental. Mr Peel was then asked to contact Constable Williams. In late April he reported ("the supplementary Peel report") that the information could not be regarded as evidence, but that with respect to the ongoing rumours a Mr Cole should be interviewed. On 26 April the respondent appointed an investigator, Mr Terry Fitzgerald, a former police officer, of Marinassess Pty Limited ("Marinassess") to investigate the matter further.

Mr Lucas, Mr Barry, (the Claims Manager of MMI General Insurance Co Ltd), Mr Dawes, (the Marine Claims Manager of MMI) and Mr Fitzgerald of Marinassess, met on 30 May 1996 to discuss the claim. The applicant claims that during this meeting a number of matters were raised including statements to the effect that the respondent was not relying on technical breaches as to manning.

There were further discussions and finally MMI declined the claim which led to this proceeding.

I now turn to the specific issues.

Which Version of the USL Code Applies.

In my view, the USL Code as amended was applicable.

The importance of this question is that under the USL Code as in force on 20 December 1988 the safety manning requirements for the vessel in off-shore operational areas, out to 100 nautical miles, required a MED2 on board. This requirement was based on the length of the vessel. Under the amendments made in 1991 the minimum safety manning was based on "propulsion power" and not on length. For vessels less than 250 kW propulsion power a MED3 was sufficient for off-shore operations between 15 and 100 nautical miles. If the vessel had a propulsion power of more than 250 kW but less than 500 kW for operations between 15 and 200 nautical miles off-shore, a MED2 was required.  Accordingly, if the USL Code in effect as at 1988 applied then a MED2 crew member was required purely on the ground of length. If the 1991 amendments applied and the vessel had less than 250 kW "propulsion power" a MED3 would suffice.

Regulation 402 of the Regulations provides:

"402A fishing vessel of less than 35 metres in length must be crewed and crew members must hold the appropriate certificates ... in accordance with Schedules I-IV of Section 3 of the Uniform Shipping Laws Code."

Regulation 103(4) provides:

"(4)A reference in these Regulations to the Uniform Shipping Laws Code is a reference to the Code as at the date these Regulations come into operation." (Emphasis added)

The Regulations were made by the Governor in Council on 20 December 1988. Therefore, it is said that the Regulations in their 1988 form apply.

The applicant points to s3 of the Marine Act 1988 (Vic) ("the Marine Act") pursuant to which the Regulations were made. That defines the USL Code as follows:

"'Uniform Shipping Laws Code' means the Uniform Shipping Laws Code that is adopted by the body of the Commonwealth, ... as that Code is amended from time to time." (Emphasis added)

The applicant relies on s105 of the Marine Act which empowers the Governor in Council to make regulations. Under para(3)(c)(ii) regulations may be made so as to incorporate any code as formulated at the time the regulations are made ...". By subs105(5) however, the above paragrapgh does not apply to the USL Code. This affords some indication that it is the USL Code as amended from time to time which is to apply.

Evidence was led by the applicant from Mr Shaw of the Marine Board that as at 1993-1994 the Board adopted an ambulatory approach to the application of the regulations. It applied the USL Code as amended from time to time and not in its frozen form as at 1988. Furthermore, the regulations were amended in 1994 to make it clear that the USL Code as amended from time to time was to apply.

Accordingly, in my view, the USL Code as amended is the relevant form of that code to be applied in the present case. The significance of this is that the criteria for determining whether the vessel complied with the USL Code falls to be determined by reference to the "propulsion power" of the vessel and not simply by reference to its length.

Construction of the Warranties
First Warranty

The applicant raises some threshold questions as to the proper construction of the warranties. The first, is whether the vessel was in survey at the time of sinking.

The first warranty is set out above and requires that the vessel is in survey at all times during the currency of the policy.

The survey certificate which is dated 16 April 1993, contained the condition that the vessel must have a minimum safety manning which includes either a master or an engineer holding a MED2 certificate. The survey certificate was issued subject to compliance with that condition.

The respondent claims that the manning condition of the first warranty was not satisfied and accordingly the vessel was not "in survey" with the appropriate governmental authority.

The applicant submits that the document should be read contra proferentem in the event of ambiguity. The words "in survey" are ambiguous and do not focus on manning, but rather on the physical condition of the vessel. The words "in survey" do not require compliance with every condition referred to on the survey certificate. It is submitted that there was a valid
survey certificate issued and that it remained in force at all relevant times.

The certificate says that it is in force until 23 May 1994 unless previously cancelled or revoked and subject to compliance with the conditions. Therefore, it entitled the vessel to operate up to 100 nautical miles off-shore until cancelled or revoked.

In my view, the vessel was "in survey" at the time of sinking. My reasons for this view are as follows:

(a)the second warranty specifically refers to the vessel being manned, operated and licensed in accordance with the regulations and by-laws. This supports the view that the first warranty is concerned with the condition of the vessel, whereas it is the second warranty which is directed to manning and operation.

(b)the emphasis in Section 14 of the USL Code, which governs ship surveys is on the physical condition of the vessel and it does not deal with crewing requirements.

(c)paragraph 34 of Section 14 provides for suspension of a certificate where the authority is satisfied that a vessel under its survey fails to comply with the survey requirements. This is some indication that the survey is to remain in force until suspended.

A survey is an act of examination of the condition of an object to determine the measures, if any, necessary to upgrade its standards according to classification needed by the authorities. See E Sullivan, The Marine Encyclopaedic Dictionary (1995), 4th edition, at 417 and also The Macquarie Dictionary, (1995) 2nd edition, at 1760.

Accordingly, in the present case, I do not consider that there can be said to have been a breach of the first warranty as a result of there not having been a crew member with a MED2 qualification on board at the relevant time.

Second Warranty

The warranty as set out previously, requires that the vessel be skippered, manned crewed, operated and licensed in accordance with the regulations, laws and by-laws of the appropriate government authority at all times during the currency of the policy.

The respondent submits that as the vessel operated more than 15 nautical miles from the coast during the voyage and did not have a MED2 crew member on board this warranty was breached.

Firstly, the applicant submits that the second warranty does not fall within the concept of a "warranty" within the meaning of s39 of the Commonwealth Act.

That section provides:

"39. (1) A warranty, in the following sections relating to warranties, means a `promissory warranty, that is to say a warranty by which the assured undertakes that some particular thing shall or shall not be done, or that some conditions shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts.

(2) A warranty may be express or implied.

(3) A warranty, as above defined, is a condition which must be exactly complied with, whether it be material to the risk or not. If it be not so complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date if the breach of warranty, but without prejudice to any liability incurred by him before that date." (Emphasis added)

Subsections 40(2) and (3) read:

"(2) Where a warranty is broken, the assured cannot avail himself of the defence that the breach has been remedied, and the warranty complied with, before loss.

(3) A breach of warranty may be waived by the insurer."

The applicant submits that in order to be a warranty some particular thing shall be done and the warranty must specify with precision exactly what is to be done. A requirement that crewing and operation be "in accordance with regulations, any by-laws and all other applicable laws", it is said, is not sufficiently precise.

I do not accept this submission.

In my view, a specification that manning and operation be in accordance with applicable laws is sufficiently specific to amount to a "promissory warranty" within s39(1). As a consequence there must be exact compliance with the warranty.

On the applicant's approach it would be necessary to spell out in detail in each "warranty", the particular regulations, by-laws and other applicable laws of the state of registration as amended from time to time during the currency of the policy.

In my view, this construction is inconvenient, impracticable and unnecessary and should not be adopted.

A second submission by the applicant, which I do not accept, is that "the laws" picked up by the language of the second warranty are only those laws which give rise to an "offence". It is said that reg 402 does not meet either criteria. That regulation reads:

"402A fishing vessel of less than 35 metres in length must be crewed and crew members must hold the appropriate certificates (if any) in accordance with Schedules I-IV of Section 3 of the Uniform Shipping Laws Code."

The second warranty refers to the manning and operation of the vessel being in accordance with the regulations, by-laws and other laws of the appropriate governmental authority. It is not concerned whether the provisions give rise to an offence. When reg 402 is read according to its language, it simply requires compliance with the relevant regulations, by-laws and other applicable laws. There is no reason to import a requirement that an offence be proven before the warranty is breached. Nor is there any justification for making a distinction between mandatory and directory requirements. In any event, reg 402 uses the term "must" which normally indicates a mandatory requirement. There is no reason to suggest that the requirements are other than mandatory, particularly as they concern requirements for the safety of human life and property. Part IV of Section 3 of the USL Code is concerned with minimum safety manning. Accordingly, it is appropriate to approach the requirements as mandatory. In any event, the warranty will apply where there is non compliance. It simply does not matter for present purposes whether the requirements are mandatory or directory.

Was there a Breach of the Second Warranty?

This depends on whether the vessel should be treated as having a "propulsion power" of less than 250 kW.

It is common ground in the present case that the vessel operated off-shore at distances in excess of 15 nautical miles. Section 3 of the USL Code, Part IV, para 24 provides that where a vessel has less than 250 kW it can operate off-shore up to 100 nautical miles with a MED3 engineer.

Paragraph 21 of Section 3 of the USL Code defines "propulsion power" as follows:

"(g) Propulsion power:

(i)In the case of a multiscrew vessel of less than 35 metres in length ... propulsion power means the maximum continuous rated power in kilowatts of the larger engine provided for the propulsion of the vessel by one screw; and

(ii)In the case of a vessel not included in (i) above, means the total maximum continuous rated power in kilowatts of all the machinery provided for propulsion of the vessel." (Emphasis added)

The important phrase is "total maximum continuous rated power of all the machinery provided for propulsion of the vessel."

A question of interpretation arises as to whether the power of all the machinery provided for propulsion is to be measured after deducting all off-takes of power before reaching the propeller, or whether the power is to be measured at some earlier point in transmission to the propeller. The applicant submits that the power is to be measured after deducting off takes of power before reaching the propeller including a deduction for the steering pump. The respondent, on the other hand, contends for measurement at the crankshaft or stubshaft prior to these off-takes.

Evidence as to Propulsion Power

Ultimately, the question is one of construction, but it is appropriate to consider these terms with respect to their common usage in the industry, in the light of expert evidence.

Although Mr Lucas expressed an opinion that the propulsion power of the vessel was less than 250 kW, I am not satisfied as to his expertise on this technical and complex matter. Moreover, he has a strong interest in the outcome.

Mr Shaw was called by the applicant. He is the Director of Marine Services with the Marine Board of Victoria. He was appointed Chief Marine Surveyor to the Board in about 1982 and over that period his role was that of Chief of Marine Survey. He said that if the owner of a vessel could substantiate that the propulsion power for a vessel was less than that indicated in the survey, to the satisfaction of the Board surveyors, then the Board would use the lower figure. When questioned as to the meaning of the term "propulsion power" he said:

".... I would not see the propulsion power of the engine as being that power that's delivered at the propeller; I would have seen the propulsion power as that power that's developed as close as possible to the engine and the losses after that would not affect my definition of propulsion power. So you've got the propulsion power here at the engine; if you've got a gearbox; if you've got bearings; if you've got tail shaft; if you've got a loss through friction which would be very small, as it goes through the stern gland, whatever. I would say those are losses, but the propulsion power that I would have been using for the purposes of determining the certificate of competency would have been that propulsion power of the engine ... It is the way we would do it and it is the way I believe we do it, but it's never been an issue to the extent it is at this point.

.....

I would look at the word - the total maximum continuous rated power in kilowatts of all the machinery provided for propulsion of the vessel. And I would sort of - in my own mind I would hold that the emphasis is on the machinery so you would work out the power of the machinery, so you have got the power of the machine that is going to provide the power for the propulsion and the losses therein are such are those ... that power that's tucked off from the machine for other matters such as electrical generators, belt driven generators or belt driven bilge pump would reduce the propulsion power and things like bearings, stern gland, gear box. That would not reduce the propulsion power but it reduces the power available to propel the vessel. In my opinion." (Emphasis added)

Mr Shaw went on to say that the owner and the surveyor would probably get their information from the published data for the particular engine from the manufacturer. He later said that what he meant by propulsion power was brake horsepower. Mr Shaw had never heard a marine engineer speak of the rated power of an engine as being the power that is delivered to the propeller.

I do not, however, attach much weight to the evidence given by Mr Shaw as to the meaning of propulsion power. Throughout his evidence he reiterated that shaft horsepower may or may not be considered to be the same as brake horsepower, and he went on to say that in his own mind shaft horsepower is the horsepower provided at the end of the propeller shaft.

Mr Shaw agreed that the indicated horsepower is the starting point. From that is deducted the power used in running the engine to get the brake horsepower. On being asked if brake horsepower was a measurement of engine rating, he expressed the view that brake horsepower and shaft horsepower may be interchangeable terms, but generally brake horsepower is that which is delivered at the stub shaft and that is the meaningful figure that interests a marine engineer. He said there are other deductions to be made such as power losses in the gearbox and friction losses in the shaft and from other devices attached to the shaft such as pumps to get the power available to the propeller. He said that the meaning really swings around the wording which may mean different things to different people. This observation leaves the question open.

I found his evidence inconclusive and conflicting on the critical question. I gained the impression that this was the first occasion on which he had been required to consider, in any depth, the distinctions being put before him.

Mr Brian Roberts was called by the applicant. He is the Regional Manager in Southern New South Wales for Cummins Australia Pty Ltd ("Cummins"), which supplied the engine. He referred to two graph diagrams showing curves of engine performance. These are in evidence (Exhibit F). Curve 1 shows pleasure boat (intermittent) performance. Curve 2 shows the work boat (continuous) performance. These diagrams are publications by the manufacturer. Mr Roberts explained that curve 2, which finishes at a level of 345 horsepower at 1800 rpm, represents what Cummins refers to as shaft horsepower. Curve 2 is the relevant graph for present purposes because it is concerned with continuous performance by a work boat. This is the power available at the output flange of the transmission available to drive the propeller. It allows for deduction of power losses arising from the operation of parts such as the battery charging alternator, a seawater pump which cools the engine through a heat exchanger, and other frictional losses. The resulting power described by the manufacturer as propeller shaft horsepower. It does not, however, take into account power losses arising from the operation of the steering pump. If a reasonable allowance is made for power used by a steering pump  from the shaft horsepower, the result will be a power of less than 250 kW. Accordingly, a MED3 crew member would satisfy the requirement of the USL Code for relevant purposes.

When referred to the expression "rated power", Mr Roberts said he regarded that term as being the power available at the fly wheel, which is the back end of the crankshaft and the engine, before deducting anything for the gearbox and other offtakes.

The applicant also called Mr Noel Riley, a naval architect, who had experience as a registered ship surveyor and was a Fellow of The Royal Institute of Naval Architects and a Fellow of the Institute of Marine Engineers. Mr Riley's expertise is in the design and supervision of the construction of commercial vessels with particular emphasis on fishing vessels; design of propellers for commercial vessels such as tugs and trawlers, and surveying vessels for insurance purposes. He has had thirty-five years experience in ship design. He has been personally responsible for the design of about 200 propellers of which about 160 have been for either new fishing vessels or refitting on existing fishing vessels.

One of the basic requirements for propeller design he said is a thorough working knowledge of engine performance. His evidence was to the effect that to ascertain the propulsion power of the vessel it was necessary to take the upper rating of 370 HP and make appropriate deductions. In his calculations he made deductions for the gear box, a seawater pump, a generator and a steering pump. On the basis of the Cummins' figures, the net propeller shaft power was, on his calculations, in the order of 330 HP or less than 250 kW.

When referred to the manufacturer's curve 2 Mr Riley considered that it would be appropriate to deduct the power drawn by the steering pump. In cross-examination he said he was not familiar with the expression "maximum continuous rated power", but he was familiar with the term "maximum continuous rating".  On the evidence, I am satisfied that these two terms are interchangeable. Maximum continuous rating is measured in brake horsepower and is the power available from the engine. Mr Riley said that maximum continuous rating was an indication of the "useful power available" from an engine. If given in brake horsepower or brake kilowatts, it is measured at the crankshaft. If given in shaft horsepower it is measured at the output coupling of the reduction box. It is normal practice for manufacturers to publish at least one or other of those figures.

Mr Riley understood curve 2 to be the maximum continuous rating for the engine. He agreed that it was never the case that an engine manufacturer published a rating which would deduct a steering pump. He agreed that the maximum continuous rating in communication among naval architects and marine engineers, "invariably refers to that which is published by the manufacturer ... without any deduction for a steering pump". He considered, however, that in order to determine what power is available at a propeller you would have to take into account whatever other machinery is run from the engine or shaft and would have to allow something for friction losses in the shafting system itself, that is in the bearings and in the stern tube with the aim of not overloading the engine under the specified operating condition. He agreed that the expression "rated power" was an industry term, which is equivalent to gross brake horsepower. Mr Riley said that he
would take curve 2 as referring to "maximum continuous rating", whereas "rated power" would refer to curve 1.

In re-examination, speaking of the two curves, he said:

"I would only be interested in curve 2. Curve 1 to me is more or less theoretical, whilst it is something that's obtained in practice on the test bed. In practical applications in a vessel it is to me no significance (sic). The more significant curve is curve 2 because it contains an allowance for the normal add-ons that one would have for a marine engine of this type. If other equipment was driven by the main engine, eg. steering pump or a trawl pump, I would deduct those - the power required by those pieces of equipment before I determine the shaft horsepower available for propulsion." (Emphasis added)

Mr Raymond Newall was called by the respondent. He is a First Class Marine Engineer and an Associate Member of the Institute of Marine Engineers. He has had considerable experience with marine diesel engines including Cummins engines. He refers to the concepts of maximum continuous rating (MCR) and shaft horsepower (SHP). Mr Newall says the maximum continuous rating is the statement by the engine manufacture of the engine's power and speed capability under specified load conditions. These ratings are based on a test standard and standard ambient conditions. The maximum continuous rating is the power produced by the engine and available at the crankshaft coupling. It therefore includes the power absorbed by all auxiliaries required to run the engine. This is what is known as the net brake horsepower (BHP) of the engine. The shaft horsepower, on the other hand, is the net power delivered to the shaft after passing through the gear box. It can be defined as the brake horsepower less transmission losses because it refers to the power available to the propeller shaft. A declaration of an engine's shaft horsepower is given for assistance of the propeller design. In his opinion, the USL Code is concerned with the size or power rating of the engine used to drive the vessel and is not concerned with the total power available to the propeller. Mr Newall refers to the reference in the definition of propulsion power to a multi-screw vessel of less than 35 metres which is limited to the power of the larger engine capable of propelling the vessel by one screw.

Mr Newall makes calculations based on the premise that the vessel was set up on a fish boat rating and not a continuous rating. He says that as such it had a maximum continuous rating of 400 BHP or 298.4 kW and a net shaft horsepower of 376 HP or 280.5 kW. He starts with a maximum continuous rating of 400 BHP.

On the assumption the vessel was fish boat rated he concludes that the propulsion power of the vessel even allowing for deductions is a net shaft horsepower of 376 HP. If one then allows for loss of power by the steering pump it would be 361 HP or 269.31 kW. If account is taken of the loss of power from use of the steering pump and power loss from the exhaust back pressure the figure would be 258.19 kW and not 235.8 kW as stated by Mr Roberts. He also says that even if it were appropriate to use the vessel shaft horsepower as the measure for purposes of definition of propulsion power, and even assuming the deductions in the affidavit of Mr Roberts were allowed to be made, the vessel still had an absolute minimum rating in excess of 250 kW.  Mr Newall expressed the view that it is not the practice to deduct any allowance from a steering hydraulic pump fitted to an engine when determining the engine's rating.

In cross-examination he agreed that he had no degree in engineering and that he was not a Member of the Institute of Engineers of Australia but was an Associate Member. He had no qualifications as a naval architect and could not for example prepare a structural design for a boat from first principles. He agreed that the meaning he attributed to propulsion power was one in respect of which he had made an assumption of the power available to the propeller was irrelevant and that he had not taken into account the power available for the actual propulsion of this particular vessel. Mr Newall considered the reference to maximum continuous rated power referred to in the USL Code is a fish boat rating, if the engine was set up for fishing.  He could give no explanation as to why the USL Code used the expression maximum continuous rated power if it was intended to apply to a fish boat rating. The evidence was that fish boat ratings are based on intermittent outputs of power and not on continuous outputs. He was unable to give an explanation as to the distinction drawn in Section 9, paragraph 14.1 of the USL Code between maximum continuous brake power and maximum brake power. The latter expression refers to the power the engine will transmit irrespective of the time the engine manufacturer nominates the engine may be run at that power.

Mr Newall said that amongst engineers the concept of continuous rating and intermittent rating have recognised meanings. The continuous rating is applied to vessels that are steaming for continuous periods, whereas a fish boat rating is designed to develop maximum power when the vessel is fishing or trawling.

Mr Newall was not aware of the actual brake horsepower or shaft horsepower of the engine in the subject vessel. In the course of cross-examination the following exchange took place:

"Q:If one was trying to determine the power available for the propulsion of the 'Pacific Queen', in order to derive an accurate answer, one would have to have access to the actual engine of the 'Pacific Queen', correct?

A:If you wanted to get down to the ninth degree, yes."

Mr Newall agreed that in his view the USL Code when it identified the need to determine propulsion power was concerned with the actual vessel.  He later agreed, that if you want to know the horsepower available to the propeller
then you have to deduct all losses that are coming off the engine and shaft.

I prefer the evidence and the approach taken by Mr Riley to that of Mr Newall. Mr Riley impressed me as a careful and reliable witness with extensive practical experience and qualifications with respect to the propulsion of trawlers and other vessels. His special experience with respect to propeller design was particularly relevant.

I do not consider that it is appropriate to carry out the exercise on the basis of a fish boat rating, because the definition of propulsion power is concerned with the maximum continuous rated power and not with intermittent power.

The evidence satisfies me that a fish boat rating is equivalent to an intermittent rating. This is normally applied to trawlers of the type under consideration on the basis that a higher amount of power can be taken out of the engine for intermittent periods when the vessel is trawling. Mr Riley makes this point in his evidence in chief. Intermittent power outputs are different to a continuous power output. The calculation of "continuous" power over a period of time results in a lower rating because the output must be sustained for a period as opposed to an intermittent output. As the definition refers to continuous rated power, I consider that the fish boat performance figures set out in Exhibit 3 are not the relevant criteria.
This conclusion is reinforced by paragraph 14.1 of Section 9 of the USL Code where the distinction is drawn between maximum continuous brake power and maximum brake power. The concept of maximum brake power is expressed to be irrespective of the time the engine manufacturers nominates the engine may be run at that power. In other words, it is an absolute maximum output irrespective of time.

Apart from the expert evidence, having regard to the language, I consider that on the proper construction of Section 3, clause 21(g) of the USL Code, the reference is to total maximum continuous rated power. I am satisfied that this is a reference to maximum continuous rating. In addition, the definition refers to "all the machinery provided for propulsion of the vessel". In my view, the words, "provided for propulsion", are critical. The words, "provided for" mean "available for" propulsion. Logically, this requires the deduction of any off-takes of power provided by "all the machinery" which are not transmitted or used for the propulsion of the vessel. In ordinary parlance, it is not appropriate to speak of power provided for a certain purpose, if in fact, some of the power has been siphoned off or provided for other purposes. The concept of propulsion power in the present case is concerned with the actual power used to propel the vessel. Accordingly, while the starting point may be the figure provided by the manufacturer, nevertheless in any individual case to determine the propulsion power referred to in Section 3 para 24, of the USL Code, it is necessary to estimate the power which is to be used for the propulsion of the vessel.

My conclusion is therefore that the propulsion power of the vessel at all relevant times was less than 250 kW and accordingly, the presence of a MED3 engineer was sufficient. There was no breach of either warranty to justify refusal of the claim.

Implied Warranty

As I have concluded that the propulsion power of the vessel was at all relevant times less than 250 kW and that the vessel was adequately manned, and was in survey, the allegation of the respondent of breach of implied warranty pursuant to s47 of the Commonwealth Act does not arise. Section 47 requires that a marine adventure be carried out in a lawful manner so far as the insured can control the matter. Breach of the implied warranty was alleged on the basis of inadequate crewing under s94(3) of the Marine Act 1988 (Vic) and the requirement that the vessel be in survey under Section 97 of the Marine Act 1988 (Vic). Neither of these allegations of breach have been made out and consequently there has not been a breach of the implied warranty under s47 of the Commonwealth Act.

Tasmanian Law

In view of the conclusion I have reached, that the vessel had a propulsion power of less than 250 kW, the argument as to illegality under Tasmanian law does not strictly arise.

However, I am not satisfied that the place of anchorage of the vessel on the evening of 16 March 1994, "near Boulder Point",  as shown on the marked charts in evidence, was at a "port" within the meaning of s4 of the Marine Act 1976 (Tas).

Section 4(1) of the Tasmanian Act defines "port" to mean:

"... any harbour, haven, roadstead, or place of resort for shipping, and any navigable river."

The evidence is that the vessel dropped anchor off Boulder Point for about three and a half hours on 16 March 1994.

The importance of this issue is that the illegality under the Tasmanian Act attaches to a vessel which plys seaward from any "port" within the jurisdiction of the Tasmanian Authority and the requirement that the crew include a MED2, applies in such a situation. The respondent submits that the place where the vessel dropped anchor was a place of resort for shipping.

Mr Lucas gave evidence that he was not familiar with the term "place of resort".  He had no recollection of being near Boulder Point or any other Point. He left it to Mr Wicks to decide where it would be safe to anchor. Mr Wicks said his intention was to go past King Island to drop the anchor and dip the tanks.  He was familiar with Boulder Point and said that there were little short pieces of beach with rock all around them as well as sections of reefs which occasionally got sand on them. Mr Wicks said that he had been there possibly ten times in the last five years. Sometimes he had seen cray-fishing boats there but he was the only trawler that went there. The vessel was one of the shortest boats trawling on the West Coast of King Island. The other boats were 70 to 80 footers and worked in heavier weather. When asked if he would describe the place where he anchored as a place of resort for shipping he said that if you did not have local knowledge you could "easy go up on the reef there anywhere". He had never heard the expression "a place of resort for shipping".

There was also tendered "Australia Pilot", Volume II, (1982) 6th edition, published by the Hydrographer of the Navy. In paragraph 2.17 it refers to anchorage at Boulder Point in the following terms:

"During W gales coasting vessels often anchor in depths of about 16m ... on the bank near Boulder Point formed by sand heaped up at the junction of tidal streams. In a settled W gale this anchorage is as safe as that in Sea Elephant Bay ... about 15 miles S and handier for proceeding W when the weather moderates."

On this evidence, I am not satisfied that the place of anchorage at Boulder Point was a "harbour, haven or place of resort for shipping". On the evidence, only one trawler goes there and some cray-fishing boats from Apollo Bay have been seen to use the spot as an anchorage in a sudden 24 hour front, but Mr Wick's evidence was that if there is a "bad front they go back home to unload".

Further, I do not consider that, at the time of the loss, it can be said that the vessel was plying seaward from a "harbour, haven or place of resort for shipping" within the meaning of s4 of the Tasmanian Act. Accordingly, the  provisions of Tasmanian law are not attracted.

It is therefore, not necessary to deal with the interesting constitutional questions raised on behalf of the applicant, as to whether the relevant provisions of the Tasmanian Act are beyond the Tasmanian parliament's power to make laws for the peace, welfare and good government of Tasmania.

Waiver - Submissions

Although it is not necessary to deal with this question for the sake of completeness I will do so.

The respondent's submission is that upon breach, the cover ceases to be applicable unless the insurer subsequently
affirms the contract. It is said the words of s39(3) of the Commonwealth Act are clear. They are set out earlier.

The respondent submits that the rationale of warranties in insurance law is that the insurer only accepts the risk provided that the warranty is fulfilled. See Doak v Weekes (1986) 4 ANZ Ins Cas 60-697 at 74, 156-7 and Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd ("TheGood Luck") [1992] 1 AC 233 at 263.

The provision also makes it clear that it does not matter whether the condition requires exact compliance or whether it is material to the risk or loss or not. The discharge is automatic. In this respect s39 can be contrasted with s24 which is concerned with a material circumstance.

In response, the applicant submits that there has been a waiver of any breach of warranty.

Section 40(3) of the Commonwealth Act provides that a breach of warranty may be waived by the insurer.

The respondent submits that this provision is concerned with the position where a policy has been discharged by the operation of s39(3) but the underwriter, in effect, affirms or agrees to reinstate the policy. It is said there can be no reinstatement of a policy after the period has expired. In the present case the policy had expired by the time of the alleged waiver. It is further submitted that discharge following a breach of a promissory warranty does not set aside the policy from the outset and accordingly no question of return of premium can arise. It is discharged on and from the time of breach. The evidence would not support a finding which would constitute waiver under either the general law or the Commonwealth Act.

The applicant relies on waiver both under the general law or under the Act.

The Evidence as to Waiver

Mr Lucas says that in about mid-April 1994 he rang Mr Barry, the Claims Manager, of MMI General Insurance Co Ltd and a Director of SB Insurances Pty Ltd. Mr Lucas said that he asked Mr Barry when he would be "paid out". He alleges that when he stated that he understood that the Peel report was completed,   Mr Barry responded by saying that the assessor's report was completed and that it was only a matter of the completion of final paper work and that the claim would be settled and a cheque given in the next week.

Mr Barry said that he received a report on 15 April 1994 from Jervis Bay Marine Consultants. He says that between 18 March and 15 April he had a number of telephone conversations with Mr Lucas and the insurance broker, Mr Och, regarding the status of the claim during which he said words to the effect that the insurer would be unable to comment on the claim until it received a report from the surveyor who had been retained to inquire into the circumstances of the loss.  The surveyor at that time was Mr Peel. Mr Barry says that the initial report of Mr Peel was incomplete and denies the above conversation with Mr Lucas in mid-April 1994.

Mr Peel's first report is dated 11 April 1994. In that report he states that his inquiries reveal that the vessel was inadequately manned at the time of the incident. He stated that the vessel was in survey at that time. At page 4 of his report, he says:

".. We note that Mr Lucas as the Owner has extensive experience at sea and on this particular vessel, and on a balance of probabilities would not have suffered from insufficient knowledge or experience in the situation in which he found himself on 18 March 1994. His determined attempts to save the vessel are well documented."

He further stated:

"In our opinion which is based on evidence presented at this time, we have excluded the deliberate sinking of the vessel. The fact that an apparently profitable joint venture had been negotiated and agreed upon supports this view.

...

... we are convinced that every effort was made to prevent the loss of the vessel once the flooding was discovered." (Emphasis added)

In discussing the evidence gathered in paragraph 12 of his report, Mr Peel expressed the view that notwithstanding some statements remained unsigned, further delays were unwarranted and that any changes would be notified on receipt of the signed statement. This is consistent with a statement being made by Mr Barry that the matter would be settled.

Mr Barry was the Director of SB Insurances Pty Limited which was a consultant to the marine insurance market. From March 1994 to June 1995 he was retained as a consultant to the Marine Division of MMI General Insurance Co Limited ("MMI"). He appointed Mr Peel to investigate the loss on MMI's behalf.

In my view, I consider it unlikely that Mr Barry in mid-April would have used words to the effect that he was unable to comment on the claim until he received a report from the surveyor appointed to inquire into the circumstances of the loss. By the time of the mid-April conversation, it is probable that he was in possession of the Peel report. I consider it more probable than not, that he would have said to Mr Lucas, particularly having regard to the later evidence to which I will refer, that the claim would be settled after completion of final paper work, and that Mr Lucas would get a cheque in the near future.

This evidence of Mr Barry is inconsistent with that of Mr Och, Branch Manager of the OAMPS Insurance Brokers Division of
OAMPS of Australia Ltd, who said that in early June 1994, Mr Barry said:

"We were in a position to settle this claim at the end of April 1994, but a telephone call was received from Eden Police Station advising we should investigate the matter further. So we are."

Mr Och alleges that this again was confirmed by Mr Barry in August 1994 when he met Mr Barry in Sydney and he said:

"MMI was ready to issue the cheque to settle the Mowie Fisheries claim at the end of April. This was not done because a phone call was received from the Eden Police Station advising MMI to investigate the matter further."

On 20 October 1994, Mr Och wrote to Mr Dawes, the Marine Claims Manager for MMI in reference to the denial of liability for the loss. This letter stated:

"MMI prides itself on 'The Standard Quality In Insurance' and repeatedly emphasises its outstanding claims service reputation.

For this matter, 7 months after the date of incident to finally come to this conclusion with a "Carefully worded letter", that means more than it states, has left a large dent in this persons (sic) assessment of MMI as a recommended insurer for its clients.

You stated to both our client in May and the undersigned in August that the claim was to be settled at end of April and the cheque was practically drawn.

It is obvious that at the time, all evidence showed that the claim was one covered under the policy irrespective of the question of manning which was not a consideration on your part.

How do we now get a statement that "The Loss of the Vessel was not caused by an Insured Peril" when you obviously had stated that the claim was payable under the Policy ..."

Mr Barry denies the words attributed by Mr Och. He says that he indicated to Mr Och in words to the effect that MMI had commissioned inquiries and no decision could be reached until the results were at hand.

MMI denies that Mr Barry had authority to make any admissions on behalf of the company.

The consultancy agreement between MMI and Mr Barry's company, SB Insurance Services Pty Ltd is Exhibit 4. Clause 6 of this agreement provides that the legal relationship is that of principal and independent contactor and not of employer/employee. There is a provision that the consultant shall not make any representation that the consultant has authority to bind the company.

There is no evidence that this arrangement was made known in any form to  Mr Lucas.

In my view, the statements of Mr Barry in mid-April provide, together with the other material, evidence as to the position adopted by the respondent. I do not regard the statements of Mr Barry as an admission on behalf of the respondent but rather as some evidence, as to his understanding of the position taken by MMI at that time.

On about 20 April 1994, a telephone call was received by Mr Dawes from Constable Williams of Eden, indicating that there may be suspicious circumstances surrounding the sinking of the vessel. On 26 April 1994 Mr Barry, under the direction of Mr Dawes, appointed Mr Fitzgerald of Marinassess to make investigations. 

Mr Fitzgerald made a report dated 7 June 1994 in which he reached the conclusion that there was no definite evidence that Mr Lucas or Mr Wicks deliberately sank the "Pacific Queen". He expressed the view that there was "considerable doubt due to the circumstances of the whole proposed joint venture, the method of crew selection, the sailing in waters that are outside the conditions of survey," that made the "claim suspicious". He suggested further inquiries.

Mr Fitzgerald made a further report on 5 September 1994 in which he reports on the statements obtained by Jervis Marine Consultants and also on correspondence from Mr Lucas and his solicitors. There is no suggestion in this report of any deliberate sinking. It concentrates on the manning warranties. In my view, on a fair reading, it is argumentative and far from impartial.  It sets out in the second paragraph to refer to possible answers that the insurer might give to dispute reasons why Mr Lucas did not comply with the warranty and the survey requirements of the "Pacific Queen".

I do not find the evidence given by Mr Fitzgerald satisfactory, and provide more specific reasons for this finding below.

On 30 May 1994  Mr Lucas attended a meeting at MMI in Sydney with Mr Barry, Mr Dawes and Mr Fitzgerald. In the course of this meeting, Lucas states that he said:

"What are we fighting about anyway? Is it the MED II issue?"

Mr Dawes is alleged to have said:

"No we will not hang our case on that issue. If we did I am sure we would lose. You show me one claim that has not been paid because of MED requirement not having been met."

Mr Lucas says that he then said:

"Please do not make my claim the test case on this issue."

Mr Dawes is alleged to have replied:

"You have no worry about that issue."

Mr Dawes claims that the result of the meeting was that he informed Mr Lucas that Mr Fitzgerald had got a bit more information and that he would be pushed to complete his report. After receipt of that report and after the Marine Board's decision, Mr Dawes would be able to give a decision.

Even on Mr Dawes' version of the conversation, Mr Lucas said words to the effect that:

"I could not find a MEDII for the trip. I am basically qualified as a MEDII anyway. Is this going to make any difference to the settlement of the claim?"

To which Mr Dawes said he responded:

"I am waiting on Mr Fitzgerald's report as to the difference between MEDII and MEDIII. However, it is not our policy to deny liability on a minor technicality. However, if the breach is of a serious enough nature then we might have a different view."

In my view, this exchange in referring to a "minor technicality" is consistent with Mr Dawes not being concerned about the difference between MED2 and MED3. He knew by this time that in the view of Mr Peel there was no practical difference between having a MED2 and MED3 on board. Moreover, in his summary to the 7 June 1994 report, Mr Fitzgerald attaches no significance to the difference between MED2 and a MED3 qualifications except for a vague speculation that:

" ... consideration might be given that if a MED2 was on board with a greater knowledge, an earlier appreciation may have been made and perhaps the ingress of water been able to be stopped before a dangerous situation occurred."

The thrust of that report was really directed to the question as to whether there were suspicious circumstances, sufficient to justify a conclusion that the vessel had been deliberately sunk.  Mr Fitzgerald's conclusion was there was no specific evidence to support such an allegation.

The query by Mr Lucas as to whether the discussion with Mr Dawes about MED2 and MED3 would "make any difference to the settlement of the claim", indicates that in the mind of Mr Lucas there had been definite talk of settlement. Moreover, when coupled with the position expressed by Mr Dawes that it was not the policy of MMI to deny liability on a minor technicality, I think considerable support is given to the version of Mr Lucas and of Mr Och as to the attitude of MMI during this period.

In the light of the Peel report and the inconclusive comments of Mr Fitzgerald about ten days later in his June report, concerning the importance of MED2 and MED3, I think it is more probable than not, that Mr Dawes said to Mr Lucas that MMI would not rely on breaches of warranty relating to crew qualifications.

On 10 June 1994 the Victorian Marine Board sent its report on the loss of the vessel to Mr Lucas and indicated that there would be no prosecution initiated in relation to the loss.

Mr Och impressed me as a truthful independent witness with a reasonable recollection of the conversations which had taken place.

In relation to the conversation of 30 May, Mr Barry agreed the question of a MED2 or a MED3 qualification was raised, although he differs with Mr Lucas as to what was said about reliance on any difference.

In his statement as to the meeting of 30 May 1994, Mr Fitzgerald refers to the conversation with Mr Dawes of 30 May. He does recall discussion of the MED2 qualifications or manning but does not mention any discussion as to whether it would make any difference to the settlement of the claim. It was evident in cross-examination that he adopted the position that he did not recollect much of the meeting at all.

In cross-examination Mr Fitzgerald was asked whether one of the main things he was initially instructed to do was to investigate the allegations advanced by Constable Williams of Eden Police. He denied this. However, his preliminary report of 7 June 1994 clearly refers to instructions to investigate the Peel report and "allegations" concerning the loss of "Pacific Queen". It is evident from the second paragraph of that letter, that these allegations were those made by Constable Williams. He tried to avoid this contradiction by suggesting that the wording in the report was probably not correct and that his instructions were simply to investigate the loss of the vessel and report to the insurers.

In my view, the evidence indicates that what occurred was that on receipt of the Peel report and between about 15 April and 20 April 1994, the respondent took the position that it was prepared to settle the claim. Mr Barry communicated that position to Mr Lucas.

When Constable Williams contacted Mr Barry on 20 April, Messrs Barry and Dawes considered it wise to appoint another assessor to investigate whether there were any suspicious circumstances.  On 26 April 1994 Mr Fitzgerald was appointed and his primary task was to investigate any suspicions or allegations raised by Constable Williams as to the deliberate sinking of the vessel. By 30 May 1994 Fitzgerald had obtained no evidence to support the allegation. He gave his report seven days later.

The versions of Messrs Dawes and Barry as to what was said about MED2 qualification at the meeting of 30 May are contradictory of the denials given by Mr Fitzgerald. Overall, I prefer the evidence of Mr Lucas on this point. In my view, this version is consistent with the earlier statements given
by Mr Barry in mid-April and is consistent with the position as indicated by the evidence of Mr Och.

At the meeting of 30 May it is more probable than not that Mr Dawes did not wish to be perceived as taking a technical point.  He was well aware that to decline a claim of this nature was a serious step so far as MMI was concerned. It is consistent with wanting to create an impression of reasonableness that such a statement would have been made, particularly in the light of the indications in the Peel report. It is unlikely that any communications with Mr Fitzgerald would have indicated to the contrary in relation to the distinction between a MED2 and MED3 qualification. It is not a matter which Mr Fitzgerald urges with any force in his preliminary report furnished seven days later. It is clear in my view that the main purpose of that report was to investigate the deliberate sinking of the vessel.

Accordingly, as far as the factual position is concerned, I accept the evidence of Mr Och and Mr Lucas as to statements made by Mr Barry, Mr Dawes and Mr Fitzgerald in the period mid-April 1994 to September 1994.

However, for reasons given below I am not satisfied that the applicant has made good its case as to waiver.

Waiver - Legal Principles and Reasoning

The applicant submits that the respondent has waived any rights which it may have otherwise had to decline liability as a result of the statements made by Mr Dawes and Mr Barry to the effect that the breaches of the crewing requirement would not be relied on. The claimed waiver is not based in any variation for consideration or on estoppel. Rather the applicant relies on what it claims is a "true" case of waiver where the statute provides a right solely for the benefit of the respondent and the waiver is imputed by law through the deliberate conduct of the respondent with knowledge. The applicant draws attention to the "delay" between the making of the claim in April 1994 and the decision to decline the claim which was notified by the respondent on 19 October 1994 on the grounds of breaches of warranty as to crewing.  Reference is made to the decisions in Craine v Colonial Mutual Fire and Insurance Co Ltd (1920) 28 CLR 305 and Commonwealth v Verwayen (1990) 170 CLR 394.

The submission of the respondent is that upon breach of warranty the cover ceased to apply unless the insurer subsequently affirmed the contract. The respondent refers to the decision in State Trading Corporation of India Ltd v M Golodetz Ltd [1989] 2 Ll.R 277 at 287 and The Good Luck [1992] 1 AC 233 at 263.

The respondent also refers to s39(3) of the Commonwealth Act 1909 as set out earlier in these reasons.

The respondent submits that the discharge from liability is automatic and does not depend on any election by the insurer to treat the policy as at an end. The underlying rationale of warranties in insurance law it is said is that the insurer only accepts the risk provided that the warranty is fulfilled. It is said to be further evident from the wording of the section that it does not matter whether the breach was relevant to the loss. Accordingly, upon breach of warranty, unless there has been an affirmation, the policy does not remain in force: Cf Arnould, The Law of Marine Insurance (1981), 16th ed para 683 and 687.

In the Good Luck (supra) at 263, Lord Goff with whom all the other members of the House of Lords concurred, quoted the observation of Kerr LJ  in State Trading Corporation of India Ltd v N Golodetz Ltd (1989) 2 Ll Rep. 277 at 287:

"Thus, the correct analysis of a breach of warranty in an insurance contract may be that, upon the true construction of the contract, the consequence of the breach is that the cover ceases to be applicable unless the insurer subsequently affirms the contract, rather than to treat the occurrence as a breach of the contract by the insured which the insurer subsequently accepts as a wrongful repudiation."

After noting the tentative terms in which the above view was expressed, Lord Goff said at 264:

"In truth the insurer, as the Act provides, is simply discharged from liability as from the date of the breach, with the effect that thereupon he has a  good defence to a claim by the assured."

His Lordship also said that it was wrong to suggest that an insurer was entitled to avoid a policy of insurance or to repudiate it when the assured has committed a breach. He considered such a suggestion reflected the fact that faced with a breach the insurer could decide to avoid it. In his opinion, it was only in the sense of repudiating liability under the policy and not in the sense of repudiating the policy, that it would be right to describe the insurer as being entitled to repudiate.

The respondent submits that under the general law there is no independent doctrine of waiver. A bare waiver it is submitted has no juridical consequences because of the absence of consideration.  It is said that if it is to have any juridical effect it must be because of the application of some other doctrine such as election, or estoppel. Reference is made to Greig and Davis, The Law of Contract (1987) at 120-136 and the fifth supplement at 11-17.

There are a number of authorities and texts which support the view that there is no independent doctrine of waiver as distinct from election, estoppel or variation of contract. These include Craine v Colonial Mutual Fire Insurance Co Ltd supra at 326, where the court set out the following propositions in relation to waiver:

1. A waiver must be an intentional distinct act with knowledge.

1. The purpose of waiver is to prevent a from person taking up two inconsistent positions.

1. The doctrine is concerned with the question whether a person has approbated so as to prevent that person from "reprobating". Put another way, it is concerned with whether a person has elected to get some advantage to which he or she would not otherwise have been entitled so as to preclude a later election based on a contrary position.

Their Honour's draw a distinction between waiver and estoppel by conduct, because the latter focuses on the effect of a statement on the recipient whereas waiver is concerned with the conduct of the person whose conduct or statement is said to give rise to the waiver. Moreover in estoppel cases knowledge of the person sought to be estopped is immaterial.

In Craine's case  itself the fire insurance company raised a defence that the plaintiff had not complied with a condition of the policy requiring a claim to be made within a certain time after the fire and providing that unless that was done no amount would be payable. The plaintiff pleaded waiver and estoppel. The jury found that the defendants had represented that they did not intend to rely on the fact that the claim was made too late. The Court held that from the conduct of the defendants at the trial it should be taken that they did not contest the estoppel plea.

In Craine's case the successful waiver defence was based on an election in the narrow sense of making a decision to exercise rights consistent only with the continued existence of the policy. Also, in that case the Court held that the facts necessary to support a plea of estoppel were made out. In the present case there was no such election between inconsistent alternatives nor are the elements of estoppel made out. Cf Freshmark Limited v Mercantile Mutual Insurance (Australia) Limited [1994] 2 QdR 390 at 395-6, 403-4 and in the article by Keith Howe, The Applicability of Waiver and Estoppel to Insurance Policies, February 1996, Queensland Law Society Journal at 63.

The doctrine of waiver was considered in the context of promissory estoppel by the High Court in Commonwealth v Verwayen (1990) 170 CLR 394. At 406, Mason CJ pointed out that often the term "waiver" is used to describe the result of the application of various principles rather than to designate a particular legal concept or doctrine. He went on to say:

"According to its strict connotation, waiver is an intentional act done with knowledge whereby a person abandons a right by acting in a manner inconsistent with that right: Craine v Colonial Mutual Fire Insurance Co Ltd ((1920) 28 CLR 305 at 326); ... However, the better view is that, apart from estoppel and new agreement, abandonment of a right occurs only where the person waiving the right is entitled to alternative rights inconsistent with one another such as the right to insist on performance of a contract and the right to rescind for essential breach. See Kammins ([1971] AC at 883). This category of waiver is an example of the doctrine of election."

Brennan J at 423 ff considered that there was a separate doctrine of waiver. He said at 424:

"The sterilizing of a right might, in some circumstances, be attributable to either a waiver or an election, but the doctrines are distinct, for a right may be waived though there is no alternative right inconsistent with it."

His Honour found that in the case before him the right to raise a limitation period as a defence was introduced solely for the benefit of a defendant who must plead the right before it is effective and that therefore the right was capable of waiver. However, he held that the right had not been waived because the time for exercise of the right had not arisen.

Deane J expressed agreement with the analyses of the law and the facts made by Dawson J in dismissing the appeal. However, he discussed in some detail the application of the doctrine of estoppel, both promissory and by conduct, to the circumstances.

Dawson J at 451 pointed out that waiver was an imprecise term and was used to describe what is done in a variety of circumstances rather than to assert any particular legal process. He considered that where it was not used in the sense of election between mutually exclusive alternatives, it was generally indistinguishable from estoppel.

Dawson J also decided the case on the basis of estoppel.

In my view, the reasons of the majority of the High Court in Verwayen's case (supra) support the view that there is no independent doctrine of waiver as distinct from election, variation of contract or estoppel.

In the present case, there is no suggestion that there has been a variation of the terms of the policy for valuable consideration or otherwise. Nor is a submission made that the elements to found estoppel have been made out.

The remaining question is whether there has been an election. The judgments of the High Court in Verwayen, indicate that for there to be an election or abandonment of a right, it is necessary that the person waiving the right should be entitled to alternative rights inconsistent with one another, such as the right to insist on performance of a contact and the right to rescind for essential breach. See Mason CJ at 407, Dawson J at 451, and Toohey J at 472. That requirement is not satisfied in the present case. At best the statements of Messrs Barry and Dawes did not amount to an election between inconsistent rights.

I consider that judgments in Verwayen limit the application of waiver to circumstances of either election, variation of contract or estoppel. See Mason CJ at 406-407, Dawson J with whom Deane J generally agreed at 451. Toohey J at 467 and McHugh J at 491.

Verwayen's case was a much clearer case than the present, because in that case proceedings had been instituted and the Commonwealth had decided not to raise the limitation defence, but later sought to do so. It obtained leave to amend its defence to rely on the Limitations of Actions Act 1958 (Vic) and to otherwise depart from its statement of policy.

In the present case, the waiver is said to have taken place prior to litigation between the parties and in an informal context. The statements relied on amount at most to no more than expressions of an intention not to rely on the breaches of warranty. There is no evidence of reliance by or detriment to the applicant as a result of the statements. Although emphasis was placed by the applicant on the substantial lapse of time between the claim and formal denial of liability I am not satisfied, in the absence of reliance or detriment, that this lapse of time amounted to waiver.

Verwayen's case has been consistently applied in subsequent decisions since 1990. It is the controlling authority and for reasons given above I consider that in the present case there was no waiver by or on behalf of the respondent as asserted by the applicant.

Good Faith

The applicant contends that the respondent should be precluded from raising the defences as to the breach of warranty. It is said that the insurance contract was one of utmost good faith and for the respondent to rely on non-compliance amounted to a breach of this duty. It is then said that the real basis of liability was the continuing unsupported adoption of the rumour conveyed by Constable Williams that the loss was not accidental and the circumstances surrounding his investigation of the matter.

There is no doubt that the insurance policy is a contract based on utmost good faith as between the parties. However, I can see no relevant breach of any duty of good faith. What is really being advanced as a breach of duty of good faith is that the respondent is approbating and reprobating as to its position as regards the breaches of warranty. This is simply another way of endeavouring to argue the waiver point.
Moreover, the duty to observe the utmost good faith does not sound in damages. See Financiere De Cite SA v Westagate Insurance CoLtd [1991] 2 AC 249 at 280, where Lord Templeman, speaking of the duty of utmost good faith, said:

"If Hodge were in breach of that duty no damage flowed from the breach for the reasons I have already given. But it may be helpful to observe that I agree with the Court of Appeal that a breach of the obligation does not sound in damages. The only remedy open to the insured is to rescind the policy and recover the premium."

See also Manifest Shipping & Co Ltd v Uni-Polaris Insurance Co Ltd ("The Star Sea") [1995] 1 Ll.R 651 at 667.

I am not persuaded that any duty of good faith between insured and the insurer in the present circumstances precludes reliance by the respondent on breach of warranty.

The evidence before me does not justify the conclusion that there has been a failure to exercise good faith on the part of the respondent, through the representations or actions of either Mr Dawes or Mr Barry in dealing with the claim or as a result of the conduct of the respondent or its agents in investigating the claim and pursuing its defences to the applicant's claims.

The doctrine of utmost good faith is based on the fact that an insurance contract is a contract to some extent made on speculation. The relevant facts lie most commonly in the knowledge of the insured. The underwriter trusts in the insured's representations and proceeds in the confidence that the insured has not withheld any circumstance in his knowledge, so as to mislead the insurer. It seems to me, primarily directed to concealment or suppression of information. See Carter v Boehm (1766) 3 Burr 1905. See also O'May on Marine Insurance (1993) at 35-44.

In relation to return of premium, reference should be made to MacGillivray & Parkington on Insurance Law, (1988) 8th ed, at 1055, where it is said that if a term is by nature a condition subsequent, such as a continuing promissory warranty and the breach occurred after the commencement of the risk, then the insurers were at risk for a time and therefore no premiums are recoverable.

Materiality

The applicant also submits that there was no causal connection between the alleged contraventions and the loss. However, as pointed out earlier, it is quite clear from the wording of s39 of the Commonwealth Act that there is no necessity for any causal connection between the breach and the contraventions.

Compound Interest

In my view this is a situation where consistently with the decision in Hungerfords v Walker (1989) 171 CLR 125 at 149, interest by way of damages should be calculated on a compound interest basis, in order to accurately reflect the applicant's loss.

Costs

I consider that costs should follow the event and that the respondent should pay the applicant's costs.

Conclusion

The applicant is entitled to an indemnity for loss of the vessel in the sum of $640,000 together with compound interest.
I direct the applicant to bring in Short Minutes which state the precise amount to be awarded, together with any other orders necessary to give effect to the above reasons.

I certify that this and
the preceding sixty-two (62)
pages are a true copy of the
Reasons for Judgment herein of
his Honour Justice Tamberlin.

Associate:

Date:  11 October 1996                

Counsel for Applicant:               Mr A W Street  

Solicitor for Applicant:                   Allen Allen & Hemsley

Counsel for Respondent:               Mr A Emmett QC
  Mr G Nell  

Solicitor for Respondent:             Ebsworth & Ebsworth

Date of Hearing:  8,9,10,11,12 & 15 July 1996  

Date Judgment Delivered:                   11 October 1996