Marine Insurance: Law and Practice
CHAPTER 4
INTERMEDIARIES
I AUTHORITY
The law of agency
4.1 A large number of commercial situations are governed, at least in part, by the law of agency, either by its general principles or by particular rules or customs applicable to the situation in hand. A comprehensive survey of agency law cannot be attempted here and must be sought elsewhere. It should be remarked, however, that the relationships between assureds, brokers, underwriting agents and insurers are to a large extent governed by the general law of agency, to which reference should be made when necessary.1Contractual and gratuitous agencies
4.2 A person may act as an agent, and so be able to affect the position of his principal, without being under any binding contractual obligation to do so and without any right to remuneration for acting. By contrast, the agent may enter into a contract with his principal whereby he promises to achieve a result, or at least to use his best endeavours to do so, in return for his principal’s providing, or promising to provide, some consideration such as remuneration. There may be an intermediate situation where, perhaps at his principal’s request, the agent acts on his principal’s undertaking, revocable or irrevocable, to remunerate him for his action, which remuneration will be payable once the agent has performed. Clearly, the precise situation in issue will depend upon its precise facts. It is sufficient to note at this stage that, at a given moment, there may or may not be a contractual relationship between a principal and an agent and their rights and duties may, but not necessarily will, vary accordingly.Three-party situations
4.3 There is an agency when an agent has the authority of a principal to affect the latter’s legal position. There is then a distinct relationship between principal and agent, with attendant rights and duties, whether or not a third party is involved. However, this relationship is often only one side of a conventionally triangular situation. The classic agency situation is one in which the agent has authority to effect his principal’s relationship with a third party. The main result of the agent’s service then is to create a direct legal relationship between the principal and the third party to which the agent himself is not a party. 4.4 However, it is possible for the agent to be a party to the relationship between his principal and the third party: for example, if A insures both cargo belonging to P and cargo of his own under a single contract with the underwriter. Although, in the simpler situation, the third party is concerned only with his relationship to the principal, there may also be a separate direct relationship between the third party and the agent. Thus, the agent who wrongly represents that he has a principal’s authority may be liable to the third party for breach of warranty of authority or he may incur liability for negligence.2 4.5 A person may act simultaneously as a principal in his own interest and as an agent on behalf of others. Thus, where a person carries on business with others by way of partnership, in acts done in carrying out the firm’s business, he can bind himself as principal and also has statutory implied authority to bind his partners.3 Such joint liability may exist on the facts of a particular case even where the relationship of the principals does not normally make them agents for each other, as may be so in the case of part-owners.4 However, a mere similarity of interest does not create authority. Thus, one part-owner does not have implied authority to insure the interests of the other part-owners, for a “share in the ship [is]the distinct property of each individual part-owner, whose business it [is]to protect it by insurance”.5Unnamed and undisclosed principals
4.6 If an agent, acting with authority, contracts on behalf of a principal but the principal is unnamed, the contract is nevertheless a valid contract between the third party and the principal, who can enforce it on proof that he is the intended principal.6 4.7 Where the principal is not only unnamed but his existence is undisclosed, he may nevertheless enforce the contract provided the agent intended, and its terms do not exclude, the possibility of the principal’s intervention.7 However, although ex hypothesi the doctrine of the undisclosed principal does not require an intermediary to disclose the existence or identity of the principal, the general duty to disclose material circumstances does require disclosure of any such circumstance that relates to an undisclosed principal.8 4.8 It has long been common for insurers to contract with a person who they know is or may be acting on behalf of unnamed assureds and not to enquire as to the identify of such assureds. In such cases, the beneficiaries of the policy are such persons that those who affected the policy had in contemplation as persons whose interests were intended to be insured, and of course the claimant will need to adduce evidence that he was such a person.9 In ordinary commercial cases where a person such as an insurer contracts with someone acting as an agent, it is generally assumed that he is willing to treat as a party to the contract anyone on whose behalf the agent may have been authorised to contract unless the agent should realise that he is not so willing.10 However, each case must of course be decided by reference to the terms of the contract under consideration and the circumstances in which it came to be made.11 In practice, it may easier for an originally unidentified party to claim under a contract to insure cargo than one to insure a ship, since (in particular where goods are being sold on cif terms) such contracts are commonly made for the benefit of a familiar range of assureds, for whom the nature of the risk is likely to be the same.12 4.9 The wording of the policy is not conclusive as to whether a person is included within, or excluded from, the range of intended assureds. Thus, in Routh v Thompson,13 the words “on my account” were held to refer to the giving of credit to the agent for premiums and not to an insurance of his individual interest. Similarly, a claim will not succeed merely because the contract was made on terms which were wide enough to include the claimant. Thus, where, with the intention of insuring the shipowner’s collision liability, a contract was effected by brokers “as well in their own names as for and in the name and names of all and every other person or persons”, the charterers could not recover from the underwriters.14 4.10 Conversely, “[t]he mere identification, whether by name or description, of certain persons as assureds cannot be sufficient of itself to demonstrate an unwillingness on the part of the insurer to contract with any other person”.15 However, it may not be merely neutral but in practice may be regarded as a positive indication of unwillingness to contract with those not identified in the policy.16 In The Jascon 5,17 shipowners arranged for completion of their new vessel to be carried out by a Singapore shipyard and instructed brokers to effect a shipbuilders’ all risks policy for the period of the completion work on behalf of various interested parties, including the shipyard. The original brokers then instructed the defendant brokers to place part of the risk on the London market but apparently failed to instruct them to make the shipyard an assured under the London policy, which did not name it as an assured. Given that when a vessel enters a shipyard for completion and fitting out the persons most immediately interested in her safety are the owner and the shipyard, that other parties with commercial interests in her may also be adversely affected if she suffers loss or damage, and that the assureds named in the London policy included other companies within the same group as the owner and even joint venturers, the absence of any reference to the shipyard and its subcontractors was treated as striking, particularly since their inclusion as co-assureds would have a significant effect on the insurers’ rights of subrogation and therefore on the risk. Accordingly the yard was held not to be entitled to claim against the London insurers as an undisclosed principal. 4.11 The principal can be in no better position than his agent but the agent must, once the principal is disclosed, act as his agent. Thus, where the agent of an undisclosed principal employs a broker and the broker has a general lien against the agent, that lien can be enforced against the principal; but, if any proceeds remain in the broker’s hands after the principal is disclosed and the lien is discharged, the sum remaining can be recovered from the broker by the principal as money had and received to his use even if the broker has already paid over the amount to the agent.18 Similarly, a sub-agent has no lien or setoff for debts owed to him by the agent after he has notice of the principal.19Authority
4.12 An agent’s power to affect his principal’s legal position depends upon the extent of his authority. This may take several forms.20 His actual authority normally denotes the express authority which his principal gives him. It includes such incidental implied authority as is necessary to enable him to implement his express authority, together with any customary authority of such an agent. The agent’s main source of authority may be a form of authority implied by fact, from the circumstances of the case. If the third party acts in reliance on a representation made to him by the principal that the agent has authority, the agent will have apparent, or ostensible, authority to bind his principal.21 A separate category of usual authority has been recognised in the case where the agent is placed in such a position that he would usually be empowered to bind his principal, but this is controversial and may be explicable as a form of apparent or implied authority. 4.13 Where there is an emergency, an agent may have authority of necessity to act for his principal, a form of authority which is, like apparent authority, a type of actual authority, implied by law. Finally, a transaction entered into by an agent purportedly on behalf of a principal but without his authority will be invalid but may be subsequently authorised by the principal’s ratification and so validated. Thus, part-owners who became aware that insurance had been effected by the ship’s husband on their behalf and who raised no objection were jointly liable to the broker for the premium.22 The Marine Insurance Act 1906 specifically acknowledges that, where a contract of marine insurance is in good faith effected by one person on behalf of another, the person on whose behalf it is effected may ratify the contract even after he is aware of a loss.23 4.14 A person who has authority for one purpose does not necessarily have it for other purposes. Thus, a managing owner, or ship’s husband, must generally take action necessary for the shipowners. But it was established that he had no inherent authority to insure the vessel on behalf of the shipowners,24 nor any implied authority to insure the freight and cargo.25 However, authority may be conferred on the facts, as where part-owners are aware that insurance has been effected on their behalf and they raise no objection.26 Moreover, it seems that in modern circumstances a ship’s husband is regarded as having implied authority to insure the ship and may easily be inferred to have authority to insure in respect of all arrangements he makes in the course of his duty.27 4.15 Different types of authority will be more or less important depending on the type of commercial situation. Problems of authority do not frequently arise in cases of marine insurance, where agents will normally act with, and will not normally act without, actual express authority. However, two situations call for special mention here. 4.16 Ratification is possible if the third party knows at the time of contracting that the person with whom he is dealing is or may be acting as an agent and the terms of the contract do not exclude that possibility.28 Where the agent is a broker, it is assumed that he is acting as an agent. 4.17 It is clear that ratification is possible by a principal on whose behalf an agent clearly intended to act when the insurance was effected.29 But it has been held that, if an agent acts voluntarily (ie, without prior authorisation), he must expressly intend to benefit, and make liable for the premiums, a particular person capable of identification at the time the contract is concluded.30 Such a rule, if general, would be extremely inconvenient in practice, however, and it is now generally accepted that an agent may insure on behalf of another even if he does not know at the time of contracting who his principal is to be.31 It has been argued (1) that such a conclusion is inconsistent with the general principle that a person without interest at the time of contracting should not be able to ratify and (2) that the cases are justifiable on the basis of the rule that a person with an insurable interest in goods can take out a policy covering interests in the goods to be acquired by other persons to whom the policy is assignable.32 However, the authority for the first proposition is a decision denying the validity of an agent’s act on behalf of a non-existent principal,33 with which none of the cases is concerned. Thus, the marine insurance rule need not be anomalous. Even if it were so regarded, it may be better to admit it as an exception to the general agency rule rather than to justify it by the second proposition, for the person effecting the insurance is normally an agent, with no insurable interest in the subject matter, and not insuring on behalf of persons who are deriving an interest from him.II DUTIES
Duty to act
4.18 If an agent is contractually bound to act for his principal and fails to do so, he will be liable to his principal to pay damages for the loss he causes.34 4.19 If an agent is under no contractual obligation to act, he is in principle under no liability for his inaction. It was acknowledged that a person cannot be compelled to fulfil instructions to insure unless he consents or induces the principal to believe that he will do so. However, he may be under a duty to inform his principal that he is not acting. In Smith v Lascelles,35 the plaintiff, who was overseas, mortgaged his interest in goods and freight to the defendant. He sent bills of lading to the defendant with instructions to insure the goods and freight. The defendant insured the goods alone. But he was held liable for neglecting to insure the freight. However, three points were made by Buller J.36 4.20 One was that, where a merchant abroad has effects in the hands of his correspondent here, he has a right to expect that he will obey an order to insure, because he is entitled to call his money out of the other’s hands when and in what manner he pleases. Buller J said also that, if the merchant abroad send bills of lading to his correspondent here, he may engraft on them an order to insure, as the implied condition on which the bills of lading shall be accepted, which the other must obey if he accept them, for it is one entire transaction.37 Third, he said that, if there is a course of dealing whereby instructions to insure are given and complied with, the instructor has a right to expect that his orders will be obeyed unless the other party gives notice to discontinue the course of dealing. 4.21 The ratio decidendi of the first judgment, of Ashhurst J, was wider. He stated that, if a direction to insure is given to a person to whom an application would naturally be made in the usual course of trade and the latter does not give notice of dissent, he must be answerable for his neglect, because he deprives the other of any opportunity of applying elsewhere to procure his insurance. Finally, the report notes that Grose J was of the same opinion, though exactly with what is not clear. Given the facts of the case, Buller J’s third point and Ashurst J’s wider principle are strictly obiter but it is submitted that all the points made in Smith v Lascelles are in principle correct, albeit their application will depend on individual facts, and a broker may well be liable for not notifying a would-be assured of his decision not to act. 4.22 If an agent is under an obligation to act, he may be absolutely obliged to achieve a certain result. So far as effecting insurance is concerned, it is far more likely that he will have the lesser obligation to use his best endeavours to reach that result. In either case, however, he should be obliged to notify the principal of the extent to which the desired result has not come about, so that the latter can reconsider his affairs. 4.23 So long as he performs the acts required by his instructions and does so without negligence, the agent should not be liable if insurance cannot be obtained or the principal otherwise fails to obtain its full benefits (eg, if the insurer refuses to pay).38Personal performance
4.24 An agent must carry out his instructions personally (although he may, in doing so, employ servants to carry out administrative tasks) and, unless authorised, is not entitled to subdelegate performance of his duties.39 Unauthorised delegation is a breach of duty per se. It may also constitute negligence. Thus, shipping agents instructed by cargo-owners to check the terms of a policy held by a bank were liable to their principals for only obtaining inadequate answers from the bank as to its terms without actually looking at the policy.40 4.25 However, it is common, as a matter of market usage or by agreement, for sub-delegation to be permitted in arranging insurance. Therefore, if the assured’s broker (the “producing broker”) is in a different country from a potential insurer or does not have direct access to the market in which a potential insurer operates, he may instruct a “placing broker” for this purpose. It is common for a broker acting for an assured overseas to be required to arrange insurance or reinsurance through the services of a broker acting in the London market, though, since reinsurance is effected on behalf of the primary insurer rather than the original assured, it will be a question of fact whether and to what extent the broker placing the reinsurance is acting simply on behalf of the primary insurer and/or on behalf of the producing broker and/or the original assured. Where an agent is authorised to instruct a sub-agent to procure insurance, it is a question of fact whether the sub-agent’s contract is with the agent and/or with the assured. However, the normal situation is that there is privity of contract between the assured and the agent, and between the agent and the sub-agent, but not between the assured and the sub-agent. In Velos Group Ltd v Harbour Ins Services Ltd,41 HHJ Hallgarten QC thought that, if the assured knows that a producing broker cannot place insurance directly on the Lloyd’s market but must use a placing broker, there will be a direct relationship between the assured and the placing broker. However, whilst this is a possibility, it has subsequently been held that this will not normally be the case.42 Nonetheless, even if a sub-agent is not liable to the assured in contract, he may be liable in tort or for restitution of unjust enrichment.Compliance with instructions
4.26 Whether or not he is obliged to carry out his principal’s instructions, an agent who does act in order to do so is only authorised, and is obliged, to act strictly in compliance with them. Non-compliance may render him liable for misfeasance or nonfeasance. 4.27 Within the context of obedience to his principal’s instructions, however, it must be recognised that they are likely to be silent on many points of detail and that, so long as the agent acts in accordance with and within the confines of his instructions, he must inevitably resort to the exercise of such discretion as he is entrusted with, either expressly or by implication. The guiding rule in such cases is that he must act in the best interests of his principal. If he does so, his principal cannot complain that his instructions were not more specific. Thus, a broker is entitled to effect a policy in the usual form. In James Vale & Co v Van Oppen & Co Ltd,43 a broker instructed to insure against “all risks” did so by effecting an all risks marine policy in the normal form even though the policy did not cover each and every possible risk which might occur, such as under the theft, pilferage and non-delivery clause.Uncertainty
4.28 However, despite the permissible flexibility indicated in the previous paragraph, this cannot be taken too far. Thus, in general, using his normal skill and care, an agent should attempt to identify uncertainty in his instructions and endeavour to resolve them in his principal’s interest. 4.29 In Yuill & Co v Robson,44 a cif contract stipulated that bullocks were to be insured “against all risks”. The broker was regarded as having acted properly in procuring a standard all risks policy, albeit that the policy contained an fc&s clause45 relieving the insurers of liability for the authorities’ destruction of the bullocks on their arrival diseased. Nonetheless, the sellers were liable to the buyers for breach of contract, as the policy did not comply with the requirements of the contract of sale. 4.30 In Ireland v Livingston,46 in which a principal desirous of purchasing 500 tons of sugar was held liable to take from his commission agent the 400 tons that was all the agent could acquire, it was laid down by the House of Lords that:“if a principal gives an order to an agent in such uncertain terms as to be susceptible of two different meanings, and the agent bona fide adopts one of them and acts upon it, it is not competent to the principal to repudiate the act as unauthorised because he meant the order to be read in the other sense of which it is equally capable. It is a fair answer to such an attempt to disown the agent’s authority to tell the principal that the departure from his intention was occasioned by his own fault, and that he should have given his order in clear and unambiguous terms”.47