Lloyds of London Underwriting Syndicates 969, 48, 1183 and 2183 v Skilya Property Investments (Pty) Ltd (316/2002) [2003] ZASCA 112; [2004] 1 All SA 386 (SCA) (30 September 2003)

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[2003] ZASCA 112
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Lloyds of London Underwriting Syndicates 969, 48, 1183 and 2183 v Skilya Property Investments (Pty) Ltd (316/2002) [2003] ZASCA 112; [2004] 1 All SA 386 (SCA); 2004 (2) SA 276 (SCA) (30 September 2003)

THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
REPORTABLE
Case No 316/2002
In
the matter between
Lloyds of London
Underwriting Syndicates 969, 48,
1183 and 2183

Appellant
and
Skilya Property
Investments (Pty) Ltd
Respondent
Before: Scott, Zulman, Mthiyane,
Brand and Conradie JJA
Heard: 29
August 2003
Delivered: 30
September 2003
Summary: Indemnity
under contract of aviation insurance; whether exclusion of liability
for illegal use incorporated in policy and,
if so, whether aircraft
used for an illegal purpose
_______________________________________________________________
JUDGMENT
_______________________________________________________________
CONRADIE
JA
[1]
This appeal is about the
respondent’s entitlement to indemnity under a contract of
insurance. The issues on appeal are the interpretation
of the
insurance contract and whether at the time of its loss the
respondent’s aircraft was being used for an illegal purpose.
The
judgment of Southwood J,
a quo
, has been reported as
Skilya
Property Investments (Pty) Ltd v Lloyds of London Underwriting
Syndicate Nos 960, 48, 1183 and 2183,
2002 (3) SA 765(T).
This,
together with the parties’ broad acceptance of his findings of fact
make it unnecessary to burden this judgment with detail.
The appeal
is before us by leave of this Court.
[2]
The respondent was the owner of
a Douglas DC 3 aircraft (popularly known as a Dakota) which it had
insured under a hull all risks
policy (‘the hull policy’) with
the Houston Casualty Company. It covered the respondent against the
more common risks of flying
an aircraft and moving it about on the
ground. The cover was not all-embracing. Some risks were excluded.
Among the excluded risks
were so-called ‘war risks’. I refer to
the clause excluding liability for these risks as the ‘war risks
exclusion’.
[3]
Section I of the
hull policy is headed ‘Loss of or Damage to Aircraft’.
The first sub-heading under
this section is ‘Coverage’. This is the indemnifying provision
which commences ‘The Underwriters
will at their option replace or
repair accidental loss of or damage to the Aircraft …’. There are
then various ‘Exclusions’
such as wear and tear followed by
certain ‘Conditions.’
[4]
Section II of
the hull policy is headed ‘Legal Liability to Third Parties (other
than Passengers)’. Section III then deals with
‘Legal Liability
to Passengers’. Sections II and III under the heading ‘Coverage’
indemnify the respondent against compensatory
damages for accidental
bodily injury (fatal or otherwise) being awarded to two different
classes of persons, passengers and crew.
Each section has its own
‘Exclusions’ and ‘Limits’.
[5]
There are four
parts to section IV. Section IV(A) is headed ‘General Exclusions
Applicable to All Sections’. Section IV(B) contains
‘Warranties
applicable to All Sections’. Section IV(C) is headed ‘General
Conditions Applicable to All Sections’. These
three sections,
then, contain general exclusions, warranties and conditions. Section
IV(D) contains ‘Definitions’.
[6]
Since section
IV(A) applies to all sections it governs Section I. It reads in part-
‘This Policy does not apply:-
Illegal Uses.
Geographical
Limits.
Pilots.
Transportation
by other
Conveyance.
Landing and
Take-Off Areas.
Contractual
Liability
Non Contribution.
War Hijacking and Other Perils
Wilful and/or
Malicious Acts
of the Assured.
1 whilst the Aircraft is being used
for any illegal purpose or for any purpose other than those stated
in the Declarations
and as defined in the Definitions;
2 whilst the Aircraft is outside the
geographical limits stated in the Declarations hereto;
3 whilst the Aircraft is being
piloted by any person other than as stated in the Declarations
hereto except that the Aircraft
may be operated on the ground by
any person competent for that purpose and entitled by law to do
so;
4 whilst the Aircraft is being
transported by any means of conveyance (excluding conveyance by
its own motive power)…
5 whilst the Aircraft is landing or
taking off or attempting to do so either at or from a place which
does not comply with
the recommendations laid down by the
manufacturer of the Aircraft unless due to force majeure;
6 to liability assumed or rights
waived by the Assured under any agreement (other than Passenger
Ticket/Baggage Check issued
under Section III hereof) except to
the extent that such liability would have
attached to the Assured in the
absence of such agreement.
. . . .
7 to claims which are payable under
any other policy or policies except in respect of any excess
beyond the amount which would
have been payable under such other
policy or policies had this insurance not been effected;
8 [This is a lengthy paragraph
dealing with radiation damage. It would be prolix to reproduce it:
it excludes liability for
‘ionising radiations or contamination
by radioactivity from any source whatsoever’ (which includes the
carriage of radioactive
materials under certain circumstances.)]
9 to claims caused by :-
(a) war, invasion, acts of foreign enemies,
hostilities (whether war be declared or not), civil war,
rebellion, revolution,
insurrection, martial law, military or
usurped power, or attempts at usurpation of power;
(b) any hostile detonation of any weapon of war
employing atomic or nuclear fission and/or fusion or other like
reaction or
radioactive force or matter;
(c)
strikes, riots, civil commotions or labour disturbances;
(d) any act of one or more persons, whether or not
agents of a sovereign Power for political or terrorist purposes
and whether
the loss or damage resulting therefrom is accidental
or intentional;
(e) any malicious act or act of sabotage;
(f) confiscation, nationalisation, seizure,
restraint, detention, appropriation, requisition for title or use
by or under the
order of any Government (whether civil military of
de facto) or public or local authority;
(g) hi-jacking or any unlawful seizure or wrongful
exercise of control of the Aircraft or crew in flight (including
any attempt
at such seizure or control) made by any person or
persons on board the Aircraft acting without the consent of the
Assured.
Furthermore this policy does not
cover claims arising whilst the Aircraft is outside the control of
the Assured by reason of
any of the above perils.
The Aircraft shall be deemed to have
been restored to the control of the Assured on the safe return of
the Aircraft to the Assured
at an airfield not excluded by the
geographical limits of this Policy and entirely suitable for the
operation of the Aircraft
(such safe return shall require that the
Aircraft be parked free of duress with engines shut down);
10 in respect of any damage which is
attributable to the wilful and/or malicious act of the Assured or
any agent or servant
of the Assured or other person under the
control of the Assured acting within the scope of his employment
or authority.’
[7]
These general exclusions from
cover leave an aircraft owner vulnerable, particularly in turbulent
parts of the world.
1
Happily there are niche markets for everything. The product developed
by the war insurance niche market in London was the ‘Aviation
Hull
“War and Allied Perils” Policy’, referred to in argument simply
as the ‘war policy.’ It was intended to fill the gap
created by
the introduction of the war risks exclusion in the hull policy.
[8]
The war policy, consistent with
its scope and function as an adjunct to the hull policy, is much
shorter. It consists of only four
sections. The first imposes on the
insurer liability for loss of or damage to the aircraft in these
words –
‘
Subject to the terms, conditions and limitations set
out below, this Policy covers loss of or damage to the Aircraft
nominated in
the Schedule against claims excluded from the Assured’s
Hull “All Risks” Policy as caused by:
War, invasion, acts of foreign enemies, hostilities
(whether war be declared or not), civil war, rebellion, revolution,
insurrection,
martial law, military or usurped power or attempts at
usurpation of power.
strikes, riots, civil commotions or labour
disturbances.
Any act of one or more persons, whether or not agents
of a sovereign power, for political or terrorist purposes and
whether the
loss or damage resulting therefrom is accidental or
intentional.
Any malicious act or act of sabotage.
Confiscation, nationalisation, seizure, restraint,
detention, appropriation, requisition for title or use by or under
the order
of any Government (whether civil military or
de facto
)
or public or local authority.
Hi-jacking or any unlawful seizure or wrongful exercise
of control of the Aircraft or crew in flight (including any attempt
at such
seizure or control) made by any person or persons on board
the Aircraft acting without the consent of the Assured.
Furthermore this Policy covers claims excluded from the
Hull “All Risks” Policy from occurrences whilst the Aircraft is
outside
the control of the Assured by reason of any of the above
perils. The Aircraft shall be deemed to have been restored to the
control
of the Assured on the safe return of the Aircraft to the
Assured at an airfield not excluded by the geographical limits of
this Policy,
and entirely suitable for the operation of the Aircraft
(such safe return shall require that the Aircraft be parked with
engines
shut down and under no duress).’
[9]
The description of the risks
covered by the war policy coincides word for word with the exclusion
from liability found in the war
risks exclusion of the hull policy
except that cover is not extended to ‘any hostile detonation of any
weapon of war employing
atomic or nuclear fission…’
[10]
Section 2 deals with extortion
and hi-jack expenses and is not now relevant. The third section of
the war policy is headed ‘general
exclusions.’ Here one finds
catalogued the kind of calamities that are by and large economically
uninsurable. They include, as
in paragraph (b) of section 1, the
detonation of a nuclear weapon and also war between the world’s
major powers and confiscation
and similar acts of appropriation by
certain governments named in a schedule to the policy. Also excluded
is liability for loss of
the aircraft arising from any contractual
arrangement as well as for consequential loss not specifically
covered.
[11]
The fourth section is the
‘general conditions.’ It is by means of clause 1 of this section
that the war policy seeks to incorporate
certain, in fact most, of
the provisions of the hull policy:
‘
1. This Policy is subject to the same warranties,
terms and conditions (except as regards the premium, the obligations
to investigate
and defend, the renewal agreement (if any), the amount
of deductible or self-insurance provision where applicable AND EXCEPT
AS OTHERWISE
PROVIDED HEREIN) as are contained in or may be added to
the Assured’s Hull “All Risks” policy.’
[12]
One point of contention between
the parties is the meaning of the expression ‘warranties terms and
conditions’. The appellants
contend that the ‘exclusions’ are
terms of the hull policy and are, therefore, by reference,
incorporated into the war policy.
The submission for the respondent
is that the policies, read together, contemplate a category of
provisions called ‘exclusions’
which does not come within the
ambit of the expression ‘warranties terms and conditions’. For
this reason the attempt to incorporate
them in the war policy failed.
In support of this contention the respondent argued that an
‘exclusion’ (in the context in which
this expression is used in
the war policy) is a legal concept sufficiently distinct from either
of the other three, that is to say,
a term, a condition or a
warranty, to justify the conclusion that, if the appellants had
wished to incorporate ‘exclusions’ in
the hull policy into the
war policy, they would (and should, in order not to have fallen foul
of the
contra proferentem rule
) have said so.
[13]
That ‘exclusions’ are not
warranties or conditions of the hull policy may be accepted. In
insurance law ‘warranties’ and ‘conditions’
have acquired
rather specialised meanings. (
Lawsa
vol 12 (1988) paras
155,156,161 at 151 and 155). But ‘exclusion’ seems to me simply
to be a convenient description for a provision
with certain
characteristics. The fact that such a provision may fulfil a
particular function does not deprive it of its character
as a term.
I agree with the respondent’s counsel that one must look at the way
the parties employed these expressions in the policies,
having regard
to the object of the policies seen as a whole, but I detect no
feature of their use in the context to suggest that
those provisions
of the contract which cannot properly be categorized as ‘warranties’
or ‘conditions’ are to be regarded
as anything other than
‘terms’. The most one can say in favour of the respondent’s
contentions is that there is in the hull
policy some inconsistent use
of the expressions ‘terms’, ‘warranties’ and ‘conditions’
and that if ‘warranties’ and
‘conditions’ were also ‘terms’
it would have been superfluous to mention them separately. But the
‘presumption’ against
superfluity which in appropriate
circumstances may be a useful device for construing a document, in
the light of all the contrary
indiciae
in the policies, cannot
carry the day.
[14]
Sophisticated semantic analysis
is not the best way of arriving at an understanding of what the
parties meant to achieve by paragraph
1 of section IV. A better way
is to look at what, from the point of view of commercial interest,
they hoped to achieve by the incorporation
provision. It is quite
clear that without the incorporation of exclusions from the hull
policy, the war policy would have left the
appellants which potential
liabilities they could not have intended to assume and which the
respondent could not have thought they
were assuming. For one thing,
no limit on the liability for loss or damage to passengers, crew or
third persons is written into the
war policy itself. These are
topics which in the hull policy are hedged about with limits and
exclusions.
[15]
There are other important
exclusions in the hull policy relating to occurrences of increased
risk which one cannot imagine a prudent
underwriter of the war policy
would ever have wished to take upon itself. They are assembled in
section 1V(A) (‘General Exclusions
applicable to all sections’)
and comprise, among others, landing or taking off at or from a place
which does not comply with the
recommendations of the manufacturer of
the aircraft and flying of the aircraft by an unauthorised pilot.
They exclude claims for
liability assumed, or rights waived, by the
assured under any agreement as well as claims which are payable under
any other policy
(except in respect of any excess).
[16]
I did not understand the
respondent’s counsel to contend that the incorporation clause
failed to integrate
any
of the general exclusions in the
hull policy into the war policy. Clearly, that would make no business
sense. Nevertheless, he maintained
that one of the general exclusions
suffered this fate. It is the first one reading as follows:
‘
This policy does not apply:-
1 whilst the aircraft is being used for any illegal
purpose or for any purpose other than those stated in the
Declarations and as
defined in the Definitions.’
[17]
The appellants repudiated
liability on the basis of this, the illegal purpose exclusion,
maintaining that the aircraft was lost whilst
it was being used for
an illegal purpose, the smuggling of four tons of South African duty
free cigarettes into Mozambique. It is
obvious that the use of an
aircraft for an illegal purpose increases the risk of loss of damage.
This is as true for the hull as
for the war policy. A risk such as
confiscation for which the war policy provides cover is greatly
increased by illegal use of the
aircraft. Considering the two
policies together as constituting a sensible business arrangement to
provide greater cover for the
respondent than was provided by the
hull policy on its own, there is every reason to give the war policy
a meaning that would acknowledge
that its underwriter was not
contractually prepared to take the risk of illegal use upon itself.
In my view the judge
a quo
erred in holding that the war
policy did not incorporate the illegal purpose exclusion.
[18]
The respondent’s alternative
argument also revolved around a semantic construction, this time of
the phrase ‘whilst the Aircraft
is being used for any illegal
purpose.’ It was contended that the provision had no application to
the facts, either because the
purpose
of the flight was not to
smuggle but some other purpose, or because the loss was not suffered
whilst
the aircraft was being used for an illegal purpose.
[19]
The ultimate purpose of the
flight was the repositioning of the aircraft at Nairobi for the
distribution of relief supplies. First,
however, the aircraft was to
be used to convey cigarettes to Beira. The cost of the Beira leg for
which the aircraft had been specially
chartered was to be borne by
the exporter of the cigarettes. It was a voyage charter in terms of
which the use of the aircraft and
crew were made available to the
exporter. It was not a contract for the carriage of goods. The flight
to Beira was not simply a diversion
on the way to Nairobi. Because of
flight control regulations overflight clearances had to be arranged
before take-off from Lanseria
airport. From that time the first leg
of the flight was undertaken for an illegal purpose even though the
projected second leg of
the flight, the repositioning of the aircraft
at Nairobi, would have been legal.
[20]
Another argument closely allied
to this was also raised by the respondent: The loading of the
cigarettes at Lanseria airport, it was
said, was perfectly legal;
while the aircraft was winging its way towards Beira it was not
engaged in any illegal activity; no illegality
would be committed
until the pilots of the aircraft attempted to take the cigarettes
through Mozambican customs without paying duty
on them. This was an
independent act, unrelated to the flying or the use of the aircraft.
[21]
This argument loses sight of
the terms in which the illegal purpose exclusion is couched: it does
not exclude from indemnity the unlawful
carriage of goods; it
excludes liability where the purpose for which the aircraft is used
is illegal. The legality of the conveyance
need have no bearing on
the unlawful object: of importance is the object for which the
aircraft was used, not the manner in which
it was used.
2
The respondent relied on cases where provisions relating to the
seizure or forfeiture of articles used for an illegal purpose were
considered.
3
They might have been of assistance if the aircraft had flown into
Beira for another purpose and contraband cigarettes had been
discovered
on board. Here the facts are that the aircraft flew to
Beira for no purpose other than to convey the cigarettes to that
destination.
[22]
It was also argued by the
respondent that at the time the aircraft was seized the smugglers had
abandoned the idea of smuggling the
cargo of cigarettes into
Mozambique so that the illegal purpose provision (which operated
whilst
the aircraft was being used for an illegal purpose)
had, at the time of seizure, ceased to operate. To test the validity
of this
submission, it is necessary to look closely at certain
aspects of the evidence.
[23]
It is not disputed that the
consignor and consignee of the cigarettes, the pilots of the aircraft
and some of the officials at Beira
airport participated in the
smuggling. The South African customs authorities had notified their
Mo-
zambican counterparts that the aircraft was
carrying cigarettes that might be clandestinely introduced into that
country. This intelligence
had been made available to the smugglers
and their confederates even before the aircraft landed. For that
reason they were too apprehensive
to unload the cargo that evening.
One of the pilots simply made a declaration concerning the cargo on
board (which did not give the
correct quantity and weight of the
cigarettes). During the night the plan to unload the cargo the next
morning was aborted when it
became known that customs inspectors were
keeping the aircraft under observation. It was accordingly decided
by the conspirators
to keep the cigarettes on board and fly them to
Nairobi. When it became clear to the customs inspectors the following
morning that
the aircraft was about to depart without having
offloaded the cigarettes it was seized. Thereafter it was forfeited
to the state
by a Mozambican customs court.
[24]
To find that by the time the
aircraft was seized the members of the conspiracy had abandoned their
plan to smuggle the cigarettes
into Mozambique would be putting too
charitable a construction on what occurred. The smugglers’ plan
could not be carried out because
it had been foiled. A purpose is not
abandoned simply because it goes wrong. One might as well say that a
robber holding up a victim
abandons his purpose to rob when the
police force him to drop his weapon. The purpose of the pilots was
not merely illegally to move
cigarettes into Mozambique but, having
done so, to transport themselves out. That was part of the venture
and, clearly, the aircraft
was to be used for this purpose. In
attempting to remove the contraband cigarettes from Mozambique the
smugglers had not yet extricated
themselves from that situation of
increased risk against which the appellants sought to protect
themselves by the illegal purpose
exclusion.
[25]
Moreover, in extricating
themselves the users of the aircraft contravened article 113(2) of
the Mozambican customs regulations. They
failed prior to departure to
make a written declaration of the cargo on board the aircraft. This
was an illegality which continued
until the aircraft was seized and
which falls within the definition of ‘smuggling’ in article 37(3)
of the Mozambican Customs
Act
4
,
the penalty for a contravention of which is a fine and forfeiture of
the smuggled goods and the transport used to smuggle them.
[26]
For these reasons I have come
to the conclusion that the aircraft was seized whilst it was being
used for an illegal purpose.
[27]
Clause 17 of section IV(C) of
the hull policy deals with the liability of the insurer where
operational directives and regulations
are breached:
’
17 Any Breach of Air Navigation Directions and/or
Regulations or contravention of the Assured’s flying instructions
and Regulations
without the Assured’s knowledge and consent shall
not invalidate a claim by the Assured under this Policy, but the
individual causing
such breach or contravention shall not be entitled
to indemnity hereunder.’
The respondent says that this clause
indicates that the illegal purpose exclusion should be read
subjectively and that it is accordingly
use of the aircraft by the
insured that is in issue and not use by the cigarette exporter or the
pilots. In this regard, it is common
cause that it has not been
shown that the plaintiff, the owner of the aircraft, or its
associated company which operated it, knew
of the smuggling of
cigarettes into Mozambique.
[28]
Section IV(C) 17 should be read
together with clause 1 of section IV(B):
‘
The Assured warrants:-
1 compliance with all air transportation, air navigation
and airworthiness enactments, regulations, rules, orders and
requirements
issued by any competent authority affecting the safe
operation of the Aircraft. Nevertheless, the Assured shall ensure:-
(a) that the Aircraft is airworthy at the commencement
of each flight;
(b) that (as far as may be reasonably possible) the
employees and agents of the Assured shall comply with such
enactments, regulations,
rules, orders and requirements.’
The effect of the warranty in clause 1 of
section IVB is that an absolute liability is imposed on the insured.
5
Any breach of any of the rules and orders would invalidate its claim
even if the breach occurred without its knowledge or consent
and
despite its reasonable efforts to prevent it. The purpose of the
breach of rules and orders extension is to soften the effect
of
non-compliance with the rules and orders warranty. It ensures that an
insured’s claim is not invalidated by a breach of the
rules and
orders described in the extension if it occurs without the insured’s
knowledge and consent. It does not mean that a loss
altogether
excluded from cover will nonetheless be covered under the policy if
the conduct that triggered the exclusion also happens
to constitute a
breach of the rules and orders warranty committed without the
insured’s knowledge and consent.
[29]
Apart from other shortcomings,
the respondent’s argument confuses the illegal purpose of a flight
with the illegal manner in which
it is undertaken. The difference was
pointed out in
Nel v Santam Insurance Company Ltd
op cit
and has been highlighted by courts in the United States of America.
6
[30]
Finally the respondent
submitted that one of the ‘purposes’ stated in part 3 of the
Declarations ‘Purposes of Use’ in the
hull policy was ‘rental’.
According to this submission all the respondent did (through its
associate company) was to ‘rent’
the aircraft and ‘rental’ of
the aircraft not being an illegal purpose the respondent’s conduct
did not fall within the illegal
purpose exclusion. There is no merit
in the point. The rental purpose is too remote. It is the immediate
operational risk that concerned
the parties. It is ‘use’ of the
aircraft in that sense which is decisive, not an enquiry into the
contractual arrangement by
which it came to be put to such use.
1. The appeal succeeds with costs which are to include
the costs consequent upon the employment of two counsel.
2. The order of the court
a quo
is
altered to read;
‘
The plaintiff’s claim is dismissed
with costs which are to include the costs consequent upon the
employment of two counsel and are
to include all costs reserved when
this matter was adjourned on 13 September 2001’.
__
________________
J H CONRADIE
JUDGE OF APPEAL
SCOTT JA )Concur
ZULMAN JA )
MTHIYANE JA )
BRAND JA )
1
See on this topic Rod D Margo Aviation Insurance
3 ed 325 - 330
2
Nel v Santam Insurance Company
1981(2) SA
230 (T) at 238E – 239F.
3
R v Samuel
1958 (4) SA 314
(SWA) at 316;
S
v Mtshali
1972 (4) SA 207
(N);
S v Bissessue
1980 (1) SA;
228(N)
;
S v Crawford and Another
1978 (1) SA 640
(O).
4
The Act refers to the ‘movement’ of goods
without the required documentation. Undocumented import and export
are thus punishable
in the same way. The respondent’s argument
that the smuggling, (which it sees as the failure to properly
declare or pay customs
duty in respect of the cigarettes) was an act
independent of the use of the aircraft is for this reason not good.
5
Cf
Imprefed (Pty) Ltd v American International
Insurance Co Ltd
1983 (3) SA 335
(AD)
6
Hall’s Aero Spraying, Inc v Underwriters at
Lloyds, London
[1960] USCA5 129
;
274 F.2d 527
;
Roach v Churchman
F. 2d 849;
Middlesex Mutual Insurance Company v Herbert C Bright
106
Cal. App.3d
282.